Staying One Step Ahead of Inflation.
by Michael Danchuk, CFP & Richard Nash, CFP
Investors Group Inc.
What does a comfortable retirement mean to you? Traveling to faraway destinations? Buying a vacation home or perhaps having the freedom to visit friends and family across the country. Whether you are chasing your dreams or looking to alleviate the very common concern of “what if I outlive my money”, you should have a sound investment plan in place to provide you with the financial security you need.
Once most individuals reach retirement, their primary investment objectives generally shift from growth to income generation and capital preservation. Investment portfolios are therefore often geared towards safer investments. Depending on the retirement lifestyle you choose, the after tax returns generated from these investments may be enough to sustain your lifestyle throughout retirement. Or will they?
The Eroding Power of Inflation
While many of us are aware of how declining interest rates and the annual deduction of income tax serve to reduce the income you receive from your investments, there is also something else at work that is not as evident but effectively erodes your standard of living. The culprit is inflation. Inflation is the ever increasing price of goods and services that you depend upon or desire. It is a subtle, gradual force that has an adverse effect on the future spending power of your money.
Over the past 25 years, inflation has averaged approximately 4% annually. Currently, the annual inflation rate is sitting at approximately 2%.
Although the latest inflation figures show relatively low inflation and day-to-day inflationary price increases are often barely noticeable, over the long term a yearly inflation increase can add up to a serious drain on your buying power.
Let’s take a look at what effect a 2% and 4% rate of inflation would have on your retirement portfolio and assume you currently rely on $50,000.00 per year from your investments to sustain your current lifestyle.
| |
$ required
with inflation adjustment |
|
Year
|
2%
inflation |
4%
inflation |
| Current |
$50,000 |
$50,000 |
| Year 1 |
$51,000 |
$52,000 |
| Year 2 |
$52,020 |
$54,080 |
| Year 3 |
$53,060 |
$56,243 |
| Year 4 |
$54,122 |
$58,493 |
| Year 5 |
$55,204 |
$60,833 |
As you can see, due to the rising cost of living, to afford what you have grown accustomed to you will need to draw $51,000 from your retirement portfolio next year at the current inflation rate, or $52,000 if the inflation rate returns to historical levels. Further, over time you need to draw even more from your retirement portfolio just to stay even with inflation. So what’s an investor to do?
Reduce Your Risk by Diversifying Your Portfolio
A common and often effective antidote to inflation is to build a retirement portfolio that is primarily geared towards income generation and capital stability but includes a capital growth component as well. Although common stocks and equity mutual funds are potentially riskier investments in the short-term, they have historically offered the best aftertax opportunity to stay ahead of inflation and keep income growing. And contrary to popular belief, it may be possible to include stocks or equitymutual funds in your retirement portfolio without incurring much additional risk.
This is because many financial markets and asset categories do not move in the same direction at the same time, which can decrease the overall volatility of your portfolio. For instance, when bond prices decline in value, stock prices typically go up.
Protect Your Purchasing Power
Staying ahead of inflation is critical and it’s important that you take steps now to protect your purchasing power. Finding the right balance between stocks and bonds is often tricky. That’s why Investors Group offers investment programs such as Symphony™* which are specifically designed to identify the proper asset mix that is geared towards providing inflation-beating returns without taking undue risks.
Why not ask us today how we can help you protect your purchasing power and keep one step ahead of inflation.
This report specifically written and published by Investors Group Financial Services Inc. (in Quebec, a financial services firm) is presented as a general source of information only, and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide legal advice. Prospective investors should review the annual report, simplified prospectus, and annual information form of any fund carefully before making an investment decision. Clients should discuss their situation with their Consultant for advice based on their specific circumstances. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. ™Trademarks owned by IGM Financial Inc. and licensed to its subsidiary corporations. “Staying One Step Ahead of Inflation” ©2007 Investors Group Inc. Comments or questions – Michael Dunchuck and/or Richard Nash can be reached at (604) 270-7700 or by email richard.nash@investorsgroup.com
*Symphony recommendations relate only to Investors Group mutual funds. Please speak to your Investors Group Consultant about how Symphony can be used as part of your overall financial plan.
This entry was posted
on Tuesday, November 3rd, 2009 at 2:46 pm and is filed under Retirement Income, Retirement Planning.
You can follow any responses to this entry through the RSS 2.0 feed.
You can skip to the end and leave a response. Pinging is currently not allowed.
