October 2023 LifeSpring Insights

Today’s high inflation is somewhat reminiscent of the early 1980s. While we’re nowhere near the sky-high levels of those days, whenever high inflation strikes, it hits hardest in things we can’t do without, like groceries and shelter.

If you’re retired or nearing retirement, the biggest challenge will be stretching budgets to cope. But if you still have time to save and build, how can you make your retirement planning work in this new era? Controlling costs is important, of course. But it’s also key to take full advantage of the opportunities – and investment tools – that higher inflation, and rates, have ushered in.

Taking stock of investment opportunities

The current climate of high interest rates has an interesting impact on certain investment types. First, it is helping to increase the returns on low-risk investments like money-market funds, term deposits offered by credit unions and their equivalent, guaranteed investment certificates (GICs) offered by banks. Annuities also gain appeal in times like these. While mostly ignored during low-rate years, these are all are worth considering again for those in retirement or building their retirement plans.

Here are three retirement-planning strategies to consider when dealing with high inflation. 

1. Hedging inflation in your retirement plan

Until recently, it was easy to come up with an inflation rate on which to base your financial planning: for most of the preceding couple of decades, increases in the consumer price index (CPI) largely remained at or near the Bank of Canada’s 2% target. 

That ended when the current bout of inflation hit, leaving us with a challenge: what rate should we assume for our golden years? While most economists, and the Bank of Canada, expect inflation to return to 2% in the next couple of years, it pays to be build in a buffer – you may want to plan for slightly higher inflation over the long term, possibly between 2.1% and 3%. 

It bears noting that inflation is a moving target in the short term, while your retirement is a long-term plan. You are best to work with an advisor to ensure your planning is based on a reasonable long term inflation assumption, while continuing to review with them if there are any tactical, shorter term shifts that will allow you to best take advantage of current opportunities (like the ones discussed in this article).

2. Dividend stocks could play a role in your retirement planning

Dividend stocks† can be a great source of retirement income, and today, their dividend yields are particularly high. That’s because higher returns on government bonds, term deposits, GICs and other lower-risk investments make dividend stocks less attractive to income-seeking investors. 

As a result, dividend stocks’ prices have fallen and their dividend yields have grown, as yields and prices move in opposite directions. That could mean higher income on a purchase made today.

Certain asset classes perform differently in inflationary environments. Traditionally, commodities, real estate and bonds tend to come back in favour for various reasons. Even maintaining a traditionally balanced portfolio can be a great hedge against inflation. But the important thing is to maintain a well diversified portfolio, which can provide smoother returns and steady income.

Stock investing does involve risk, so be sure to speak to an investment advisor and get a check on equity investments that are appropriate for your goals, age and risk tolerance.

3. Annuities: Another “safe” investment to consider

Under an annuity, you invest a one-time sum in return for a fixed payment that includes some of that cash returned to you, plus interest. You can set up an annuity for either a stated period of time or the rest of your life.

For most of the last 20 years, the rate on annuities has been low. But thanks to higher interest rates, annuity rates are much higher today, making them more appealing as a source of retirement income. 

In the current rate environment, you can purchase more income from an annuity for less initial investment. Annuities purchased in non-registered accounts may also offer some benefits when it comes to income tested benefits (like OAS). This is because some of the payment received from an annuity could be considered return of capital and therefore not reportable as income on your tax return.

Since OAS payments are indexed automatically with the consumer price index, protecting these payments may provide a valuable hedge against inflation that is not available within other sources of retirement income. You can also explore annuity options that will increase with inflation, but note that they come with added initial cost. 

Usually the surprising value beyond the income from an annuity is protecting OAS, which increases on a schedule with the consumer price index (CPI). This is a great inflation hedge that is very expensive to buy in a pension or annuity – most will grow when able, and usually at a reduced amount from the CPI.

Annuities are provided by licensed insurance† representatives. Ask your advisor about this option, how it might work for you, and how to go about mixing them into your portfolio.

Seek advice to adjust and advance your plan

No matter where you are on your financial journey, a professional advisor can help you with the ups-and-downs along the way. From inflation to investments, they can provide the insight and information on your best course of action, with solutions tailored to your specific needs.

If you have questions about any of these strategies – or the impact of today’s economic reality on your finances – contact your advisor to discuss. Reaching your financial goals often requires adjustments, especially as the economy makes shifts. Your advisor can provide the advice needed to keep you on track and moving forward to achieving your goals.