Money milestones: how to deal with inflation on a fixed income in retirement?

Personal Finance Family Finance

More than half of those approaching retirement age say rising cost of living kept them from retiring: report

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Jan 14, 2022 • Jan 14, 2022 • 4 minute reading time • Join the conversation Inflation defeated other concerns, such as not having enough savings and not planning well for retirement. Photo by SunMedia files

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MONEY MILESTONES: In an ongoing series, the Financial Post examines personal financial questions related to life’s big milestones, from marriage to retirement.

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The consumer price index has been high for eight straight months, reaching an 18-year high in November and continuing to surpass the Bank of Canada’s comfort zone, meaning rising inflation is now a retirement risk.

Canadians notice. More than half (56 percent) of those approaching retirement age said the rising cost of living kept them from retiring, according to a November report from Fidelity Investments Canada. Inflation defeated other concerns, such as not having enough savings and not planning well for retirement.

“It’s certainly concerning, (retirees) have a right to be concerned,” said Paul Shelestowsky, senior wealth advisor at Meridian Credit Union in Ontario’s Niagara region.

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The consumer price index rose 4.7 percent in November from a year earlier, according to Statistics Canada’s December data, as a result of price increases for gasoline, shelter and food. Inflation exceeded the Bank of Canada target for the first time in April, by between one and three percent.

Shelestowsky said he includes two percent inflation in retirement plans for his clients, consistent with the bank’s preferred scope and the long time horizon that retirement planning entails. But he encourages Canadians preparing to retire to rethink their estimates and use higher inflation to stress their plans.

“We know that … it will probably be four to six percent in the next six months, and it could return in the second half of the year,” he said. ‘But if not, are you all right? Do you have enough money to finance your retirement? If you don’t, you either have to have less income or pursue a higher return.’

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Jason Heath, director of Objective Financial Partners, said retirees should maintain a “healthy stock position” to hedge against inflation.

“It’s a very difficult environment right now for a conservative retiree or a conservative retiree who is about to retire,” he said. “Anyone who invests in bonds, GICs and fixed income, the interest rates are definitely not keeping pace with the rise in inflation, especially after paying taxes on withdrawing investments.”

Energy, real estate and banking stocks typically perform particularly well in inflationary environments, Shelestowsky said. He mainly deals with mutual funds and said he is looking for fund managers who hold cash and gold and buy up energy and banking stocks.

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Retirees and those nearing retirement should also take a closer look at their investment costs, Heath said. Conservative investors, in particular, may pay higher fees than the returns they get from the safer parts of their portfolio.

Rising inflation adds a new dimension to the hotly debated topic of whether retirees should delay receiving their Canada Pension Plan and Old Age Security payments.

Shelestowsky said the answer may depend on what other retirees have to rely on.

Those with the stability of a defined benefit pension might feel safe deferring CPP payments, while those who need to manage their own money through a defined contribution pension, Registered Retirement Savings Plan (RRSP), or Registered Retirement Income Fund may be better off to start CPP earlier to extend the life of those funds.

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“Certainly in an environment of rising interest rates, you could run through your RRSPs faster than expected,” he said.

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Heath said many Canadians could benefit from delaying CPP payments. They will receive fewer payments overall, but the longer they wait, the more their monthly amount increases.

Canadians who start receiving CPP at age 60 receive 36 percent less per month than if they began receiving it at age 65, the median retirement age; those who delay CPP after age 65 get an additional 0.7 percent for each additional month they delay, up to a maximum of 42 percent by age 70.

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“Most people prefer to retire early. There’s this mindset of, ‘If I don’t start my retirement, I’ll have to take money out of my investments and that’s not good,’ or ‘I’ve been depositing this so I want to get it as soon as possible,’ Heath said. “It can even be counterintuitive, as most retirees would be better off.”

Heath pointed out that both CPP and OAS are also guaranteed by the government and increase with the cost of living. CPP’s inflation adjustments are based on the average reading of the CPI for the 12 months to October 31, compared to the previous year.

“If inflation is high or you live to be 110, those pensions continue to pay,” he said. “Your investments may not last that long, so CPP and Old Age Security can be a great way to protect against increases in the cost of living in retirement.”

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This post Money milestones: how to deal with inflation on a fixed income in retirement?

was original published at “https://financialpost.com/personal-finance/family-finance/money-milestones-how-to-handle-inflation-on-a-fixed-income-in-retirement”