Inflation puts comfortable retirement at risk. Here’s a solution.

As Russia’s invasion of Ukraine sends gasoline prices to record highs, and warnings of persistent shortages are poised to affect basic commodities such as wheat, metals and energy, Canadians are quickly experiencing how inflation disrupts the economy.

Inflation, currently at a 40-year high, is also one of the greatest threats to Canadians entering retirement: It erodes their purchasing power, it increases their draws on savings, and it could result in them outliving their money.

“When you’re working, you’re earning a wage, and wages tend to keep up with inflation. On the other hand, retirees usually do not have the option to go back to work, they do not have the option to earn money to make up for shortfalls and also their expenses are often not voluntary, such as health care,” says Bonnie-Jeanne MacDonald, director of financial security with Ryerson University’s National Institute on Ageing (NIA).

How inflation erodes retirement savings

An NIA survey shows that 77 per cent of Canadians ages 55 to 69 are worried about their financial health. It also found that 79 per cent of respondents aged 55 and older believe current government-run plans, such as the Canada Pension Plan (CPP) and Old Age Security (OAS), fail to provide sufficient income to enable a comfortable retirement.

Ms. MacDonald says for those with low incomes, CPP, OAS and the Guaranteed Income Supplement are only intended to replace 40 per cent of average earnings, “and of course much less for people who are higher earners. The rest does need to be made up with savings,” she adds.

“So it is really the responsibility of people themselves to make sure that their savings deliver this kind of inflation-indexed life income.”

Even a modest rise in inflation can have serious consequences on living standards for retirees.

Assuming you require $50,000 in after-tax income to cover your expenses for 2022, and inflation is 2 per cent on average for the next 20 years (the Bank of Canada’s inflation target rate), you will need roughly $74,000 in after-tax income to cover those same expenses. If inflation averaged 3 per cent over the next 20 years, you would need roughly $90,000 in after-tax income to cover those same expenses. That’s an increase of 48 per cent and 80 per cent respectively.

Ms. MacDonald says Canadians face a dual financial challenge of inflation and retirement that could last 30 or 40 years. In addition, dependable private-sector defined benefit (DB) pension plans are being replaced with defined contribution (DC) or group RRSPs that put the risk on employees.

“Whatever they may be, they are all individual savings accounts and what they are lacking is some kind of lifetime pension income. They are all pension plans without pensions and this is where the vast majority of Canadians are finding themselves,” she says.

Her advice for those approaching retirement is to consider what life post-work could look like, including how secure their income will be in retirement and what options they have to reduce their risk of outliving their savings.

• 77 per cent of Canadians ages 55 to 69 are worried about their financial health
• 79 per cent of Canadians aged 55 and older believe current government-run plans, such as registered retirement savings plans (RRSPs), the Canada Pension Plan (CPP) and Old Age Security (OAS), fail to provide adequate savings to prepare for a comfortable retirement

An investment solution that can help

To help solve the problem of income insecurity in retirement, last summer, Purpose Investments launched the Longevity Pension Fund to provide monthly lifetime income to Canadian retirees. It’s a first-of-its-kind mutual fund that provides the longevity risk pooling attributes of DB pensions.

Put simply, the investment gains from those who die earlier than average are used to subsidize those who live longer. The Longevity Pension Fund can be purchased through an online discount brokerage account or through a financial advisor, and its mix of underlying assets is intended to help address inflation.

“Pooling longevity risk is absolutely seen as a critical solution to what is seen as a pension crisis, especially in countries where we have these shifts away from defined benefit pension plans to DC plans,” says Ms. MacDonald, an expert advisor to the Longevity Pension Fund. “How are we going to ensure that these aging populations will have secure retirement income?”

Clayton Brown, a Toronto-based retirement income planner with the Purpose Longevity Platform, says the fund is designed to solve that longevity problem of “how long am I going to live and how long does my cash flow need to last?”

“With the Longevity Pension Fund, it will last as long as you do and through its design, the distributions should increase over time,* which will in effect help offset the rising cost of living,” he explains.

Mr. Brown also notes that the Longevity Pension Fund accounts for the long-term effect of inflation by incorporating equities that tend to rise over time and other real assets (real estate, commodities, precious metals) that do well in an inflationary environment, as well as strategic use of low duration fixed-income holdings to produce steady and hopefully rising monthly payouts to investors over their retirement.

Allocating a portion of their retirement savings to the Longevity Pension Fund gives investors’ confidence they’ll have income no matter how long they live – and presents one way retirees can find some peace of mind in a world that seems increasingly uncertain.

For more information, check out the Longevity website and Purpose Investments on Twitter.

Advertising feature produced by Globe Content Studio with Purpose Investments. The Globe’s editorial department was not involved.