Is your money safe in a mutual fund?

October 1, 2024

One day, your retirement income will flow from the capital you have been saving for the last thirty to forty years of your working life. Before you switch your investments to ultraconservative vehicles such as GICs or T-bills, beware of inflation’s effect on the prospect of lowering interest on your savings.

Inflation can turn low-growth to no-growth. Beware of today’s lowering interest rates. Putting all your money in safe vehicles (including GICs, T-bills, money market funds) could reduce your after-inflation retirement income. Inflation is temporarily lowering, generally lowering GIC and Term Deposit interest rates. If we see a year or two of more high inflation, it could zero out the low-growth guaranteed securities offer. Even with an inflation rate of just 2%, an annual retirement income of $65,000 might not cover your needs over ten years. An estimated future value of $79,000 would be required to meet the same financial demands.

Growth investments may fight inflation. Consider the potential to combat retirement income erosion due to inflation by holding a portion of your portfolio in equity mutual funds that have the potential to increase in value. This strategy can also add diversification, along with professional fund management. Equity funds can increase or decrease in value, potentially gaining in value when the relative stock market sectors increase. For example, a fund specializing in financial services may increase in value when the value of bank stocks within the fund increases.

Many retirees can invest capital over more extended periods. Remember, if you retire at age 65, you may live another 10, 20 or 30 years. That is a significant time horizon. Potentially adding growth through a diversified equity mutual funds portfolio may help fight inflation and deliver better, long-term returns in a low-interest rate environment over the long term.

 

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