Retirees: 2 Ways to Offset the Effect of Rising Inflation

Retirees can stretch their pensions and earn passive income from a third source to offset the effect of runaway inflation.

| More on:
Senior Couple Walking With Pet Bulldog In Countryside

Image source: Getty Images.

Economists are warning Canadians that labour and supply constraints plus elevated inflation will linger until next year. Because of pressures from higher prices and interest rates, they forecast a declining GDP growth in the next two years. From 3.7% in 2022, it would soften to 2.6% in 2023 then to 1.9% in 2024.

The same economists predict at least four more rate hikes this year and another two next year. Retirees in particular will take a big hit from rapidly rising prices, because it will squeeze their purchasing power. The situation presents a headache to them, as money could run out sooner than later.

Retirement experts suggest a “stretch and invest” strategy to offset the ripple effect of inflation. While it looks intimidating, the moves are helpful to support the spending needs of retirees.

Stretch your pensions

Pensions like the Old Age Security (OAS) and Canada Pension Plan (CPP) are for life, but they only replace the average pre-retirement income. If you’re 65 and claim both today, the combined monthly payout is $1,428.49. Consider the pensions as your fixed income, which you must stretch to keep pace with higher cost of living.

Delaying the payments until 70 is an option to receive higher pension amounts. Still, working around a limited budget isn’t easy. It requires sacrifice to curtail spending or forego large purchases. Moreover, unexpected expenses can crop up from time to time.

Save and invest

The OAS and CPP aren’t retirement plans, so retirees are responsible for creating other income sources to pad monthly budgets. For example, stocks tend to rise with inflation. In the current environment, commodity stocks like energy are profitable picks for retirees.

Besides the price appreciation, investors can earn recurring income from dividends. You can hold them in a Tax-Free Savings Account (TFSA) for tax-free money growth and non-taxable income.

Top-notch holding

Enbridge (TSX:ENB)(NYSE:ENB) is a standout because it performs like a utility company in North America’s oil & gas midstream industry. Its diversified asset footprint, including a liquids pipeline network, is its competitive advantage. This top-notch energy stock has a dividend-growth streak of 26 years and pays a generous 5.88% dividend.

A $25,000 investment in Enbridge can produce $367.50 passive income every quarter. In Q1 2022, the $114.34 energy infrastructure company reported $1.7 billion in adjusted earnings, a 4.35% increase from Q1 2021. Management also announced a 3% increase in its quarterly dividend effective March 1, 2022.     

Distributable cash flow increased 11.26% to $3.07 billion year over year. Management said the strong first-quarter results were in line with expectations and it anticipates the core businesses to deliver strong utilization and good operating results through the rest of the year.

Al Monaco, Enbridge’s president and CEO, said, “In summary, we are pleased with our progress on our strategic priorities and a good start to the year. Our existing connections to the best markets, paired with leading low-carbon capabilities, position Enbridge to generate long-term shareholder value while building a bridge to a cleaner energy future.”

If you invest today, the share price is $56.45 (+16% year to date).

Inflation hedge

Retirees with a third income source like Enbridge likely won’t come up short during high inflation. You can also hold to stock forever to produce a pension-like income

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »