How might inflation impact your retirement plans?

Inflation not only affects the cost of living—it could mean your investments don’t grow the way you've hoped. Consider these strategies to keep your nest egg safe. The post How might inflation impact your retirement plans? appeared first on MoneySense.

How might inflation impact your retirement plans?

For retirees and near-retirees, at least five dire possibilities can threaten a long and fruitful retirement: taxes, investment fees, crumbling stock markets, soaring interest rates and inflation. 

We can largely control the first two by maximizing the use of tax-effective vehicles like and , and avoiding high-fee investment solutions. Stocks and interest rates are trickier, typically addressed by ensuring that the traditional free lunch of diversification and asset allocation are commensurate with your financial resources and lifestyle objectives. 

But what about ? Throughout the first half of 2021, inflation has variously been depicted as an ominous looming threat, or merely a “temporary” spike, triggered by the COVID recovery. It’s certainly been inching up this summer: food prices are at their highest level in almost three decades, and the prices of housing, energy and even used cars are soaring. U.S. inflation is up 5.4% versus a year ago and is at a 13-year high.

It remains to be seen whether the U.S. Federal Reserve is correct in viewing this as “transitory” or whether BlackRock, Inc. CEO Larry Fink is correct in saying it’s considerably more entrenched. “Transitory for longer,” as MoneySense colleague Dale Roberts quipped in his , is an oxymoron. 

But if you’re contemplating retirement or semi-retirement, is inflation a sufficient threat to consider postponing it? We tackled similar ground in a year ago, shortly after the COVID bear market hit. Then, as now, the long-term future is essentially unknowable. As Vancouver-based portfolio manager Adrian Mastracci of Lycos Asset Management Inc. sees it, “Various pundits are making the case for both a robust economy and one not quite so. Investors should remember that they cannot control either flavour. They may get both, one followed by the other.”

Some fear inflation is a threat to stocks. However, a stock portfolio in itself can be a good inflation hedge as long as the right stocks are chosen, says Matthew Ardrey, wealth advisor and portfolio manager with Toronto-based TriDelta Financial. “You want to invest in companies with relatively inelastic demand for their products,” says Ardrey. “A company that can push on costs to consumers instead of absorbing them will be able to be more profitable.” Some stocks are more vulnerable to inflation than others. Mad Moneys Jim Cramer recently said high-tech digital commerce stocks, like Google, may be inflation havens. Those that can boost prices, like Netflix, may also be similarly insulated.

Aside from stocks, Ardrey recommends adding a trio of other asset classes: commodities, real estate and gold. Commodities are relatively inelastic in their demand, so price increases do little to affect the amount of consumption: more on which below. (or REIT ETFs) are an easy, liquid way to add real estate to an inflation-resistant investment portfolio. “Physical assets like real property often continue to grow above the rate of inflation. Additionally, if the loans borrowed to purchase the property are fixed-rate, then inflation erodes the cost of repayment over time.” That said, “In a post-COVID environment, you need to be selective in where you invest in this asset class,” Ardrey cautions. Focus on inelastic areas like residential real estate. People will always need a place to live.”

The case for gold stems over concern that governments increase their money supply by “printing money,” raising worries about creditworthiness. “Investors often move to gold during more unstable times in the markets,” Ardrey says. “Precious metals can provide inflation protection. They are a primary input in many manufacturing cycles and often have no real replacement, making them inelastic.” (Read more about buying gold here.)

Personally, I rely on traditional asset allocation to cover the various possibilities of inflation, deflation, prosperity and depression. I’ve always found to 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 some 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), with the other 10% in other precious metals like silver, platinum and palladium. Some might prefer to put some of the precious metal allocations into a 5% position in cryptocurrencies like bitcoin and ethereum, or “digital gold” (which we investigated earlier in .). Unlike dollars, which governments can print in unlimited quantities, bitcoin is a bit like land: no more will be issued when they reach the 21-million bitcoin limit built into the cryptocurrency’s original design.

Dale Roberts likes the inflation-fighting diversification of the Purpose Diversified Real Asset Fund (PRA/TSX), of which I now own a modest position. Its goal is to “protect purchasing power with real assets,” and diversify a core bond and equity portfolio to “protect against inflation with a broad basket of real assets and related equities.” It splits its real assets into five major varieties: energy, precious metals, base metals, agriculture and real estate. Within each of those five categories, it invests two-thirds in related equities and one-third in direct commodity exposure. So for example, the energy segment invests in cotton futures, soybean and corn futures, but also stocks like Archer-Daniels-Midland Co. It invests in crude and gasoline futures as well as stocks like Chevron Corp. and Exxon Mobil Corp. Geographically, almost 60% is in the U.S. and 15% in Canada, with the rest in cash. The base metals segment invests in copper futures and stocks like Nucor Corp. and Freeport-McMorRan Inc.

Most Canadian retirees will already be heavy in Canadian stocks, which have a higher than typical smattering of energy, mining and commodity plays. However, real assets—most would include their principal residence here—don’t really cover fixed income. 

The traditional fixed-income solution to inflation in Canada has been real return bonds: the equivalent of America’s TIPS, or Treasury Inflation-Protected Securities. Both can be accessed via ETFs or mutual funds.

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

Another approach 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 funds, with an allocation to life annuities. Actuary Fred Vettese has counselled moving perhaps 30% of registered funds to such solutions. 

Inflation can be particularly pernicious to those who expect to live a long time. So don’t forget the innovative Purpose Longevity Fund solution we . It incorporates 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 (DB) pension plan backstopped by taxpayers. If you lack such a plan (and many do), find comfort in the fact most Canadians qualify for the Canada Pension Plan and Old Age Security, both of which are in effect inflation-indexed annuities. To the extent these are also DB plans and government-guaranteed to boot, CPP and OAS are immensely valuable, as is the tax-free (GIS) for seniors with few other financial resources.

Many articles have been written on the strategy of delaying CPP and OAS to age 70. The focus is usually on the absolute higher monthly benefits of waiting till 70: 42% more compared to taking CPP at 65; 36% more for deferring OAS from 65 to 70. That’s certainly a valid strategy if you have enough income from other sources to tide you over to 70—not everyone does. But don’t forget that the bigger the starting base of CPP/OAS, the more valuable the annual inflation adjustment will become.

Adrian Mastracci cautions retirees not to make sweeping changes like deregistering RRSPs. “The better question is whether this income has more value in your later years. Do the math on whether CPP/OAS are best started at age 70. A compromise is starting one at 70 and one prior. Or one spouse takes them both early, while the second spouse starts them at age 70.”

Do all these things, along with a broadly diversified allocation of assets that includes inflation hedges, add in a sprinkling of annuities or tontine-like solutions like Purpose Longevity, and I think most would-be retirees will have done everything they reasonably can to tackle inflation, not to mention the opposite conditions. Of course, human capital is also worth considering: the ability to continue to generate an income at least part-time in retirement is also valuable. 

Jonathan Chevreau is the founder of the , author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at

 

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How condo insurance works

Condo insurance is important for protecting yourself, your unit and your stuff. Here’s what you need to know about what it covers and how it works. The post How condo insurance works appeared first on MoneySense.

How condo insurance works

Condo insurance is a smart decision. Regardless of whether you just purchased a brand new loft or a cozy older suite, you’ll need to make sure your asset is protected. 

While condominium insurance is not required by law like car insurance, often mortgage lenders or your building will require you to have it. And while the extra payment can take up cash flow, remember that this coverage can save you money in the long run, should you suffer an expensive loss. Where it gets tricky is how the insurance works in tandem with your condo corporation’s policy. Read below for a simple explanation.

What is condo insurance?

Condo insurance is a personal policy that protects your individual unit and rounds out the coverage you automatically get from your condo corporation.  Here’s how condo insurance works: The condo corporation’s insurance will protect common spaces and amenities like gyms, pools, lobbies, hallways and elevators. Your personal policy will cover what’s in your unit, including personal property, the cost of repairs, the expenses involved in living elsewhere during those repairs, and liability should someone get injured in your unit. 

Your personal condominium insurance provides coverage in three different ways:

Protecting personal property

This includes clothing, appliances, furniture and what’s in your condo locker. Policies generally start at $20,000 worth of coverage, with the option to pay for additional coverage on high-value items, like art and jewellery. (Learn more about contents insurance here).

Providing emergency housing

It provides cash for a hotel or temporary rental if you have to move out of your unit while it’s being repaired during an insured loss. For example, if your neighbour’s unit catches on fire, and you can’t live in your unit because of smoke or repairs, your condo insurance policy would cover the cost of your alternative accommodation.

Covering medical costs

It covers medical bills if someone is injured on your property. If the injured party decides to sue you, it helps pay for legal bills too. The average coverage ranges from $500,000 to $3 million, so there’s plenty of wiggle room to find the coverage you need. 


Compare personalized quotes from some of Canada’s top home insurance providers in minutes*


Does condo insurance cover appliances?  

The short answer is yes, because appliances are considered personal property and they’re contained within your unit. (However, if you are a tenant in a condo, you don’t own the appliances—your landlord does. You require renters insurance that’s tailored to the value of your personal possessions and not your landlord’s. Read more about apartment renters insurance here.)

Does condo insurance cover damage or injury in common areas? 

Any damage in the common areas of your building, like the front entrance, party room or pool, is covered by the Homeowners Association (HOA) Insurance which your condominium corporation—and part of your maintenance fees—foots the bill for. “On top of that, [they] will likely have insurance on the building itself,” says Matthew Johnson, customer care manager at Sonnet Insurance.

And it’s not just up to your HOA to decide what kind of insurance it needs. Across the country, each province and territory has a condo act that outlines a condo corporation’s legal insurance responsibilities.

However, there is a major caveat for individuals who own units within the condo. “The condo corporation’s insurance or HOA insurance will not cover you, your personal belongings and liability unless there is damage to the shared elements in the condo, so personal condo insurance is still required,” Johnson adds.

And sometimes, your condo corporation’s policy can’t foot the entire bill when there’s damage or injury as a result of an insured peril. For instance, when someone slips on the glossy marble floors of your boutique building and the condo corporation’s liability coverage comes up short, the condo owners have to pay the difference. They each have to cover a fair share of the remaining payout—and the cost can be eye-watering. Instead of draining your savings or maxing out your credit, special assessment coverage will pay this out for you. The takeaway? Read the fine print and ensure this coverage is included in a condo home insurance policy and if not, it’s worth paying extra to avoid a financial surprise in the future.


Compare personalized quotes from some of Canada’s top home insurance providers in minutes*


Does a condo insurance policy cover water and fire damage?

When it comes to accidental water and fire damage, condo homeowners insurance coverage will take care of the costs. And take special note of the word accidental: that means sudden and unexpected, not something you could have prevented. “Typically, anything that is preventable will be specifically excluded from a policy,” explains Johnson. “Something like mould build-up causing damage to wood/walls would not be covered, as this can be prevented with regular maintenance. Similarly, leakage or seepage would not be covered if the damage occurs over a period of time, like from pipes under the sink.”

Specific to water damage, unexpected burst pipes and leaky appliances are covered in a basic policy while sewer backup or flooding costs are not. The rationale is not everyone will need protection from floodwater or wastewater. If you live on the 20th floor, there’s a low risk of this kind of water damage to your unit. However, if you live in, say, a ground-floor property with a view of a lake, there’s a higher risk. The bottom line: Ask an insurance professional to assess your water damage risk and tailor your policy to meet your needs.

How much coverage do you need? 

Essentially, how condo insurance works is as a partnership between your personal policy and your HOA’s policy. “It is important to confirm the coverage that is made mandatory by your condo corporation, as they will want to make sure both parties are protected in the event of a claim,” says Johnson.

Once you have the mandatory coverage, assess if you need to top it up to cover the true value of your personal belongings and if you need to pay extra for flood water or sewage water damage.

Next, research add-ons that you might want for extra suite relief. For example, improvements and betterment coverage covers unit improvements and renovations such as new cabinets and flooring. Generally, insurance only pays for repairs and replacements that meet the building’s original standards so if you switch out the laminate floors for a wide plank hardwood and a quartz counter for marble, there’s the option to cover the higher value of those upgrades. 

Johnson suggests options for more coverage, which may vary between companies. These can include identity theft expenses, lock replacements, and a green coverage enhancement which pays an additional $25,000 to replace the damaged property using environmentally friendly and energy-efficient materials, products, or methods of construction.

How much is condo insurance?

Expect to pay anywhere from $250 to over $1,000 year says Johnson and he lists various factors that determine the cost of your premium:

  • The overall number of claims in the building. The logic: The more claims already logged, the higher the risk of future claims.
  • Your own insurance history. If you’ve made a claim before, the insurance business assumes you will make more in the future, so your premium goes up to cover your higher risk of making a  claim again. 
  • The coverage you select. When you top up the basic coverage with added features, the price goes up.

 

 

 

 

 

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