Ask the Expert: How to protect your retirement savings from inflation

If inflation rates continue to rise, more than half of Canadians believe they’ll have to push back their target retirement date, according to the Healthcare of Ontario Pension Plan’s 2023 retirement survey. But experts say it doesn’t necessarily have to be that way. Inflation is a “future inevitability,” says Tony Maiorino, who leads a team of 250 client-facing advisors in his role as head of RBC Family Office Services. And while Maiorino acknowledges that more Canadian retirees are feeling the effects of inflation, which he best describes as a rise in prices causing a decline in the value of your dollar, it’s an inevitability that people can plan for. “As an individual, you want to be thinking about … ‘How do I increase the value of my dollar today so that in 10-15 years that dollar is still worth a dollar in terms of purchasing power?’” Maiorino said in an interview with Yahoo Finance Canada.

Government pensions are inflation protected

Here’s the good news: government pensions such as the Canada Pension Plan (CPP) and Old Age Security (OAS) are regularly adjusted to keep up with the cost of living. “So, people at the lower end of the spectrum, even though they have less spare room, most of their income is insulated from inflation,” Jason Pereira, senior partner and financial planner at Woodgate Financial, said in an interview with Yahoo Finance Canada. For those less reliant on CPP, Pereira says it might make sense to delay tapping into the plan until the age of 70 – or close to it – to help maximize the lifetime benefits. CPP payments increase by 8.4 per cent every year after the age of 65, leading to a maximum increase of 42 per cent by age 70. “But here’s the thing,” Pereira added. “At age 70, you get 42 per cent more of a number that’s been adjusted to the average industrial wage, which is higher than inflation. “So, the number you get at age 70 tends to be closer to 50 per cent more.” Pereira says the decision of when to start drawing from CPP comes down to two things: your life expectancy, and whether or not you can afford to live without it those first few years. “If you have no other sources (of income), then it’s out of the question,” he said.

Limiting the impact of inflation on your portfolio

As for those other sources, experts agree the best way to maintain your purchasing power in retirement is to build a well-diversified investment portfolio that, ideally, outpaces inflation. In 2022, the annual inflation rate rose to a 40-year high of 6.8 per cent, according to Statistics Canada. But financial planners typically use the Bank of Canada’s targeted two per cent inflation rate for their retirement projections. “It’s really important to remember that we are not talking about today,” Pereira said. “We’re talking about the long term.” A well-diversified portfolio could mean investing in a combination of stocks, bonds, mutual funds, and/or Guaranteed Income Certificates (GICs). If you ask Maiorino, it could also mean looking at real estate, precious metals like gold and silver, and whether investments outside of Canada in another currency “might be a hedge against inflation.” Ultimately, though, Pereira says “there is no perfect inflation hedge.” That’s part of the reason why he advises clients to build a portfolio designed around their risk tolerance. Many Canadians aren’t in a position to take a stock market risk, Pereira says, and that’s okay. “If that means they’re in a really conservative portfolio that’s not likely to outpace inflation, then their savings rate has to be higher,” he added. “There is no witchcraft to this.”

Setting your expectations for when to retire

Shelley Smith, an investment advisor at TD Wealth, has two pieces of advice for Canadians concerned about how inflation might impact their retirement plans. First, think about your expectations for retirement. “It could be, ‘I want to be able to go to Europe on vacation every year,’”Smith said in an interview with Yahoo Finance Canada. Then, talk to an advisor or financial planner about whether you have the assets to meet those expectations, and if not, what adjustments need to be made. The rest usually takes care of itself. “Generally, when I talk to clients, retirement becomes more about the goals, that purpose that you have, after you leave the workforce,” Smith said. “And how do we make those portfolios work for you in all types of conditions?”