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Do I really need to be in the stock market?

Updated: Mar 30, 2022

Your retirement savings need to keep up with inflation

Inflation has been the buzz word lately. With good reason: inflation rates are way higher than usual. In January, prices in Canada rose by more than 5% over the past year; normally inflation is around 2%. Whether inflation is 2% or 5%, the implication is the same: life will be more expensive in the future than it is now.

Inflation matters. If today you estimate that you’ll need $60,000 of income each year in retirement, by the time you retire in twenty years that number will be more like $89,000 once you account for the rising cost of living.

It might feel discouraging to hear that the cost of your retirement is going up every year. You’re putting money aside, but you feel like you’re falling behind! Don’t worry – as long as your savings are growing at least as fast as inflation, it’s going to be ok.

The stock market to the rescue

For most of us, there are three places to put our savings: in a savings account (or GIC), in bonds, or in the stock market. All three play an important role when it comes to investments. The GIC is the safety portion: you’ll never lose money and you’re guaranteed to be paid a certain amount of interest. But the rate you earn is lower than the rate of inflation. Bonds will generally have a higher rate of interest than a GIC, but can go up and down in value. Bonds act as a counter-balance to the stock market, since they often don’t move in the same direction at the same time.

The stock market is the growth driver, the part of your investments that help your savings keep up with the cost of living – and then some. The U.S. and Canadian markets have returned (on average) 8-10% per year over the long term, which means your savings will grow faster than inflation.

Depending on your age and your retirement plans, how much you invest in each of these asset classes will vary.

To make my point clear, I dug up some data that tells the story. Here’s what I found:

In this chart, I’ve used the actual inflation rates over the past 20 years, the interest rate paid on Tangerine’s high-interest savings account (HISA), and the actual annual returns of the U.S. stock market. (Using the Canadian market would tell a similar story.) Three important numbers:

  1. A retirement that cost $60,000 a year 20 years ago now costs $86,160;

  2. $60,000 invested in a HISA in 2001 would have grown to about $85,700 at the end of 2021; and

  3. Investing $60,000 in the stock market would have grown to about $216,500.

The HISA savings grew by less than your annual cost of living while the stock market investment is worth far more.

There are nuances to these calculations and I'll note that the market was very strong over the last three years, making the stock market returns a bit unusual, but history has consistently shown that investing in the stock market earns you more than putting money into a savings account over long time periods.

The bottom line: the stock market offers inflation protection and it is the simplest way to grow your money faster than the cost of living. It should be a part of a long-term retirement plan.

What about the risks? The stock market can be so volatile! Yes, it can be and it’s not always a comfortable ride. There are ways to even out the bumps, though, and prepare yourself for down markets, a topic I’ll cover next.

Investing in the stock market can be simple. If you want to get more comfortable and learn more about investing, let’s talk.


Notes: HISA rates are from Tangerine’s website. Stock market returns are the S&P 500 in US dollars. Taxes are not considered, which is realistic if you’re investing in a RRSP or TFSA. As always, this article is not to be considered investment advice. This is my opinion. You need to make an informed and careful choice about your investments.


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