It's Your Money  

Keep your retirement portfolio ahead of inflation

Protect retirement savings

Rising inflation — particularly the kind of record inflation seen recently — will always make the headlines.

While many people worry about how they’ll be able to afford increasingly expensive products, retirees tend to worry more about how much it will cause their savings to lose value. When “safer” investment options, such as corporate and government bonds, are delivering returns considerably lower than the rate of inflation, this is an understandable concern.

Let’s take a closer look at the impact high inflation can have on your portfolio, why keeping money in cash can be a mistake and how to help your retirement portfolio become inflation proof.

How inflation can impact your retirement savings

Many retirees wonder if they’re going to be OK in retirement. Will they have enough to spend and will their savings last? Inflation can certainly make your investments less valuable unless your retirement income is able to keep up with it.

That’s why it’s important to know the details of all of your sources of retirement income. Some of them, such as the Canada Pension Plan and Old Age Security are adjusted regularly for inflation.

Other income may not be inflation adjusted however, such as some company pensions and retirement savings (for example, investments in your Registered Retirement Savings Plan and Tax-Free Savings Accounts). These investments’ ability to outgrow inflation will depend on their performance.

During a situation like we experienced in 2022, with high inflation and a financial market downturn, some retirees could find part of their retirement savings drop in value, at least over the short-term.

If inflation does bring about a considerable shortfall in retirement income, there are a number of options available. You could delay retirement, work part-time in retirement, lower your retirement spending or downsize your home and use the cashed-in equity to cover the shortfall. None of these are ideal, but there are ways to help avoid them from happening.

Converting investments into cash isn’t the solution

A common reaction when financial markets start to lose value is to sell stocks, bonds and mutual funds, and convert them into cash accounts. From a purely investing perspective, this can be an unwise move, in that you will lock in your losses and could miss out when the market bounces back. Your portfolio could take a long time to recover.

From an inflation-proofing point of view, this is even more of a losing strategy. Most savings accounts offer interest at two to three per cent, which would be considerably less than inflation in 2022 (it peaked at 8.1% in June). At 8% inflation, cash savings that grow by 3% interest will effectively lose their value by 5% per year.

Thankfully, there are several strategies that can help protect your retirement savings from the ups and downs of inflation.

How a long-term financial plan can overcome inflation

A solid, long-term financial plan will take into account a number of potential variables, such as longevity (how long you’ll live), market dips and inflation.

It is very important to stress test financial plans for several possible scenarios, such as what would happen if investments performed worse than expected, or if inflation were to shoot up? You should also revisit your plan every year - a living plan should adjust and adapt to changes in the markets and your personal circumstances.

The earlier you start saving, the longer you have for your investments to grow and enjoy the benefits of compound returns. The larger your savings, the bigger your safety net against inflation.

How a well-diversified portfolio protects against inflation

It’s worth remembering that inflation in Canada has rarely exceeded three per cent for most of the last 30 years. When planning for the long term, FP Canada recommends using an annual inflation rate of 2.1 per cent for retirement plans.

Portfolios that contain a healthy percentage of equities (stocks or mutual funds containing stocks) have historically always outpaced inflation considerably, over the long term. You would also need your portfolio to be well diversified — it should contain a good spread of industries and geographical locations.

Also, investing in companies that are able to pass on increased costs to customers, such as grocery stores and other retail outlets, will also help to protect your investments from inflation.

Other strategies to protect retirement savings from inflation

Certain investment assets can perform better than others during times of high inflation.

Commodities, such as oil, gas, wheat, etc., tend to have a fairly consistent demand, so price increases usually have little effect on their consumption levels.

Inflation-protected assets, such as real return bonds and Treasury Inflation Protected Securities (TIPS) are designed to deliver cash flow that keeps up with the cost of living. Both are available in mutual funds.

Real estate investment trusts (REITs) provide an easy way to invest in real estate without becoming a landlord. Pooled money means that your risks of unpaid rents should be lower. The value of Canadian real estate has, on average, grown considerably above the rate of inflation over the last 15 years.

Make sure your retirement portfolio is inflation-proofed

Your certified financial planner can discuss your retirement needs with you and develop a robust financial plan that will help you understand the steps you need to take to provide the income you need, when you need it.

These plans can be stress-tested for inflation, as well as other variables, such as market volatility and increased lifespan.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett has worked in the financial advice industry for over 15 years and is designated as a chartered investment manager(CIM) and certified financial planner (CFP).

In 2014, Brett was appointed to the board of directors of FP Canada (the national professional body for financial planning) and spent seven years on the board, including his final two as board chair. More recently, he was appointed to the Financial Planning Standards Board (FPSB), which is the international professional body for this industry with a three-year term beginning in April 2023.

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy-to-understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the national and global boards focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns or if you’d like a referral to a qualified CFP professional in your area by emailing him at [email protected].


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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