Retired Money: how to prepare for “Transitory for Longer’ inflation

As oxymorons go, you have to love the phrase “Transitory for Longer,” which comes up in my latest MoneySense Retired Money column. It looks at inflation, which of course is in the news virtually every day this summer, and one reason why stock markets are starting to weaken again (along with renewed Covid fears). You can find the full MoneySense column by clicking on the following headline: How might Inflation impact your Retirement plans?

As with trying to divine short-term moves in stocks or interest rates, I view predicting inflation — whether near-term, medium-term or longer-term — as somewhat futile. So the column preaches much the same as it would about positioning portfolios for stock declines or rises in interest rates: broad diversification of asset classes.

Asset Allocation for all Seasons

The ever useful four asset classes of Harry Browne’s Permanent Portfolio I find may be a good initial mix of assets to prepare for all possibilities: stocks for prosperity, bonds for deflation, cash for depression/recession and gold for inflation. Browne, who died in 2006,  famously allocated 25% to each.

That’s a good place to start, although as I point out in the column, many might add Real Estate/REITs and make it a five-way split each of 20%. Some suggest 10% in gold (both bullion ETFs and gold mining stock ETFs), which might be expanded to include other precious metals like silver, platinum and palladium. Some might add to this a 5% position in cryptocurrencies like Bitcoin and Ethereum, which some view as “digital gold.”

To the extent stock markets and interest rates will forever fluctuate over the course of a retirement, such a diversified approach could help you sleep at night, as some asset classes zig as others zag. Seldom will all these assets soar at once, but hopefully it will be just as rare for all to plunge at once.

Annuities and new “Tontine” approaches

Another approach to this problem is not so much Asset Allocation but what finance professor Moshe Milevsky has dubbed “Product Allocation.”

That might mean replacing some of your RRSP or RRIF capital, or even taxable money, with an allocation to life annuities: actuary Fred Vettese has counselled moving perhaps 30% of registered funds to such solutions. While they may cost more, there are also inflation-linked annuities.

Also don’t forget the innovative Purpose Longevity Fund solution we looked at earlier this summer, incorporating what Milevsky has termed “tontine thinking” in its makeup.

Despite its innovations, Purpose Longevity is not the equivalent of the classic inflation-indexed Defined Benefit pension plan backstopped by taxpayers.   If you lack such a plan,  find comfort in the fact most Canadians qualify for the Canada Pension Plan and Old Age Security, both of which are inflation-indexed. To the extent these are also DB plans and inflation-indexed and government guaranteed to boot, CPP and OAS are immensely valuable, as is the tax-free GIS for seniors with few other financial resources.

Do all these things, along with a broadly diversified asset allocation that includes inflation hedges, add in a sprinkling of annuities or tontine-like solutions like Purpose Longevity, and I think would-be retirees will have done everything they can to handle inflation, not to mention the opposite conditions.


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