Will Inflation Impact Your Retirement?

By iA Private Wealth, January 04, 2023

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) pension plan 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 Investment 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 wealth-eroding effects of high inflation:

1. 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.
2. 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 traditional bonds that many investors hold, your advisor may suggest investing in securities like floating rate or real-return bonds (or funds holding such securities). As market rates rise, these bonds tend to maintain value better and generate more income than traditional bonds. Also, an allocation to GICs can lock in today’s higher rates before they decline, helping you put away more cash for retirement.
3. 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.
4. 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.

We can create a retirement plan that works for you – even in inflationary times – so contact us today.

This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax, investment or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This article does not constitute an offer or solicitation to buy or sell any of the securities mentioned. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.