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Navigating Retirement in Times of High Inflation: Strategies to Secure Your Future Thumbnail

Navigating Retirement in Times of High Inflation: Strategies to Secure Your Future

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.

When 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 you may receive with a workplace defined contribution pension plan (DC) is linked to how the investments perform. If markets are declining – which typically happens during periods of high inflation – the investments in your defined contribution plan might not generate returns that keep pace with inflation.

Conversely, retirees in a defined benefit (DB) plan could potentially be better off because these pension plans guarantee a specific income stream and are indexed to inflation. 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 will also help you contend with rising costs.

How We Can Help: Strategies to Safeguard Retirement Funds During High Inflation

We’re experienced in helping you create and maintain customized wealth plans flexible enough to endure different economic and market conditions. 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. 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, 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. We can optimize your contributions to help save on taxes by using vehicles like RRSPs and TFSAs. This also instills a disciplined approach so you can save money on a regular basis.

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 it is important to identify a strategy that fits into your time horizon and risk tolerance. It is a common and time-tested strategy to invest during these periods to take advantage of lower prices. As the markets recover, your “buy low” investments could benefit significantly and enhance your retirement savings.