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Inflation is eating away at your retirement nest egg

The best way to combat inflation is to ensure that your portfolio earns more than the inflation rate. In August, Canada’s inflation rate remained at a whopping 7%, and that higher rate is rapidly depleting your retirement savings. Jessica Moorhouse, a financial expert, provides an example: Assume you need $4,000 per month in today’s dollars to live on in retirement, or $48,000 per year. If you adjust for inflation at 3% per year, you’ll need $135,000 per year in 35 years. “That’s how powerful inflation can be,” Moorhouse says. Inflation will eat away at your nest egg and future income regardless of what you do, but there are strategies for mitigating the effects of inflation. For starters, according to Moorhouse, you should make sure your investments are actually invested rather than sitting in cash in your Registered Retirement Savings Plan or Tax-Free Savings Account. She then suggests that you understand what you’re investing in and that your investment portfolio has an appropriate asset allocation of equities (stocks) and fixed-income investments. Your portfolio may be ultra-conservative if you told your financial adviser that you want to be safe with your investments. Conservative portfolios are considered low risk, but they produce lower returns over time and are more vulnerable to inflation. According to Moorhouse, the best way to combat inflation is to ensure that your portfolio earns higher returns than the inflation rate. Over long periods of time, the stock market has delivered returns greater than the Canadian inflation rate, so you should have a healthy dollop of stocks. Stock market holdings should make up between 40% and 75% of your portfolio, depending on your risk tolerance. Investing in stocks through ETFs is a good way to ensure diversification and low investment costs. According to personal finance expert Rubina Ahmed-Haq, as you get closer to the time when you need the money, you should put more of your money into fixed-income investments like bonds or GICs. “If you’re approaching retirement, it’s a good idea to take some money out of, say, stocks and put it into more fixed-income products that will help you manage your money more carefully in the future,” Ahmed-Haq says. If the market crashes just before you retire and you start drawing down your portfolio, you’ll have some funds in a safe haven to live off of until the markets recover. PARTICIPATE IN THE CONVERSATION Anyone can read Conversations, but you must be a registered Torstar account holder to contribute. If you do not already have a Torstar account, you can open one right now. Register Sign In Conversations are our readers’ opinions and are subject to the Code of Conduct. The Star does not agree with these viewpoints. More articles from The Star & Partners