How might inflation impact your retirement plans?

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.

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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.

Dale Roberts likes the inflation-fighting diversification of the Purpose Diversified Real Asset Fund (PRA/TSX), of which I now own a modest position. Its goal is to “protect purchasing power with real assets,” and diversify a core bond and equity portfolio to “protect against inflation with a broad basket of real assets and related equities.” It splits its real assets into five major varieties: energy, precious metals, base metals, agriculture and real estate. Within each of those five categories, it invests two-thirds in related equities and one-third in direct commodity exposure. So for example, the energy segment invests in cotton futures, soybean and corn futures, but also stocks like Archer-Daniels-Midland Co. It invests in crude and gasoline futures as well as stocks like Chevron Corp. and Exxon Mobil Corp. Geographically, almost 60% is in the U.S. and 15% in Canada, with the rest in cash. The base metals segment invests in copper futures and stocks like Nucor Corp. and Freeport-McMorRan Inc.

Most Canadian retirees will already be heavy in Canadian stocks, which have a higher than typical smattering of energy, mining and commodity plays. However, real assets—most would include their principal residence here—don’t really cover fixed income. 

The traditional fixed-income solution to inflation in Canada has been real return bonds: the equivalent of America’s TIPS, or Treasury Inflation-Protected Securities. Both can be accessed via ETFs or mutual funds.

To the extent stock markets and interest rates will forever fluctuate over the course of retirement, such a diversified approach could help you sleep at night, as some asset classes zig when others zag. Seldom will all these assets soar at once, but hopefully it will be just as rare for all to plunge at once. 2022 has seen the traditional 60/40 balanced portfolio perform terribly, with bonds having one of their worst returns on record and providing little protection from sagging stock markets.

Another approach is not so much asset allocation but what York University finance professor Moshe Milevsky has dubbed “product allocation.” That might mean replacing some of your RRSP or RRIF capital, or even taxable funds, with an allocation to life annuities. Actuary Fred Vettese has counselled moving perhaps 30% of registered funds to such solutions. As rates have risen, annuities are suddenly becoming more appealing to potential purchasers. Higher rates when an annuity is purchased mean higher annuity payments.

Inflation can be particularly pernicious to those who expect to live a long time. So don’t forget the innovative Purpose Longevity Fund solution we looked at earlier this summer. It incorporates what Milevsky has termed “tontine thinking” in its makeup. Guardian Capital has also come to the table with its GuardPath Longevity Solution, initially offering three tontine-inspired products for accumulation, decumulation and a hybrid version.

Despite their innovations, Purpose’s and Guardian’s offerings are not the equivalent of the classic inflation-indexed defined benefit (DB) pension plan backstopped by taxpayers. If you lack such a plan (and many do), find comfort in the fact most Canadians qualify for the Canada Pension Plan and Old Age Security, both of which are in effect inflation-indexed annuities. To the extent these are also DB plans and government-guaranteed to boot, CPP and OAS are immensely valuable, as is the tax-free, means-tested Guaranteed Income Supplement (GIS) for seniors with low incomes and few other financial resources.

Many articles have been written on the strategy of delaying CPP and OAS to age 70. The focus is usually on the absolute higher monthly benefits of waiting till 70: 42% more compared to taking CPP at 65; 36% more for deferring OAS from 65 to 70. That’s certainly a valid strategy if you have enough income from other sources to tide you over to 70—not everyone does. But don’t forget that the bigger the starting base of CPP/OAS, the more valuable the annual inflation adjustment will become.

Adrian Mastracci cautions retirees not to make sweeping changes like deregistering RRSPs. “The better question is whether this income has more value in your later years. Do the math on whether CPP/OAS are best started at age 70. A compromise is starting one at 70 and one prior. Or one spouse takes them both early, while the second spouse starts them at age 70.”

Do all these things, along with a broadly diversified allocation of assets that includes inflation hedges, add in a sprinkling of annuities or tontine-like solutions like those from Purpose and Guardian, and I think most would-be retirees will have done everything they reasonably can to tackle inflation, not to mention the opposite conditions. Of course, human capital is also worth considering: the ability to continue to generate an income at least part-time in retirement is also valuable. 

MoneySense contributor Jonathan Chevreau is also founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected].

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Read more about retirement:

• Earning, saving and spending money in Canada: A guide for new immigrants 
• How much should I have in my RRSP?
• Know your TFSA contribution limit
• Planning for retirement with little to no savings to draw on