Planning for retirement is a challenge under normal circumstances. It might be many years before you retire, so imagining your future lifestyle, estimating expenses and anticipating your level of savings and income is difficult.
Today’s high inflation and rising interest rates add complexity to retirement planning. For decades, inflation and interest rates were low, making the planning process more predictable since people didn’t worry much about a soaring cost of living. These days, you only need to look at gas and food to recognize that prices have jumped significantly.
Retired people often live on a fixed income, so it doesn’t take many years of high inflation to erode savings faster than expected. For example, the income stream of retirees with a workplace defined contribution (DC) pensionplan is linked to how their investments perform. If markets are declining – which typically happens during periods of high inflation – the investments in their DC plan might not generate returns that keep pace with inflation.
Conversely, retirees in a defined benefit (DB) plan could be better off because these pension plans guarantee a specified income stream and are indexed to inflation (partially or fully). As a result, DB plans help retirees withstand higher inflation and maintain their purchasing power. Note that both Canada Pension Plan and Old Age Security payments are indexed to inflation, so that also helps retirees contend with rising costs.
Benefits of financial advice
As you plan for retirement, it’s valuable to work with an advisor. They’re trained to help create and maintain customized wealth plans flexible enough to endure different economic and market conditions. Experienced advisors can also recognize shifting circumstances and make financial adjustments accordingly.
When it comes to retirement planning, consider these four strategies to help you manage the potentially wealtheroding effects of high inflation:
- Diversify your portfolio. As mentioned, many investments decline in value when inflation is high, since rising costs often lead to rising debt. This may prompt people to reduce spending, which negatively affects business growth. However,
not all investments follow the same pattern, as high inflation actually benefits some industries, such as commodities like oil and gold. Diversified exposure to industries, sectors and geographical regions may help manage volatility and risk,
as some (or all) of your losses will be offset by the winners.
- Be selective with fixed income. Similar to the point above, diversifying fixed-income exposures may also help when inflation and interest rates rise. In addition to the traditional bond funds that many investors hold, your advisor
may suggest investing in floating rate or real-return bond funds. As market rates rise, these funds tend to maintain value better and generate more income than traditional bond funds.
- Use registered products. RRSPs and TFSAs are proven options to save tax efficiently for retirement. At any time, but especially when inflation is high, you should preserve as much wealth as possible. While your advisor helps you save
tax by using vehicles like RRSPs and TFSAs, they also instill a disciplined approach so you can save money regularly, either for investing or as part of your retirement cash reserves.
- Be opportunistic. Since retirement can be costly as people are living longer, an important planning goal is building long-term wealth. Over the short term, stock markets tend to decline when inflation is high, but everything moves
in a cycle. Eventually the markets will rebound, so if the strategy matches your time horizon and risk tolerance, your advisor may recommend investing now to take advantage of lower prices. As the markets recover, your “buy low” investments
could benefit significantly and enhance your retirement nest egg.
Speak with your advisor to learn more about how to manage your investments in inflationary times.
For definitions of technical terms in this piece, please visit iaclarington.com/glossary and speak with your investment advisor. The information provided should not be acted upon without obtaining legal, tax, and investment advice from a licensed professional. Commissions, trailing commissions, management fees, brokerage fees and expenses all may be associated with mutual fund investments, including investments in exchange-traded series of mutual funds. The information presented herein may not encompass all risks associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. The iA Clarington Funds are managed by IA Clarington Investments Inc. iA Clarington and the iA Clarington logo, iA Wealth and the iA Wealth logo, and iA Global Asset Management and the iA Global Asset Management logo are trademarks of Industrial Alliance Insurance and Financial Services Inc. and are used under license. iA Global Asset Management Inc. (iAGAM) is a subsidiary of Industrial Alliance Investment Management Inc. (iAIM).