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Can your retirement savings stand up to inflation?

The high cost of living is convincing some people to adjust their plans.

Across Canada, the effects of inflation are being felt in different ways these days by various age groups. For young people and students, a lack of cash on hand or an increase in personal debt may be the biggest concerns. People in mid-life and mid-career might find the series of rapid interest-rate hikes has made it difficult to meet their loan and mortgage payments. For retirees or those nearing retirement, inflation has likely chipped away at their savings and investments with worrying intensity.

Most retirees depend on investment income to fund their lifestyle, but rising prices and underperforming markets could reduce the value of a substantial nest egg that’s been designed to see them through their golden years. As the economy strives to get inflation back under control at a time and an age when most of their wealth-accumulating years are behind them, this setback could dim their outlook for the future.

A combination of challenges

In 2021, the Consumer Price Index (CPI) in Canada was just above 3.4 per cent,[1] which was the country’s highest CPI rate in 30 years. This increased to a 40-year high of 6.8 per cent in 2022. Included in this average annual figure was a year-over-year inflation rate of 8.1 per cent in June 2022, a 39-year high.[2] At these levels, it’s understandable for people to fret over the loss of purchasing power and the devaluation of their investments.

However, there are strategies that people can adopt to protect their financial interests.

Market volatility

The combined effects of inflation, rate hikes and the likelihood of a mild or major recession can contribute to ongoing market volatility, which can affect some investment portfolios more than others, depending on how it impacts the three main asset classes (equities, fixed income and cash).

Stocks are vulnerable to the whims of the market, but results can vary from sector to sector. Canada’s strong resources, energy and financial sectors all respond differently to economic conditions, but overall are seen as better able to withstand market shocks than other more specialized industries.

Diversifying a portfolio with fixed income investments, such as bonds, can be an attractive option for income generation, especially during times of declining stock values. Historically, as interest rates rise, bond yields typically follow. Consider that in response to rate hikes aimed at taming inflation, the benchmark yield on a 10-year Government of Canada bond has risen from 1.97 to 3.37 within the past year.[3]

On the other hand, it can be tempting to simply transfer investments into cash, sidelining savings in a low-risk fund or bank account – or under a mattress – until economic prospects swing back towards a more positive direction. Although this can be counterproductive unless the money is earning enough interest to offset the rate of inflation, holding a portion of your portfolio in cash can be a useful tactic to protect against further market downturns and provide a source of funds for investing at lower prices during those declines.

Assets that are generally viewed as relatively unaffected by inflation include real estate, which is often seen as a hedge against inflation. However, rising interest rates to combat inflation mean higher mortgage rates, which in turn affect buyer behaviour. As a residual effect of interest rate hikes, residential home prices started to decline in the latter half of 2022 and are predicted by some to slide further, for at least the short-term, in 2023.[4]

Inflation will always play a role in our economy – and just like the financial markets, ups and downs can be expected. One of the keys to coping with inflation is being prepared to respond to it in ways that protect your investments from significant losses – and even take advantage of some situations. When the value of an investment declines, which can happen for any number of reasons, it doesn’t necessarily mean it will never gain value again. It may even present opportunities to “buy the dip,” which means buying equities when prices fall and thus acquiring more shares for your money. Owning more shares can increase a portfolio’s value over a longer time frame. Regardless of the situation at any given time, taking steps to continually review and revise a retirement investment plan to counter economic pressures can make a difference.

A flexible mindset

The spike in inflation that began over a year ago was not expected to go as high as it did or to last as long as it has. If recent financial news and experiences have been unsettling, arranging a review of your investments with your advisor may help. Everyone’s situation is different, as will be the most effective actions to protect your retirement funds. In any case, being flexible and mindful of some relevant strategies can help you protect more of your retirement savings and reduce the inflation-fueled stress on your portfolio.

1) Increase contributions to your investment portfolio while you’re still earning a steady income and have plenty of time for it to grow into substantial savings before you retire. At the time of retirement, you can work with your advisor to readjust your portfolio and reduce your risk exposure by shifting towards conservative and fixed income investments that are less vulnerable to volatility.

2) Continue to work. Although the prospect of trading in your laptop computer for a beach towel or a fishing pole is appealing, retiring with financial concerns is not. The downturn in global markets and the increase in the cost of living and borrowing does not carry the same negative impact for those who are still employed. Many people’s peak earning years are late in their careers when they’ve reached senior positions at top salaries. Those final few years can have a huge impact on the amount you’re able to set aside for your eventual retirement.

3) Stick to a budget. Keeping your spending within your monthly budget might be difficult at times, but setting limits is better than continually trying to dig out of deepening debt. What you save now can earn interest and be spent tomorrow when costs return to more acceptable levels.

4) Consider altering your income expectations for retirement. The post-work lifestyle you envision may be different from what is realistically possible. Being prepared for sudden changes in income or the onset of new economic hurdles will enhance your ability to overcome them if and when they occur.

More than a century of market history has shown that even though inflation, and the actions taken to control it, can weigh heavily on financial markets, they eventually recover. It may take some time but generating any growth above the rate of inflation is preferable to passively losing ground to higher prices. Continuing to invest with regularity during all market conditions can potentially lead to aggressive gains when the next bull market arrives.

Change with the times

In Canada, the past year has been a vivid lesson in how quickly economic circumstances can change. Working with an advisor to keep pace with them and protect your savings is not only good planning but can help you take advantage of opportunities to mitigate inflation and avoid becoming a victim of inflation-fueled volatility.


[1] Statistics Canada, “Consumer Price Index: Annual review, 2022,” The Daily, January 17, 2023, catalogue no. 11-001-X, https://www150.statcan.gc.ca/n1/daily-quotidien/230117/dq230117b-eng.htm.

[2] Statistics Canada, “Consumer Price Index, June 2022,” The Daily, July 20, 2022, catalogue no. 11-001-X, https://www150.statcan.gc.ca/n1/daily-quotidien/220720/dq220720a-eng.htm.

[3] Bank of Canada bond yields, Government of Canada Benchmark 10-year bonds, February 2022 – February 2023.

[4] Bank of Canada predicts further dip in home prices after delivering quarter-point rate hike. The Globe and Mail. January 2023.

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