While inflation remains an important factor to consider in portfolio construction, super funds should use more accurate information about their members to create benchmarks that suit retirees’ actual needs, according to the Milliman Retirement Expenditure and Profiles (ESP).
The report found that while retirees should be wary of rising inflation, which could quickly destroy the value of their lifetime’s savings and have a profound impact on quality of life, it did not mean that inflation was an appropriate benchmark for super funds.
Milliman said that funds wishing to retain an inflation-based benchmark should reweight the components to reflect the real-world spending patterns of their retirees.
According to the report, retiree’s expenditure substantially differed from the official Consumer Price Inflation (CPI) index, as health accounted for 12 per cent of 65 to 69-year-olds’ total expenditure and continued to rise to 23 per cent of expenditure by the time they reached age 80 to age 84.
At the same time, retirees’ expenditure on travel and transport almost halved between 65-to 69-year-old band and the 80 to 84-year-old band.
Also, other components such as housing, education or property prices accounted for a much lower proportion of retirees’ expenditures.
Milliman said that some funds may take a step further and decide to replace Consumer Price Index (CPI)-based benchmark altogether, with an absolute return benchmark giving some retirees greater certainty.
“In this way, funds can create a personalised retirement journey for members and truly improve their retirement lifestyles,” the study said.