Coin purse with a receipt and an arrow trending upward, concept of inflation
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This article appears in the Mid-November 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

Reaching out to clients proactively, stress-testing plans and making tactical adjustments can give clients a sense of control when they’re feeling anxious about inflation.

“[People] assume that what’s happening now [in the economy] is going to happen forever, so we have to talk people through that,” said Julia Chung, CEO of Spring Financial Planning in Vancouver. She reminds clients that just as the stellar market returns of 2021 weren’t going to continue forever, today’s worryingly high inflation rates will moderate in time.

But while the bad times may not last, Chung runs worst-case scenarios for clients just in case. “‘How high can your [personal rate of] inflation go and how low can your return be [where] we’d still be OK?’” she said. “‘What’s the spread between those numbers where you’d have to make different decisions?’ That’s what I want to talk people through.”

Zainab Williams, founder of Elleverity Wealth Management in Milton, Ont., said that running projections, including worst-case scenarios, can shift clients’ perception about their next 30 or 40 years of retirement. Her clients nearing retirement are cutting back on spending — reducing the number of planned vacations or delaying giving money to children — rather than withdrawing more income than necessary during a bear market.

Middle-aged clients who struggled to find affordable care for elderly parents during the pandemic, meanwhile, now are focusing on saving for end-of-life care for themselves.

“Not a lot of people have gone through this type of high inflation; it was your parents who went through this,” Williams said. “Now that you’re taking care of your parents, and you’re also paying out of your pocket for their care, you’re starting to see [that] the value of your dollar is not so strong.”

Chung says she has been running scenarios for clients using inflation rates of 2.10%, 2.75% and 3.00%, as suggested by FP Canada. “On occasion, we have pressed it higher,” Chung said. She meets with all clients regularly, and she makes sure to talk to her retired clients ahead of year-end retirement income withdrawal decisions.

“Retirement income planning is something that should be done every single year,” Chung said.

If the client anticipates a rise in spending, they will have to decide from where to draw income, she said, considering not only current and future income tax consequences, but whether there is cash available if investments will have to be sold.

“If you had a bad year in the market, which most people did, maybe you don’t have that much investment income that’s going to get taxed, so it might actually be a good year to take taxable money out of a registered account,” Chung said.

Clients may want to withdraw enough to reach the top end of their tax bracket, for example, if they’re in a lower tax bracket now than where they’re likely to be in subsequent tax years.

Clients must also consider how inflation can affect when to take Canada Pension Plan (CPP) and old age security (OAS). Clients with greater financial need or a shorter life expectancy may be inclined to begin receiving government pension payments from one or both programs before age 65.

Clients who have sufficient income, however, may decide to delay receiving one or both payments to benefit from larger payments down the line. For every month that OAS is deferred beyond age 65, the payout is increased by 0.6%. For CPP, the payout increases by 0.7% each month after age 65.

This year, the federal government announced it would boost OAS payouts for those 75 and older by 10%, providing another reason to defer if a client’s financial plan allows for it. The OAS bump is “factored into the deferral opportunity as well,” said Wilmot George, vice-president of tax, retirement and estate planning with CI Global Asset Management in Toronto. “You’re not going to miss out on your 10% increase because you decide to defer.”

Chung said that she helps clients consider the various factors that will affect the decision of when to begin CPP and OAS: the benefits of deferral, the impact of inflation, tax consequences of receiving income now or later, as well as longevity risk and the risk of clawback of the OAS.

However, some clients still want to take CPP and OAS at 65, Chung said, even when her projections have shown deferral is the better option. Clients tell her they don’t want to risk dying before taking their benefits. If her projections show that taking CPP or OAS earlier won’t derail a client’s financial plan too badly, Chung will go along with the decision, even if it isn’t the optimal choice from a financial planning perspective.

“There’s no easy, off-the-cuff approach to this,” Chung said. “People [are] trying to run their lives and this is really complicated, so let’s focus on [supporting] them.”