Retirees beating inflation through equities

Investing in equities can help a retiree's potential for a higher sustainable withdrawal rate by gaining more flexibility in accounting for inflation, according to a report by Milliman Financial Risk Management.

The report found that since 1930 the growth rate of the S&P 500 dividend kept up with inflation, and outpaced it by more than one per cent per year.  

"Over the course of 10 years the dividend has doubled to $41.31 [per share]. Based on the level of the S&P 500 in April 2005 (1157), $41.31 per share equates to a yield of 3.5 per cent," the report said.

"A level far superior to the two per cent yield on the 10-year Treasury bond in April 2015."

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The report noted the reason for the ability to keep up and outpace inflation is because businesses are able to pass along price increases to consumers.

"History bears witness to the ability (and arguably tendency of stocks' earnings, dividends, and share prices to inflate with the economic price inflation," the report said.

"For this reason we believe investors should have a significant allocation to stocks, both when approaching and during retirement."