Tips to protect your retirement savings from inflation

Inflation continues to be a main concern for many Canadians as it affects the cost of groceries, housing, travel and pretty much everything. The more prices rise – the less one has available for discretionary purchases, because their purchasing power decreases. Retirees and people nearing retirement are particularly sensitive to inflation as their income may not keep up with rising prices. Here are some strategies advisors can use to protect their clients' retirement savings.

The importance of having a plan

A plan is the foundation. Without a plan, it’s much harder to cope with inflation. The first step is to understand what a client's retirement will look like. You need to identify their income needs, but also their sources of income. Will money come from government benefits? A defined benefit plan? You should also look at the client’s assets and consider any health concerns.

Another source of worry is debt. And, how well a retiree with debt can handle interest rate hikes. Ideally, debt should be fully paid off before retiring. 

Also, to ensure that the retiree is meeting their basic livings needs, purchasing an annuity can be a good choice. It can provide a reliable source of cash flow, while reducing the need to access money from investments. The income generated by an annuity can provide clients some peace of mind, knowing that they have some reliable income to help with basic living expenses.

When to apply for government benefits

In an inflationary environment or not, this is an important decision. Clients can choose to receive their Quebec Pension Plan (QPP) or Canada Pension Plan (CPP) benefits as early as age 60. However, delaying benefits is often the best choice, no matter how you run the numbers.1 Of course, you need to assess each client’s specific situation. It may be inappropriate to delay taking QPP/CPP pension benefits if the client has a shortened life expectancy for example.

For individuals who take CPP/QPP before age 65, the amount that they otherwise would have been entitled to at age 65 is reduced by 0.6% for each month that it’s taken early, so at age 60 it is reduced by 36%. 

For individuals who decide to delay CPP/QPP after age 65, the amount that they otherwise would have been entitled to at age 65 rises by 0.7% for each month that it’s deferred. In the case of CPP, it can be deferred until age 70, so the amount received will increase by 42% and in the case of QPP, it can be deferred until age 72, so the amount received will increase by 58.8%.

But this doesn’t tell the whole story. CPP/QPP benefits are adjusted annually for inflation, so it does provide some level of inflation protection for clients. And for those who delay receiving their CPP/QPP benefits, their entitlement will also be adjusted by the CPI and the National Wage Adjustment factor growth. It affects the CPP/QPP benefit calculation in a way that often increases the delay incentive and also heightens the penalty for taking benefits early.1

Although most people can afford to wait, an overwhelming majority (9 in 10) choose to take their CPP/QPP benefits by age 65, according to the National Institute on Ageing, Ted Rogers School of Management, Toronto Metropolitan University. 

Deciding whether to collect CPP/QPP benefits early or at age 65, or to defer to a later age, is a choice that needs serious consideration. To facilitate the deferral decision, one interesting option is to purchase a term certain annuity to bridge a client’s cashflow needs until they start to receive the CPP/QPP benefits at a later date. The annuity will produce a steady and reliable source of income for the retiree. 

One of the most important factors affecting any decision is whether the client’s retirement plan can withstand the ups and downs of inflation, and when it can’t.  It’s worth considering the use of solutions, like a term certain annuity, that can provide the client with a guaranteed income source, that can be customized to adjust annually for inflation, similar to that of CPP/QPP.

Maximize the TFSA’s advantages

Often overlooked, the tax-free savings account has many advantages for retirees. This applies especially to clients who have higher cash flow needs or income in retirement. It’s more cost-effective for them to withdraw money from their TFSA. These withdrawals are not taxed. So, they will not affect income tested benefits, such as Old Age Security received. Clients can even replenish their TFSA the year following their withdrawal and use those savings as needed later on.

The most effective ways to generate retirement income 

A variety of investment products and strategies can generate income in a tax-efficient way. Guaranteed Investment Funds (GIFs), commonly referred to as segregated fund contracts, may be suitable for some clients. A client has a number of funds from which they can choose to invest in within the contract, thereby allowing them to choose funds that allocate tax-efficient income, such as eligible Canadian dividends and capital gains (losses) in non-registered plans.

For tax purposes, it may be possible to transfer some income to a spouse. This is the case for QPP/CPP income, where up to 50% of each spouse’s benefit can be shared with the other spouse. Another easy to implement solution involves a Registered Retirement Income Fund (RRIF). With a RRIF, the younger spouse’s age can be used to minimize the withdrawal amount that is required in the year.