Retirement costs continue to increase

| December 10, 2018

There was a modest increase in the cost of living in the September quarter for retirees.

The ASFA Retirement Standard September quarter figures indicate that couples aged around 65 living a comfortable retirement need to spend $60,843 per year and singles $43,200, up 0.4 and 0.6 per cent respectively on the previous quarter. At the modest level the increase was 0.6 per cent for both singles and couples. These increases are slightly higher than the 0.4 per cent increase in the All groups CPI.

Total budgets for older retirees increased by around 0.3 per cent at the comfortable level and 0.4 per cent at the modest level.

Association of Superannuation Funds of Australia (ASFA) CEO Dr Martin Fahy said the fact that the cost of retirement over the most recent quarter only increased by a relatively small amount is welcome news for retirees but relatively low rates of price increases are more the exception than the rule in Australia over the longer term.

“Retirement can stretch over three decades or more and retirees need to be prepared for and invest for the long term.”

Chart 1 below, which comes from a recent Australian Bureau of Statistics paper on long term movements in the level of the CPI, shows that the current decade has the lowest average rate of increase in the CPI in the seven decades that the CPI in its current form has been published.

However, external shocks to the economy, such as high commodity prices or an adverse movement in the exchange rate or an oil price shock, have the potential to impact on prices and wages in the Australian economy.

For instance, high commodity prices and growing domestic demand in the latter stages of the Global Resources Boom saw year-ended inflation rise to a peak of 5 per cent in September 2008.

A continuation of the current drought also is likely to put upward pressure on food costs in the year ahead, with this likely to be exacerbated by relatively high costs of fuel.

While the overall rate of inflation was relatively low over the last 10 years (with the CPI growing by 22 per cent in total), some costs grew strongly. For instance, over the ten years to September 2018:

  • Property rates and charges rose by 64 per cent
  • Water and sewerage charges rose by 68 per cent
  • Electricity charges rose by 109 per cent
  • Gas charges rose by 83 per cent
  • Health charges rose by 55 per cent

Price increases were much more modest for discretionary expenses, such as for leisure, communications, electrical appliances, home items and clothing.

Chart 1: Annual average CPI increase by Decade (%)

Chart 1: Annual average CPI increase by Decade (%)

“We recommend you get in touch with your superannuation fund to find out what options are available to you, so that you have the best chance of coping with future price increases and living your post-work years free from major financial worries,” said Dr Fahy.

The most significant price increases in the September quarter were for international holiday travel and accommodation (+4.3%), domestic holiday travel and accommodation (+2.4%), and automotive fuel (+1.4%). The most significant offsetting price falls for this quarter were for telecommunications equipment and services (-1.5%). The rise in international holiday travel and accommodation was due to the summer peak seasons in Europe and America.

The main contributors to the rise in ongoing housing expenses were property rates and charges (+2.3%) and utilities (+0.8%), driven by water and sewerage (+1.3%), gas and other household fuels (+1.1%) and electricity (+0.4%).

The rise in the housing group is the lowest September quarter rise since 1998, and is due to subdued results in the utilities, rents and property rates and charges. September quarters typically have price changes in utilities and annual changes in property rates and charges.

The cost of utilities has been impacted by modest rises in electricity prices this quarter. In 2018, stabilising wholesale costs and retail competition have led to subdued rises in electricity prices for households, whereas strong rises in wholesale costs in the eastern and southern states drove electricity price rises in 2016 and 2017.

The main contributor to the rise in transport costs this quarter is automotive fuel (+1.4%) due to continued increases in world oil prices flowing through to consumers. Automotive fuel fell in July (-2.0%) and August (-0.1%) and rose in September (+5.2%), to reach its highest quarterly price index level since 2014.

Food costs increased by 0.5 per cent, around the average rate of inflation for the quarter. The main contributors to the rise in the food and non-alcoholic beverages group this quarter were fruit (+2.4%) and vegetables (+1.6%). Adverse weather conditions earlier in the year have impacted the supply of fruit and vegetables, leading to an increase in prices.