How to Combat Inflation in Retirement

If you are not concerned about inflation in retirement, you should be. It can erode your purchasing power over time so that years after retiring, you may find that you can’t afford as much as you could before if you haven’t taken steps to combat inflation. The good news is that there are several things you can do to combat inflation and therefore, feel more secure in your retirement. I will be covering several of these in this article.

As I’m sure you already know, inflation has been higher than usual lately. The Consumer Price Index in Canada rose 6.8% on an annual average basis in 2022, which was a 40-year high. This compares to an average of about 2% over the last 20 years before 2021.

Consider the rule of 72. When you take the number 72 and you divide it by an interest rate, that tells you how long it takes for prices or investments to double. If inflation is 3%, it takes 24 years to double. If inflation is 4%, it takes 18 years for prices to double. It can work the same way with investments. If you invest $100,000 that pays 8% a year, it will take 9 years to double that investment to $200,000. The rule of 72 will help you to know when your income will need to double to have the same purchasing power.

The following are several tips to help deal with inflation before and during retirement. I have divided the tips into overall, insurance, investments, and income tips.

Overall Tips

1. Save as early as you can and as much as you can. When you save early in life, you have the advantage to compound your interest and other income over time, which is a great way to combat inflation. If you have a retirement savings plan at work and your employer matches part of your contributions, make sure you take advantage of this by maximizing the amount you contribute. Your employer’s contributions are like “free money” to you as long as you stay with that employer long enough for their contributions to be vested.
2. Increase the portion of total investments in safer vehicles as you near retirement so that you don’t experience a large drop in investment values with market volatility. A rule of thumb that could be used is to have at least 100 minus your age as a percent, invested equities and the remainder in fixed income investments. See some investment options below.
3. Create an emergency fund of 3-6 months’ worth of living expenses. This could be in your TFSA where you are not taxed on the income and if you make any withdrawals, you can put the money back in the following year. This emergency fund is good to have to cover unexpected expenses like car repairs or job loss.
4. Talk to an insurance agent or investment specialist, especially if you are close to or already in, retirement. Your advisor can assess your finances and suggest strategies that may help offset inflation.
5. Consider delaying payments of Canada Pension Plan (CPP) and Old Age Security (OAS). Both are in effect inflation-indexed annuities, going up every year with inflation. To increase the amount, you receive as monthly payments, consider waiting to start collecting on these. Every month you wait to start collecting CPP, until you reach age 70, the amount goes up by 0.7%, and the larger the starting base, the more valuable the annual inflation adjustment will become. To provide income while delaying CPP, you could purchase a term certain annuity to bridge cashflow needs. You could also borrow using the cash surrender value of your life insurance policy as collateral.
6. Plan for your healthcare costs ahead of time. See insurance options below for some solutions that better prepare you in retirement.
7. Find ways to cut your expenses. Downsizing your home may be an alternative, especially if your children have grown up and moved out. Alternatively, you could have a home that you could share with your adult children so that expenses can be shared. Another expense to cut before retirement is debt so you don’t have these debt payments in retirement, and you free up extra cash for living expenses.

Investment options

Historically, equity investments and investments that invest in equities have the highest return on investment, thus being a good hedge on inflation. Unfortunately, equities tend to be volatile, and this makes it uncomfortable for many. The good news is that there are some ways of getting some of growth that equities provide while still getting some guarantees to protect your investments from the downside. Here are some options to consider:

1. Equity Index Guaranteed Investment Certificate (GIC). According to a recent Forbes article (Average Stock Market Return by Benjamin Curry, Feb. 16, 2023) – “Investors who keep their money at work in the S&P 500 have been able to enjoy an annualized stock market return of around 10% over the long haul.” This has been better than inflation, thus investing in Equity Index GICs allows you to get higher growth while still getting guarantees. Here are examples of the features offered:
   1. Partly linked to market performance, partly guaranteed at a predetermined fixed rate.
   2. 100% capital guarantee at death
   3. Can choose your capital guarantee at maturity: 90%, 100% or 110% – can even guarantee some of your gains, but only in registered accounts. The lower the capital guarantee, the more profitable the conditions.
   4. Choose whether your investment matures after 5, 7, or 10 years. The longer your term, the more attractive the rate for the fixed portion.
   5. Some insurance companies allow you to redeem your GIC anytime, but certain fees and penalties may apply for early withdrawals.
   6. The variable portion will reflect a market index or a fund, as you choose. When you decide it will reflect a fund, it is overseen by a leading management firm and returns mirror the performance of that fund.
2. Guaranteed Lifetime Withdrawal Benefit (GLWB). Here are some of the features:
   1. Guaranteed 4% annual income in the years of saving with no withdraws.
   2. Income base reset automatically every 3 years – potential to increase income.
   3. 75% death & maturity benefit guarantee.
3. Consider Personal Pension Plan® (PPP®) for business owners. Here are the advantages of a PPP® over a Registered Retirement Savings Plan (RRSP) and an Individual Pension Plan (IPP):
   1. Assuming the same rate of return on assets in an RRSP, the PPP® member could have over $1,000,000 more in registered assets to retire on.
   2. Can contribute more than IPP when between ages of 18 to 39 which is applicable when there are children involved in the business.
   3. Ability to “Double Dip” in set up year, contributing double what you could normally.
   4. Investment management fees, annual administration fees, trustee fees and actuarial fees are all tax deductible for the contributing company.
   5. Assets inside a PPP® are trade-creditor protected.
   6. Investments can be made in non-RRSP asset classes, providing more investment options.
   7. Company can claim refund of sales tax on fees.
   8. Guaranteed ’underperformance’ of safer assets in DB (Defined Benefit) account will trigger larger special payments & thus added tax deductions, allowing for additional contributions to the pension plan.
   9. Protection from Tax on Passive Income (TOPI) rules.
   10. No deemed disposition on death of shareholder when others are part of plan where an RRSP is deemed to be disposed of on death when no spouse, potentially saving a lot of taxes on the estate.
   11. If excess funding occurs, PPP® client can elect to move overfunded DB (Defined Benefit) into DC (Defined Contribution) side of plan.
   12. Additional benefits can be purchased via “terminal funding”.
   13. PPP® are served through ‘fiduciary oversight’ by a legal fiduciary – other plans, members are deemed to be looking after their own interests.
   14. PPP® clients have ability to appoint a corporate trust company as a corporate trustee, thus moving risks away from clients and friends.
   15. Ability to split pension income at any age compared to RRIF income can split starting at age 65.
   16. Ability to use $2K refundable pension credit earlier than can be used with RRSP.
   17. Ability to increase tax deductible contributions past the age of 71 via special payments.
   18. The large tax savings/refunds created by the multitude of additional tax deductions could be used by the corporation to purchase an overfunded Universal Life (UL) policy with the corporation designated as the death beneficiary thereby funding the policy with $0.00 cost.
4. Annuity with an index option. Only a few insurance companies offer this.
   1. Income amounts can be adjusted annually by indexing up to a certain percentage.
   2. A life annuity pays a monthly or yearly income for your entire lifetime. If you are concerned about outliving your money, they may be an option for you.
5. Segregated Funds allow you to invest in various asset classes (like some equity funds) that can provide a higher return than inflation while providing guarantees in the case of a down market. They offer maturity and death guarantees between 75% and 100% with some that have regular resets so that you can lock in your gains with higher guaranteed levels. Funds that invest in other asset classes like commodities, real estate and gold can also be a good hedge against inflation.
6. Take advantage of tax-free savings account (TFSA) so that you can accumulate savings without paying taxes on the income. When you need to take money out, you can add it back the following year.

Insurance options

1. Critical Illness insurance – Experiencing a heart attack or stroke or finding out that you have a serious illness like cancer, can eat away at your savings very quickly. You may have to make renovations to your home, pay for medication your health plan doesn’t cover or make a trip to a specialist outside the country. This is where critical illness insurance can pay for these costs or anything else you may want or need, thus protecting your savings. If you are concerned that you are paying for something that you will never need, you can add a Return of Premium rider to this policy, so you get what you paid if you never make a claim under certain circumstances.
2. Life Insurance – the buying power of the face amount of the life insurance policy decreases over time with inflation. To be able to get higher face amount on your policy, it is a good idea to have a guaranteed insurability rider. This allows you to increase your policy without undergoing another medical examination. For Whole Life policies, you could purchase a participating policy that pays policy dividends that can be reinvested into more coverage and a growing cash surrender value (CSV). You can then borrow using the CSV as collateral to fund your retirement. For more information on this, see my blog article called “Building Wealth with your own Family Bank in Canada Using Whole Life Insurance”.
3. Disability Insurance with index rider – some policies offer riders that provide some measure of financial protection against inflation. If you were to become disabled, you could get a higher monthly benefit by the inflation rate with this rider. It’s a useful option to boost the monthly payout available on your disability policy.
4. Health & dental plans – Healthcare expenses generally increase at a rate higher than overall inflation and failing to plan for medical costs can consume a lot of your retirement income. Many people have health and dental plans with their employers but when they retire, those benefits go away. It is wise to purchase an individual health and dental plan for your potential medical needs in retirement because people tend to spend more on this as they get older, and costs keep going up.
5. Long-term care plans – Many Canadians will need either help while living at home or need to live in a long-term care facility. As retirees age, they may require assistance with daily activities such as bathing, dressing, and eating. Long-term care insurance can help cover the cost of these services, which can be expensive. This can help retirees maintain their independence and reduce the financial burden on their families.
6. Funeral & Final Expense Insurance – The cost of funerals is going up and you can lock in the cost now and have your funeral prearranged with insurance so you can help reduce the financial and emotional burden your family face while grieving.

Income option

1. When I joined Experior Financial Group Inc., I did it to provide better service to my business owner clients and to provide income long into my retirement years. I can work my own hours and build up passive income while building a legacy that can be passed to my family. Consider this for yourself and join my team.
2. Start a side business before or during retirement so that it is a source of income for you in retirement. This could also allow you to make some deductions against the business income such as a portion of household expenses for a home office. If you incorporate your business, you could purchase a Health Spending Account policy that allows you to pay for health and dental expenses with before tax dollars.
3. Passive income could be created from rental properties, writing a blog or royalties from published works.

In conclusion, inflation can have a significant impact on the buying power of savings in retirement. Retirees who rely on savings to fund their retirement may find that their standard of living is eroded over time because of inflation. However, by following some of the investments, insurance, income, and other options above, you will be able to combat some of the impacts of inflation, ensuring that their savings retain their purchasing power and maintain your standard of living over time.

Let me help you fight inflation in retirement. Contact me today at [email protected].