Can I retire at age 55 with higher inflation?
You want to retire at age 55 but inflation is running hotter and higher over time.
You had a retirement plan, but that plan might now be derailed due to higher inflation.
Inspired by a reader question when it comes to early retirement:
Can I retire at age 55 with higher inflation?
This post has the answer including what assumption you could make and why deferring government benefits provides built-in inflation fighting power.
What is inflation?
At the most basic level, inflation is an increase in the price of goods and services over time.
What does inflation mean for you and me?
Inflation means an erosion of purchasing power.
Why is that significant?
Over time, higher inflation will make life more expensive. In retirement, more expenses (without the ability to increase your portfolio value dramatically via new savings from working) could pose longevity risks for your portfolio. Meaning, you might run out of money.
How might you combat inflation in retirement?
In some past articles on my site, I reference this outstanding post: Inflation on A Wealth of Common Sense.
In that post, Ben Carlson highlighted one of his favourite ways to combat inflation: the stock market.
“The stock market is a wonderful hedge against inflation for a few reasons. Since 1928, the U.S. stock market is up 9.8% per year while inflation has averaged 3% per year. So stocks have grown at nearly 7% more than the rate of inflation. One of the reasons for this is the fact that earnings and dividends also grow at a healthy clip above inflation. Over the past 93 years, earnings have grown at roughly 5% per year. Stocks also have perhaps the greatest income stream of any asset. Dividends have grown at roughly 5% per year.
So, one way to combat inflation is hold more stocks than bonds. Consider that as you approach retirement or semi-retirement.
Is all inflation bad?
I would argue some inflation is always very good. The economy is growing. Better than deflation. Deflation is associated with a shrinking economy and depressed times – less money in supply and therefore less money to spend.
Are there inflation winners to own?
For one, consider being a retiree that is debt-free in higher inflationary times. As a debt-free retiree you don’t have to worry about any large debt on a fixed (or variable) repayment plan. I would also be inspired by any retiree that owns their primary home entering retirement.
To quote Mark Twain: “Buy land, they’re not making it anymore.”
Real estate tends to be more valuable as inflation runs higher. Beyond your primary home, consider owning Real Estate Investment Trusts (REITs). This way, you can be a landlord without the rental headaches.
A good rule of thumb for REITs is about owning 5-10% REITs as part of your total portfolio value. Avoid going higher than 10-15% of your portfolio for sector risks.
Second, beyond real estate and REITs, some inflation winners tend to be owning energy, consumer staples stocks, and commodities.
Check out how some U.S. equity sectors have performed related to inflation here, this can relate to Canada as well:
Based on my thesis above, you’ll find the following sectors should help fight or beat inflation:
- Consumer staples
Can I retire at age 55 with higher inflation case study
For any early retirement or retirement plan, including if you want to retire at age 55 with higher inflation, you need to understand and embrace wealth builders during asset decumulation as well:
- time, and
- rate of return.
Added together, ample savings/investments, with time to compound/grow against inflation, with modest rates of return are helpful to fight inflation in retirement. So are inflation-protected government benefits. More in a bit.
Retirees also need to steer clear from wealth killers:
- taxation, and last but not least,
As we will see in my case study below, inflation could destroy a well intentioned retirement plan.
Can I retire at age 55 with higher inflation assumptions
For my case study, we need to make a number of assumptions. I’m also going to make some assumptions for you. One is, you already know the benefits of “smoothing out taxes” in retirement.
That means you might consider drawing down tax-deferred accounts (RRSPs/RRIFs or LIRAs/LIFs) sooner than later (far before the year you turn age 71), over time, usually before non-registered assets (taxable accounts) and then finally tax-free accounts (TFSAs).
This makes a great drawdown order for many early retirees to consider: “RNT” (RRSPs first, then non-registered, finally TFSAs). The ability to “smooth out taxes” is key to avoid any tax hits in any given year, certainly without knowing what taxation may or may not occur in our government’s future.
For retirees that have been fortunate enough to build up sizeable non-registered assets, they might also want to consider winding down the taxable account first: “NRT” (Non-registered first, then RRSPs, finally TFSAs). This provides some extra time for RRSP assets to compound away, tax-deferred, before being tapped in the year you turn age 71 if you are worried about longevity risk.
In either drawdown sequence, my second assumption is you know that Canada Pension Plan (CPP) and Old Age Security (OAS) benefits can deferred until age 70. Although I can appreciate the CPP and OAS “bird in hand” arguments from some, thereby taking government money as soon as it becomes available, the reality is, you’ll get a MAJOR income boost if you delay CPP and OAS as long as possible. This is also helpful to fight inflation.
Higher, guaranteed, inflation-protected income are just a few reasons to take CPP and OAS as late as possible with higher inflation here and likely to stay for the coming years. This means as inflation and prices rise, so do your government income streams.
There are other overlooked retirement income considerations for you to understand here.
In delaying CPP to age 70, this translates to a 42% income boost in CPP payments.
Delaying OAS to age 70 means a 36% income boost in OAS payments.
In our case study below, both CPP and OAS will be taken at age 70 for starters.
Here are my other assumptions: can I retire at age 55 with higher inflation?
- My fictional retirement couple, Suzy and Ted, want to retire at age 55 (this year).
- Inflation is running higher, so they’ve tilted their portfolio a bit towards more stocks than bonds over the last year or so. They have a 70/30 stock to bond asset mix, including some individual REITs, energy and commodity stocks to help fight inflation.
- They keep 1-years’ worth of cash in savings and do not intend to touch that stash-cash unless there is a major emergency and/or they absolutely need the money for living expenses as part of their drawdown order, i.e., they are running out before selling their house.
- They’ve amassed an impressive $1 M in assets by age 55, mostly inside their RRSPs (RRSPs = $800k; TFSAs = $200k).
- They have no pension plans from work.
- Since they wanted to retire early, they didn’t have max contribution years to CPP. I’ll assume they will get a conservative 50% of CPP maximum benefits normally provided at age 65 – but they will defer those CPP income benefits getting a 42% income boost at age 70.
- Full OAS starts at age 65 but again, I’ve deferred OAS too until age 70 for another 36% income boost.
- CPP and OAS are indexed to inflation values below.
- Retirement spending is increased by inflation values below.
- They have no debt.
- I’ll assume somewhat of a die-broke plan, until age 95, beyond keeping their paid off home here in Ontario. This means they will strive to spend assets during retirement – aligned to their target – thinking only the sale of their home is the desired estate plan. Mind you, my couple is very concerned about higher inflation and want to know the impact on their portfolio with higher inflation and what they could spend.
- My rates of return with a 70/30 portfolio are purposely a bit conservative. Rates of return are just shy of 5% per year on average throughout retirement, *after fees are accounted for.
*Of course, my fictional retirement couple doesn’t pay much in fees since they follow my hybrid investing approach: a blend of BTSX dividend paying stocks and low-cost ETFs for extra diversification.
Option 1: Can I retire at age 55 with inflation at 2.5%?
Historically, our Bank of Canada has set inflation targets at just 2% but, in my opinion, they’ve totally dropped the ball and shouldn’t be counted on to help consumers curb inflation – so watching what you spend and where you spend your money increasingly falls on you!
Suzy and Ted want to spend about $4,000 per month, on average, or close to $50,000 per year. Their preferred drawdown order is “RTN” for RRSPs first, TFSAs next, and finally cash savings as non-registered assets since they know about smoothing out taxes from my site 🙂
With inflation averaging about 2.5%, over the next 40 years for them, here are the results:
Some things you should know about these results, this drawdown order, with 2.5% inflation:
- Taxation using an RRSP/RRIF early drawdown strategy and delaying government benefits to age 70 is next to nothing. The effective tax rate for Suzy and Ted is just 10% combined in their 50s and 60s. In fact, when they hit RRIF withdrawals in their 70s and beyond, their combined tax rate drops to single digits!
- With “RTN” drawdown order, we spend RRSP/RRIF assets first.
- Because they started slowly withdrawing from RRSPs, RRSP asset values are much lower when they RRIF assets in their early 70s, lowering taxation but also allowing the RRIFs to continue to grow slowly putting RRIF assets closer to zero at age 95 helping their estate plan wishes.
- With just spending $4,000 per month, and with 2.5% inflation, Suzy and Ted never in fact touch their TFSA assets. Those TFSAs have ballooned in value to $1.6 million at age 95 – not helping their die-broke plan!
The takeaway for you is: with 5% sustained returns, 2.5% sustained inflation, $800,000 or so inside your RRSPs at age 55 (the rest in TFSAs), and by deferring CPP and OAS benefits to age 70 – you can easily spend $4,000 per month.
Option 2: Can I retire at age 55 with inflation at 3.5% over time?
A 1% bump in inflation, over time, doesn’t sound like much but it can have a major impact on retirement plans including when you take CPP and OAS benefits to fight longevity risk.
Suzy and Ted still want to spend about $4,000 per month, on average, or close to $50,000 per year.
With inflation averaging now 3.5% over time, can they still retire?
Because most of their income in retirement in their 70s and 80s and beyond comes from government, inflation-protected benefits, they remain in the clear. See example below just from Suzy.
*Suzy’s portion only above. Ted’s would be similar.
See below for combined:
Some things you should know about these results, with 3.5% inflation:
- I adjust their drawdown order: it’s now “RTN” to pull down RRSP/RRIF assets first, then TFSA assets in their elderly years before touching any cash/non-registered savings that are only growing at about 1.5% or so in a savings account as their emergency fund.
- Even with 3.5% inflation, because they started slowly withdrawing from RRSPs, this year in their 50s, while RRSP/RRIF assets are gone by age 83 they still have ample TFSA (tax-free) assets in reserve to fund elderly years – assuming those assets also grow at 5% over time.
- Keeping TFSA assets “until the end” is both estate planning smart and tax-smart, since all TFSA withdrawals will be tax-free beyond CPP and OAS government benefits. Their tax rate in their 80s and beyond is incredibly low ~ 5% or less combined!!
- With spending $4,000 per month, even at 3.5% sustained inflation, Suzy and Ted are fortunate to never deplete all TFSA assets – not exactly helping their die-broke plan but also more than enough to combat inflation over time.
The takeaway for you is: with $1M invested ($800,000 or so inside your RRSPs + $200,000 inside your TFSAs at age 55) with 5% sustained returns, 3.5% sustained inflation for 40 years = you can easily spend $4,000 per month.
Option 3: What about taking CPP at age 60 and OAS at age 65?
Ah yes, these “bird in hand” people.
Well, from the above before I highlight this option, you should now realize that a modest spend in retirement coupled with deferring CPP and OAS benefits, can help fight longevity risk, even with inflation moving higher and higher.
Will taking CPP and OAS earlier work with higher inflation?
Unless Suzy and Ted truly want to die-broke, taking CPP at age 60 and OAS at age 65 will incur some longevity risks in retirement. Higher inflation will eat into their portfolio and early government benefits more aggressively to the point whereby our fictional retirement couple might run out of money.
AND trending to age 95, where they arrive at zero beyond liquidating the house:
Can I retire at age 55 with higher inflation summary
Most couples, who have modest retirement savings inside their RRSPs, TFSAs, even without any workplace pensions whatsoever should be fine in retirement – with equally modest spending needs.
That said, keeping your money management fees away from greedy financial piranhas, minding your taxation, being very selectful of your retirement drawdown order, AND ensuring the best time to consider government benefits will be HUGELY critical factors to weather higher inflation.
With ample savings and some careful reflections, you can likely retire at age 55 during periods of higher inflation or any other age as well.
Thanks for your readership and do consider sharing this detailed case study with others!
I look forward to your comments.
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There are free calculators for your retirement drawdown ideas on my dedicated Helpful Sites page here.
All figures, tables and assumptions above are for educational and illustrative purposes only and never implies any financial or tax advice. I look forward to posting more case studies over time.
There are other case studies on my Retirement page here.
I continue to refine my expected budget for my upcoming retirement. My house in Ontario is paid for. In order to get a budget down to $4,000 per month, I have to cut out vacations, owning a vehicle, any health-related expenses, and all maintenance on my house. That’s not realistic at all.
Ya, I think $4k per month is a bit low but very doable if you are frugal if no debt. Our spending plan is about $4k-$5k per month in semi-retirement and I am hopeful dividends and distributions will cover almost all of that soon.
I can appreciate depending on the car you want to drive, and any vacations, $4k is a bit low.
Conservative Planning always gives peace of mind when situation is not in our favour, which means high inflation/poor investment return occurs in the first 5 years of retirement, therefore, a buffer and selection of investment products have to be very strategic, we want to grow the original pie (starting capital investment) in a safe and steady approach. At least, make sure the pie is not shrinking for the first few years, so that the Compound effect can work its wonders. Careful planning is the key.
Totally agree with the careful planning Angela. I’m probably too conservative with our personal plan but I would rather err on the side of caution 🙂
I’ve always felt the first 5 years of retirement are key. Not any one year really, rather the sum of 5 years and those impacts.
What are your assumptions Angela?
Hi Mark, one thing that created an OMG moment for me was when we realized that aTFSA, if used very late, or never, in cash flow planning is A GROWTH instrument. Conventional advice is to invest more safely as you age. But if you’re retiring at 55 or 60, have pension and other income and can view your TFSA as a bonus or even a cash-rich estate planning tool, is can be invested assertively in the stock market. At age 55 or 60, you may well have 30 years of growth to enjoy and if the market in the future even somewhat resembles the market of the past, you could have a very substantial estate. And totally tax free to you or your heirs.
Great work on your site sharing your knowledge research and insights. Thank you!
Great to read William, yes, absolutely, the TFSA can be using as a MAJOR growth account for long-term estate planning. 100%.
Read on also here:
So, keeping the TFSA intact well into your 70s or 80s can help estate planning and longevity risk. “And totally tax free to you or your heirs.”
Thanks for sharing the site with others!
If life is not a straight line on a good day, doesn’t it make more sense to take inflation protected CPP and OAS earlier and take some of the heavy lifting off of the personal assets? I tend to think in possibility vs probability. It is possible that both people live to 95 but not probable. When one of them passes a substantial chunk of income is now gone with one OAS eliminated and CPP reduced and the RRSP substantially reduced.
Having 10 years of no CPP contributions may also have an impact.
Why does the chart where they tap into TFSA at age 83 as an income source have them only taking approximately 30K at age 55 from the RRSP pile? I thought the needed 48K.
Thanks for doing these. This bird in the hand guy starts CPP this summer.
Great questions. “It depends”. When it comes to personal assets, yes, taking CPP and OAS earlier can take the load off but when it comes to longevity risk (see post) and higher inflation, clearly, taking CPP and OAS later is beneficial. It’s really not even close. 🙂
With 3.5% inflation, at 5% returns on average, RRSP/RRIF assets are gone by age 83. As in zero RRSP/RRIF assets.
They must start TFSA withdrawals at that age because they have to. I can appreciate the chart might be misleading so I’ve clarified this is Suzy’s portion only, Ted’s would be similar.
The probability of both living to age 95 is remote of course but this is just one case study with many combinations and permutations.
The takehome point is with 5% sustained returns, 3.5% sustained inflation for 40 years, $800,000 or so inside your RRSPs + $200,000 inside your TFSAs at age 55 and by deferring CPP and OAS benefits to age 70 – you can still easily spend $4,000 per month.
The same is not true if you take CPP or OAS early. The math doesn’t add up.
Hope that helps!!
Really depends on how much personal assets you have and how heavily one depends on CPP and OAS for retirement expenses.
The optimistic solution is different for different person I guess. For us, it’s clearly more beneficial to delay CPP/OAS so that we can have more time to melt down RRSP and smooth out the tax curve. Plus the protection for longevity and inflation.
Meant to add my friend – regardless of the decision (bird in hand or not) – it’s your decision and personal. All good in my book!
Ha ! Nice one Mark, you almost worked out my wife and my retirement plan for us. I just turned 48 so I hope Cash Flows and Portfolios is around when I turn 55 so I can use your services. Great scenario presentation and blog post today.
Awesome Chris – thanks very much and we hope to be around for a few years if we can!! 🙂
Thanks Mark for this very interesting case study. Inflation rate this year is far higher than 3.5% though, so this couple might not be able to live comfortably if this continues.
With the high inflation rate, my first reaction is Thank God I didn’t retire. I think high inflation requires a larger nest egg for retirement. Also, high inflation is not friendly for stock market.
Regarding to debt, here is a very interesting article about debt can be a useful tool for building wealth in high inflation environment. https://www.freedomthirtyfiveblog.com/2015/12/the-benefits-of-inflation.html
Ya, yes, inflation is easier to manage while working!
For my wife and I, I’m banking on about 3.5% inflation for the coming decades.
I will be working part-time in my 50s to avoid sequence of returns risks and to help fight inflation. It’s going to be higher than 2% or so for the coming decade I think. My guess is it should average about 3.5% going forward hence the numbers in this post.
Even if inflation is closer to 4.5% for this couple, for decades on end, they are fine because they have ample TFSA assets to combat as a safety valve. Without keeping TFSAs “until the end” they are in trouble.
Yes, Liquid’s site is good and an interesting take. You have to be comfortable with leverage however and I would argue most millennials should not be taking on too much risk. It can end badly.
Thanks for your comment as always May.
Thanks for sharing the article.
This couple decided to retire this year at age of 55, what about in the next 10 years, the inflation ranges from 8-15%, just like in the 70s, or we all know that the real inflation in everyday life now is more than 10%, therefore, it is possible that the next 10 years, inflation could go as high as around 10% per year. Can your plan include the analysis of the sequence of inflation risk? Say first 10 years, it stays like 8-10%, second 10 years, 5-8%, third 10 years, 3-5%, fourth 10 years around 2%? If the first 10 years, inflation runs higher like what we experience today, this couple’s net worth will be shrinking a lot, thus impact their retirement decision?
Not this case study Angela but I could play with the numbers. 🙂
At 4.5% sustained inflation, for the next 40 years, this couple runs out of money at age 89/90. They would need to sell their house worth $2M in those age 89/90 dollars which is fine for their die-broke plan.
If inflation goes to 10% for a decade, then down again, we’re all in trouble. 10% per year is not sustaintable and 10%+ inflation did not occur throughout the 70s, an entire decade, only for a few years. For fun, I used 4.5% inflation for the next 40 years and a bad 5-year run from ages 55-60 where their portfolio returned just 1.5% per year.
The result: even with 1.5% returns for 5 years straight, with 4.5% inflation, their money lasts until ages 79/80 once again and they still have a $1.6 M house they can tap as needed.
This case study does not include major sequence of returns risks, just a modest 5% portfolio return for the next 40 years.
More case studies to come on bad returns! 🙂
In this case study the couple needs a fixed amount of $4K, in real life I think people will adjust the expense. Which means, when money is not enough, the living standard will go down. I think two things will be helpful once retired: first, budget a buffer for expenses in retirement. Second, have a plan to cut the budget easily if inflation is high/market is bad etc.
I am planning retirement on the high end of our expenses to have a buffer. And also a plan to cut the expenses when time is bad. Things come into the mind is less or no travel (might be forced to, sigh. Don’t want to go to Europe due to the war right now and quite a few Asian countries are still closed to tourists due to covid), less expensive food (more pork and chicken, less seafood, steak and lamb).
Totally agree May.
Angela’s points are well taken and it points to how much folks are considering inflation and sequence of returns risks in retirement. These are not trivial issues.
Just like asset accumulation, in asset decumulation, you shouldn’t be spending every penny all the time. You need guardrails and buffers. When times are “good”, you can spend more, 10% or 15% more for an example.
When times are tight, you “cut back” for months or years as needed, maybe upwards of 20% as needed.
You have to plan for this. Failing to think about these things is foolish IMO because life is not a straight line on a good day 🙂
Both yourself and Angela are clear cases you are thinking this all through and thinking about risks.
That’s awesome for planning.