For retirees and those nearing retirement, five major risks can jeopardize a long, comfortable retirement: taxes, investment fees, volatile stock markets, rising interest rates and persistent inflation.
You can largely manage the first two risks by maximizing the use of tax-efficient vehicles such as TFSAs, RRSPs and RRIFs, and by avoiding high-fee investment products. Market returns and interest-rate cycles are harder to predict; the usual response is to use sensible diversification and an asset allocation that matches your financial resources and lifestyle goals.
Inflation, however, presents a unique challenge. In 2022 inflation remained elevated as economies recovered from the pandemic and central banks moved from ultra-low rates to rate hikes to cool spending. If you are thinking about retiring or cutting back to part-time work, should inflation make you delay retirement? The long-term future is unknowable, and investors should recognize that both strong and weak economic outcomes are possible. The key is to prepare for multiple scenarios rather than try to predict the next market move.
Stocks can serve as an effective hedge against inflation when you choose companies whose products or services have relatively inelastic demand. Firms that can pass higher costs on to consumers typically retain margins and profitability better than those that cannot. Some technology and digital commerce companies, for example, have pricing power and recurring revenues that can help them weather inflationary periods—though historically technology shares have sometimes struggled in high-inflation environments, as seen in 2022.
Beyond equities, a well-rounded inflation-resistant portfolio often includes commodities, real estate and precious metals. Commodities—energy, agricultural products and base metals—tend to have inelastic demand, so price rises do not always curb consumption significantly. Real estate exposure, whether through direct holdings or liquid REITs and REIT ETFs, also provides a hedge: property values and rents often rise with inflation, and fixed-rate mortgage debt is gradually eroded by inflation over time. In a post-pandemic world it remains important to be selective within real estate, favoring segments with persistent demand such as residential housing.
Gold and other precious metals are another traditional inflation hedge. Investors often turn to gold during periods of market uncertainty or when they worry that governments may expand the money supply. Precious metals are used in industry and manufacturing and frequently lack close substitutes, which can make them relatively inelastic and useful as a portfolio diversifier.
A time-tested approach that addresses multiple macro scenarios is broad asset allocation. One simple and well-known example is Harry Browne’s Permanent Portfolio: an equal split among stocks, long-term bonds, cash and gold designed to perform acceptably across prosperity, deflation, recession and inflation. Some investors adapt that idea by adding real estate to create a five-way split—reducing each slice accordingly—or by allocating some portion to other precious metals or alternative assets such as selected cryptocurrencies.
For investors seeking a targeted vehicle that combines many real assets, diversified real-asset funds can be effective. These funds aim to protect purchasing power by investing across energy, precious metals, base metals, agriculture and real estate, and by balancing direct commodity exposure with related equities. Geographic diversification and a mix of futures and operating companies can help smooth returns, though investors should understand the fund’s concentration and the balance between equities and direct commodity holdings.
Many Canadian retirees already have meaningful exposure to natural-resource sectors through domestic equity holdings. However, real assets alone don’t replace the role of fixed income in a portfolio. For inflation protection within fixed income, real-return bonds (the Canadian equivalent of U.S. TIPS) remain a primary solution; these securities can be bought directly or via ETFs and mutual funds.
Traditional balanced portfolios—with a typical 60/40 allocation—may not always provide the expected downside protection. In 2022, for example, rising interest rates produced one of the worst bond performances in decades, offering little shelter from falling equity markets. That reality has pushed some advisors and retirees to consider alternative approaches beyond simple asset mixes.
One such alternative is “product allocation,” a concept that favours guaranteed income solutions in the retirement mix. Replacing some RRSP, RRIF or taxable assets with life annuities can secure defined lifetime income. With rising interest rates, annuities have become more attractive because higher rates translate into larger payout amounts at purchase. Some actuaries suggest allocating a meaningful portion of retirement capital to annuities to reduce longevity and sequence-of-return risk.
Newer longevity-focused products—sometimes incorporating tontine-inspired structures—are also appearing in the market. These solutions aim to share longevity risk among participants or to combine pooled risk with capital market exposure to improve retirement income outcomes. While innovative, these products are not direct substitutes for traditional inflation-indexed defined-benefit pensions backed by government guarantees.
Public pensions remain a critical piece of the retirement income puzzle. Most Canadians qualify for the Canada Pension Plan (CPP) and Old Age Security (OAS), both of which include inflation adjustments and act like government-guaranteed, inflation-protected annuities. Low-income seniors may also qualify for the Guaranteed Income Supplement (GIS), which provides means-tested additional income.
Delaying CPP and OAS can be a powerful strategy for increasing lifetime income. Waiting until age 70 raises the monthly CPP and OAS payments substantially compared to starting at 65. The right timing depends on your overall cash flow needs and expected longevity; delaying increases the starting benefit and thus magnifies the value of subsequent inflation adjustments. Couples can further optimize timing by staggering or splitting claims to suit household income needs.
Practical advice for retirees: don’t make hasty, sweeping changes to registered accounts without running the numbers. Consider whether guaranteed income solutions, diversified real-asset exposure, targeted inflation hedges and a continued ability to earn some income part-time would together meet your objectives. Combining these elements—sound asset allocation, select annuity positions, exposure to commodities and real estate, and government benefits—will help most retirees prepare for inflation as well as other economic conditions.
MoneySense contributor Jonathan Chevreau is the founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected].
Read more about retirement:
- How much should I have in my RRSP?
- Know your TFSA contribution limit
- Planning for retirement with little to no savings to draw on