Can I retire at age 55 with higher inflation?

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?

No.

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?

Yes.

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.

How much real estate should you have in your portfolio?

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:

• Energy
• REITs
• Consumer staples
• Financials
• Utilities
• Commodities

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: 

1. amount,
2. time, and
3. 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: 

1. fees,
2. taxation, and last but not least,
3. inflation. 

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.

Overlooked retirement income and planning considerations

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.

My Dividends

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!

Reference: https://www.bankofcanada.ca/core-functions/monetary-policy/inflation/

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:

AND

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?

Certainly.

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.

Notes:

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?

Nope.

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.

Mark

Related Reading:

How to invest for higher inflation.

When to take your CPP benefit?

Should I take the commuted value of my pension to help fund my retirement?

These millennials want to achieve financial independence at age 50 – can they do it?

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.