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.

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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.

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