We can largely control the first two by maximizing the use of tax-effective vehicles like TFSAs, RRSPs and RRIFs, and avoiding high-fee investment solutions. Stock market returns and interest rates are trickier, typically addressed by ensuring that the traditional free lunch of diversification and asset allocation are commensurate with your financial resources and lifestyle objectives.
But what about inflation? Throughout 2022, inflation has remained elevated, triggered by the COVID recovery and stimulative monetary policy by way of ultra-low interest rates. Central banks in Canada and abroad have done an about-face, raising rates to try to slow down spending and cool inflation.
If you’re contemplating retirement or semi-retirement, is inflation a sufficient threat to consider postponing it? We tackled similar ground in this space a year ago, shortly after the COVID bear market hit. Then, as now, the long-term future is essentially unknowable. As Vancouver-based portfolio manager Adrian Mastracci of Lycos Asset Management Inc. sees it, “Various pundits are making the case for both a robust economy and one not quite so. Investors should remember that they cannot control either flavour. They may get both, one followed by the other.”
Some fear inflation is a threat to stocks. However, a stock portfolio in itself can be a good inflation hedge as long as the right stocks are chosen, says Matthew Ardrey, wealth advisor and portfolio manager with Toronto-based TriDelta Financial. “You want to invest in companies with relatively inelastic demand for their products,” says Ardrey. “A company that can push on costs to consumers instead of absorbing them will be able to be more profitable.” Some stocks are more vulnerable to inflation than others. Mad Money’s Jim Cramer has said high-tech digital commerce stocks, like Google, may be inflation havens. Those that can boost prices, like Netflix, may also be similarly insulated. Historically, technology stocks have not done well in a high-inflation environment, and 2022 has been no different.
Watch: When can I retire?
Aside from stocks, Ardrey recommends adding a trio of other asset classes: commodities, real estate and gold. Commodities are relatively inelastic in their demand, so price increases do little to affect the amount of consumption: more on which below. REITs (or REIT ETFs) are an easy, liquid way to add real estate to an inflation-resistant investment portfolio. “Physical assets like real property often continue to grow above the rate of inflation. Additionally, if the loans borrowed to purchase the property are fixed-rate, then inflation erodes the cost of repayment over time.” That said, “In a post-COVID environment, you need to be selective in where you invest in this asset class,” Ardrey cautions. Focus on inelastic areas like residential real estate. People will always need a place to live.”
The case for gold stems over concern that governments increase their money supply by “printing money,” raising worries about creditworthiness and the value of money. “Investors often move to gold during more unstable times in the markets,” Ardrey says. “Precious metals can provide inflation protection. They are a primary input in many manufacturing cycles and often have no real replacement, making them inelastic.” (Read more about buying gold.)
Personally, I rely on traditional asset allocation to cover the various possibilities of inflation, deflation, prosperity and depression. I’ve always found Harry Browne’s Permanent Portfolio to be a good initial mix of assets to prepare for all possibilities: stocks for prosperity, bonds for deflation, cash for depression/recession and gold for inflation. Browne, who died in 2006, famously allocated 25% to each.
That’s a good place to start, although some might add real estate/REITs and make it a five-way split each of 20%. Some suggest 10% in gold (both gold bullion ETFs and gold mining stock ETFs), with the other 10% in other precious metals like silver, platinum and palladium. Some might prefer to put some of the precious metal allocations into a 5% position in cryptocurrencies like bitcoin and ethereum, or “digital gold” (which we investigated earlier in this column). Unlike dollars, which governments can print in unlimited quantities, bitcoin is a bit like land: no more will be issued when they reach the 21-million bitcoin limit built into the cryptocurrency’s original design.
If you can afford to not take your CPP and OAS until you are 70, do it if you think that you will live longer than 84. What’s in your DNA is crucial. Don’t scrimp though, make sure that you have enough cash to do all the things that you want.
I think it makes a lot of sense to wait to take CPP and OAS if you can afford it. In our case we have large RRSP/RRIF accounts that are fully taxable so we want to work them down before taking in more income. This will hopefully leave less tax to pay at the end and our heirs get to keep more. But the reasons are different for everyone and many things need to be considered.