Accounting for inflation in your retirement plan
These days, as the economy lifts toward recovery, inflation isn’t a big deal – but, according to
some experts, it could be. For retirees that could mean a big drop in the real future purchasing
power of their investments. Simply put, inflation means that the income you expect from your
investments over the next 10, 20, 30 or even 40 years may be lower than in today’s dollars.
Over the last 20 years, inflation has averaged 2% a year but many financial advisors are
planning for an annual rate of 4%. As a retired investor, this means that your portfolio will need
to achieve an average return of at least 4% just to stay even. If that isn’t the case, you will need
to go looking for higher returns or accept a more limited lifestyle. And with longer lives being
projected for today’s retirees, you may need to stretch your retirement dollars over many more
years – for example, financial advisors are now recommending that investment portfolios should
be structured to provide an income until at least age 95.
Very conservative investors may find it challenging to achieve an average return of 4% or above
– especially if they confine themselves to such fixed-income investments as Guaranteed
Investment Certificates (GICs) or Government Bonds.
The income you will require for all your retirement years depends on your personal lifestyle
choices and other factors – such as, whether you plan to travel extensively or are more of a
‘stay-at-home’ person – but most experts agree that protection against inflation means
structuring a balanced portfolio that includes equities, along with fixed-income investments and
cash.
A five-year study of the S&P/TSX composite index shows why: The period from 1976 to 1980
had an inflation rate averaging 8.9% per year but the 5 year annualized rate of return on the
index was 26.6% and its real rate of return was 14.4%. If you had invested $100,000 in the
Canadian index for that total period, it would have grown to just over $300,000 or $196,000 in
real dollars – much better than the rate of inflation.
To assess your need for inflation protection, start with these questions:
Which sources of your income are indexed for inflation – for example, your company
pension?
Which expenses will decrease over time – for example, travel expenses?
Which expenses will increase over time and are likely to experience high inflation – for
example, medical expenses?
Which expenses will experience lower inflation – for example, utilities?
To what degree do your current investments offer inflation protection?
You need a long-term strategic retirement income plan and your professional advisor can help
develop – and monitor -- the right plan for you that takes into account the effects of inflation.
This column, written and published by Investors Group Financial Services Inc. (in Quebec – a Financial
Services Firm), presents general information only and is not a solicitation to buy or sell any
investments. Contact a financial advisor for specific advice about your circumstances. For more
information on this topic please contact your Investors Group Consultant.
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