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Money Milestones: How To Deal With Inflation On A Fixed Income In Retirement

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

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Money Milestones: How To Deal With Inflation On A Fixed Income In Retirement

MONETARY MILESTONES: In an ongoing series, the Financial Post explores personal finance issues related to major life milestones, from marriage to retirement.

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The Consumer Price Index has been high for eight consecutive months, hitting an 18-year high in November and continuing to exceed the comfort zone of the Bank of Canada, meaning rising inflation is now a risk for retirement.

Canadians are taking note. More than half (56%) of people approaching retirement age said the rising cost of living was preventing them from retiring, according to a November report from Fidelity Investments Canada. Inflation has overtaken other concerns such as not having saved enough and not having planned for retirement properly.

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“This is really worrying, (retirees) have a right to be concerned,” said Paul Shelestowsky, senior wealth advisor at Meridian Credit Union in the Niagara region of Ontario.

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The consumer price index rose 4.7% in November from the previous year, according to December data from Statistics Canada, due to increases in gasoline, housing and food prices . Inflation broke the Bank of Canada’s 1-3% target range for the first time in April.

Shelestowsky said he factored 2% inflation into his clients’ retirement plans, in line with the bank’s preferred range and the long-term horizon that retirement planning entails. But he encourages Canadians preparing to retire to revise their estimates and substitute a higher rate of inflation to test their plans.

“We know that… it will probably be four to six percent over the next six months, and it could come back in the second half of the year,” he said. “But if not, are you okay?” Do you have enough money to fund your retirement? If you don’t, you need to either have less income or look for higher returns. “

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Jason Heath, chief executive of Objective Financial Partners, said retirees should maintain “healthy exposure to equities” to hedge against inflation.

“It’s a very difficult environment right now for a conservative retiree or a future conservative retiree,” he said. “Anyone who invests in bonds, GICs and fixed income securities, interest rates certainly don’t keep up with increases in inflation, especially after paying taxes on investment withdrawals. “

Energy, real estate and banking stocks tend to 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 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. Cautious investors in particular may pay higher fees than the returns they get from the more secure parts of their portfolio.

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

Shelestowsky said the answer may hinge on the savings retirees have to rely on.

Those with the stability of a defined benefit pension payment might feel secure in delaying CPP payments, while those who will have to manage their own money from a defined contribution pension, a registered plan Savings for retirement (RRSP) or a registered retirement income fund may be better to start the CPP earlier to extend the life of these funds.

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“Certainly in a rising interest rate environment, you could be going through your RRSPs faster than you expected,” he said.

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

Canadians who start receiving the CPP at age 60 receive 36% less per month than if they had started at age 65, the average retirement age; those who postpone CPP past age 65 receive 0.7% more for each additional month they delay, up to a maximum increase of 42% at age 70.

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“Most people prefer to start retirement earlier. There’s a certain mindset: ‘If I don’t start retiring I have to take money out of my investments and that’s not good,’ ”said Heath. “It can actually be counterintuitive, as most retirees had better postpone. “

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

“If inflation is high or you live to be 110, those pensions keep paying,” 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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