With interest rates rising once more, homeowners and investors are keeping a close eye on inflation. While inflation directly links to cost of living and RBA decisions on interest rates, it also plays a broader role in your retirement planning.

Understanding how inflation can affect your financial plans – and knowing what to do about it – will help you build sustainable wealth and stay on track to your long-term goals.

Understanding Inflation 

Inflation refers to the increase in prices across goods and services, which typically rise over time. 

In Australia, the key inflation indicator is the Consumer Price Index (CPI), which measures the percentage change in the price of household goods and services. Published monthly by the Australian Bureau of Statistics, the CPI is calculated by tracking the prices of thousands of items and aggregating these prices against the previous month. 

Inflation impacts cost of living, which affects your retirement planning in two key ways: by reducing your spending power at retirement, and by eroding the value of your investments.

Inflation and Purchasing Power

When we plan for retirement, we factor in cost of living, cash flow, investment returns and personal lifestyle to design a financial strategy that effectively provides for a comfortable retirement. 

Inflation can be erratic. It hit record highs of over 15% in the 1970s, was much lower in the early 2000s, but rose sharply again after COVID. We can’t predict what the CPI will be when you retire, but with inflation, costs rise and purchasing power declines. 

According to the RBA’s Inflation Calculator, what you could buy 30 years ago for $100,000 would today cost you just over $219,000, an increase of 119.5%. Look at house prices and the discrepancy is even more pronounced. In 1995, the average Sydney house price was about $195,000. Just over 30 years later, it’s $1.6 million. 

Looking ahead 10, 20 or 30 years to your retirement, you can see that inflation poses a risk to future purchasing power, lifestyle plans and, significantly, financial confidence. It’s why strategic financial planning is essential. 

Inflation and Your Investments

We recently published our asset class returns annual update, which highlights the role inflation plays in your investment decisions. 

As we reported, international shares for the calendar year ending 31 December 2025 had a return of 12.5%, Australian shares returned 10.3% and Australian property 9.7%. Lagging behind were cash (3.8%) and fixed interest (7.9% Australian; 6.9% international).

While these figures point to better-performing investment options, they become even more significant when you consider inflation. In January, the CPI sat at 3.8%. That means when you factor in inflation, cash accounts only are effectively making no returns.

The key to a successful retirement strategy is diversified investments, as Newealth financial Planner Dejan Pekic explains:

“Defensive assets, such as bank accounts, provide stability, but they won’t protect you against inflation. For that, you need growth assets as part of a diversified strategy. Growth assets can jump 5 or 10%, decline with market slumps, but overall, they provide longer-term inflation-beating returns.”

Strategies for Successful Retirement Planning

Knowing how inflation impacts retirement helps you plan for your future with clarity. 

At Newealth, we take a holistic approach to financial planning that includes superannuation, investment and retirement planning, cash flow management and tax planning. 

If you’re in the early stage of planning, or nearing retirement, we can provide comprehensive financial planning tailored to your current situation and long-term goals.

General Advice Warning:

The information in this blog is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider whether the information is appropriate for you and seek professional advice before making any financial decisions.
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