How inflation affects your portfolio returns
Most retirees depend on a fixed income, whether from registered pension plans or personal retirement savings. But what should you do when you need to access your savings during a period of high inflation? Put simply, inflation is a measure of the rate of rising prices for goods and services over time. Inflation can happen because of price increases in production costs or other reasons. For example, in January of 2023, Canadian food prices were up 8.9% per cent from the year prior. Price jumps like this can be quite sharp at times and affect your cashflow despite consumption habits that may stay the same.
Retirement portfolios are no exception. So, it makes sense that retirees are affected differently by inflation based on their lifestyle, spending habits and how their money is saved and/or invested.
Some inflation risks for retirees:
- The cost of your expenses may rise faster than your fixed income can keep pace with.
- You may deplete your savings at a faster rate than anticipated – especially if your spending is higher than planned.
How can you help your portfolio keep pace with inflation?
If you’re not retired yet, the first step is to plan ahead. Work with an advisor to account for inflation and ensure that your plan may be built to deliver income that may increase over time to help your income keep pace with inflation.
If you are already retired, try to resist the urge to get out of the market. Staying invested can be a prudent way to hedge against inflation. Time in the market is more important than timing the market.
During periods of inflation, some industries tend to perform better. While sectors like consumer discretionary and technology often perform poorly, consumer staples and utilities tend to outperform. With rising costs, some companies may be able to raise their prices to reflect higher costs, and this may lead to higher earnings. Therefore, investing in funds where active managers take those factors into account may bode well.
Invest strategically and for growth
During high inflationary periods, funds invested in equities historically tend to provide returns higher than the rate of inflation3. If, for example, the equity portion of your portfolio returns nine percent, but the inflation rate is six percent, your returns are three percent above the inflation rate. Retirees may, therefore, want to consider a strategy that invests some assets in growth-oriented funds.
The 60/40 portfolio may make a comeback
The 60/40 portfolio has long been a popular investment portfolio strategy consisting of a 60% allocation to equities and 40% to fixed income. Many in the wealth industry have debated whether the 60/40 portfolio is still relevant, especially during the recent period where both stocks and bonds fell in tandem. For the fixed income portion, an inflationary environment generally affects bond prices negatively because central banks must raise interest rates to fight price pressures. The reason is because fixed income prices have an inverse relationship with interest rates. The higher the interest rates, the lower the fixed income prices. Pre-retirees, however, could benefit from depressed bond prices with attractive yields, especially given the likelihood of a recession.
Segregated funds and their advantage
Segregated funds, like mutual funds, pool investors’ money in professionally managed diversified funds. Unlike mutual funds, segregated funds offer insurance guarantees that can protect a portion of your initial investment in the form of death benefit and maturity guarantees. Further, Sun GIF Solutions from Sun Life Global Investments can protect your savings, participate in market rallies, provide lifetime guaranteed income if you choose this option, and offers a contract structure that may allow your income to increase over time, enabling it to mitigate inflationary risk. To learn more about Sun Life Global Investments suite of segregated funds, please visit our website.
In conclusion, inflation will affect you whether you are a pre-retiree or you have already transitioned to retirement. There are a variety of options to help mitigate the impact of higher prices and keep your retirement plan on track – even if inflation rates rise. Speak to your advisor today to learn more.
2Source: or chart above Source: https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000403
This article is published by SLGI Asset Management Inc. and contains information in summary form. This article is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by SLGI Asset Management Inc. These views are subject to change and are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy.