Inflation Lessons from History | The adviser’s advantage



For these reasons, the current high inflation environment will have an impact all retirement plans. For context, Figure 1 shows inflation since 1900 in the United States and Canada.

Chart 1: Inflation, 1900-2021

Source: US Bureau of Labor Statistics and Statistics Canada

Figure 1 shows a strong correlation between inflation rates in the two countries. For the sake of simplicity, we’ll use the US inflation rate for the rest of this article.

Let’s first debunk the common misconception that stocks always beat inflation. That is not exactly correct. History shows that stocks have beaten inflation during secular uptrends. However, during secular bearish or sideways trends, they don’t. Only specific stocks and sectors beat inflation outside of secular uptrends.

Figure 2 shows the growth of stock index returns relative to inflation during each of the secular upward trends of the last century (1921-1928, 1949-1965, 1982-1999). Either way, stock indices were able to beat inflation, as expected. It is important to note that the US stock index (represented by the Dow Jones Industrial Average) outperformed the Canadian stock index during these periods.

Figure 2: Inflation and Stock Indices During Secular Uptrends

This chart shows how the Dow Jones Industrial Average and S & P / TSX Composite Index performed against inflation over three secular bull markets (1921-1928, 1949-1965, 1982-1999).  In all three periods, stock indexes beat inflation - by a significant margin in the third period.  The DJIA outperforms the TSX in everyone.

Let’s look at the periods outside of secular uptrends. Figure 3 shows the growth of stock index returns relative to inflation during secular lateral and downward trends (1900-1920, 1929-1948, 1966-1981), when the index did not beat inflation . (Data for the Canadian index was not available before 1919, so no TSX line for the 1900-1920 period.)

Figure 3: Inflation and Stock Indices During Secular Sideways and Bearish Trends

Figure 3 shows the growth of stock index returns relative to inflation during secular lateral and downward trends (1900-1920, 1929-1948, 1966-1981), when the indexes did not beat inflation.

The Canadian stock index outperformed the US stock index during these periods of inflation, particularly during the period 1966-1981. This is because the TSX index includes more stocks that perform better under higher inflation regimes – such as energy, precious metals, and real estate – and may pass price increases through. customers.

Case study

What can we learn from history? Inflation has a big impact on pension plans. Retired clients generally don’t have the luxury of waiting for better markets, as they have to withdraw larger and larger amounts of their savings for the remainder of their retirement.

Take the example of Bob, 65, who needs $ 40,000 of his CPI-indexed retirement savings for the rest of his life. Using the popular 4% initial withdrawal rate, he calculates that he needs $ 1 million for his retirement.

Two years later, after experiencing annual inflation of 6.8% for two consecutive years, Bob decides to revise his plan. He’s updating his retirement calculations to reflect the impact of this higher-than-expected inflation, and he’s using an initial withdrawal rate of 3.5% that is more realistic going forward.

The result: Bob’s recalculation shows that he needs about $ 1.3 million in retirement savings. That’s 30% more capital than he had budgeted a few years ago.

The crucial question is: do your clients have sufficient inflation cushion in their retirement plans?

Advisors should stress test clients’ retirement plans to make sure they can withstand two or three years of higher inflation. And don’t be afraid to overweight Canadian stocks over foreign stocks during times of high inflation.

Jim C. Otar is a retired financial planner and engineer. He is the founder of His latest book is Advanced retirement income planning (2020).



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