By Jillian Stinson
Inflation and the cost of living are rising rapidly. What does that mean? How will they affect your retirement savings goals?
More and more, we hear about inflation in Canada in 2022. You have probably noticed how much your grocery bill has increased recently. In general, the cost of living in Canada has risen steadily over the past year.
The Canadian Consumer Price Index*, the best-known indicator of inflation, rose 3.4% in 2021. This is the highest inflation rate in Canada since 1991. To give an idea, the annual inflation rate has been around 2% for the past 20 years. Statistics Canada says the rise is mainly due to supply chain issues caused by COVID-19. And that’s no wonder. Therefore, it is expected that the inflation rate is on everyone’s lips, including those of the media.
The effects of inflation can become a source of concern regarding investing and saving for retirement. By understanding how inflation can affect your future, you can make better decisions today.
Contents :
What is Inflation?
Where are the effects of inflation most felt?
How does inflation affect your income?
What is the inflation risk for your retirement?
What is the impact of inflation on your investments?
How to protect against inflation?
Inflation: how can an advisor help?
What is Inflation?
Inflation is an overall increase in prices and the cost of living. Over time, the prices of some goods (e.g. bread) increase, while others may decrease (e.g. computers). Inflation measures the average rise in prices.
Where are the effects of inflation most felt?
The main sectors affected by inflation in 2021 are:
energy, including gasoline, fuel oil and natural gas;
housing, including replacement costs (real estate) and household items;
food in grocery stores and restaurants, more recently.
What is the impact of inflation on your income?
Simply put, the more inflation increases, the more the value of your money decreases.
Inflation is like a leaky faucet. The amount of water lost seems negligible at first glance. But when you consider the impact over time, it’s a different story.
Suppose you hide $50,000 under your mattress today. Also, suppose annual inflation is 3%, and you get the money back in 10 years. Well, the increased cost of goods and services will bring the present value of your savings down to $37,000. If you wait 20 years, the current value drops to $27,000, and so on.
While many people’s income adjusts to inflation over time, not everyone does—especially people on fixed incomes, like retired ones. Indeed, many retirees have a fixed income that does not keep up with inflation.
What is the inflation risk for your retirement?
Inflation is one of the biggest enemies of retirement savings. Depending on various factors, it may even represent a greater risk for some people. Age and when you need your savings are two big ones.
Unfortunately, our expenses (property tax, gas, groceries, etc.) increase even in retirement. Inflation is a powerful force, especially over a long period. And the rising cost of living means you’ll pay more for the things you’ll need in retirement. This is not the ideal time when you are probably not earning any income. But there are plenty of things you can do to protect your retirement savings against inflation.
Are you on track to reach your retirement savings goals? Use our retirement savings calculator to find out.
How does inflation affect your investments?
Inflation is one of many factors to consider when planning your retirement. A diversified portfolio*, which contains investments focused on growth above inflation, is an excellent way to protect against the effects of inflation.
How to protect against inflation?
You never know how inflation will evolve. Here are some solutions to find the peace of mind you need:
Set a budget and track your spending. A budget will help you analyze your spending habits and find ways to save.
Do you need to establish a budget? Try our Budget Calculator.
Make a plan. An excellent way to hedge against inflation is to develop.
