Managing the Effects of Inflation


Take steps to protect your retirement savings.

When the cost of goods and services rise over time, that’s known as inflation. Depending on economic circumstances, the rate of inflation will change. In the early 1980s, the U.S. and Canada were exiting a period of double-digit inflation. Since 2000, on the other hand, the average rate of inflation in Canada has been a much more manageable 2%.1

Even so, inflation, which is a measure of the general rising costs of goods and services, will have an impact on your long-term investments. Here’s your three-step plan to protecting your retirement savings.

Step 1: Know why inflation matters
Let’s say 15 years ago, your monthly grocery bill was about $600. Today, that exact same basket of groceries would cost just over $700. That’s the impact of roughly 2% inflation on one budget item over a decade. Imagine the impact on your entire household budget over 20-plus years, because that’s how long you could be spending in retirement.

To manage that impact, you’ll want to create a retirement budget and take a look at your retirement income. After accounting for the effects of inflation over time, will you still have enough money to enjoy a comfortable retirement?

Step 2: Create a retirement budget    
While it might be tempting to take your current household budget, run it through an online inflation calculator1 and figure out your retirement readiness, it likely won’t be accurate because your income and expenses will be different in retirement than they are now. 

For example, your health care costs may go up, but you may no longer have a mortgage (which matters because health care costs are increasing much more quickly than mortgage rates!). Similarly, the cost of commuting to work each day might disappear, but then your income may also be drastically reduced.

To manage the impact of inflation, you’ll need to create a retirement budget based on your planned lifestyle. Key components of a retirement budget include basic expenses like housing, food, insurance and health care, plus discretionary expenses like travel, hobbies, gifts, etc. If you’re not sure where to start, talk to your retired friends and family about what new costs they faced once they retired, as well as what expenses declined or disappeared. 

With a retirement budget in place, you can look up average inflation rates for what you expect to be your biggest budget items, like food, transportation and health care2. Now adjust your retirement budget to account for inflation.

Step 3: Assess your retirement income
Some of your retirement income may come from government plans like the Canada Pension Plan (CPP) and Old Age Security (OAS), or from a company pension. The federal government regularly increases CPP and OAS payments, and some company pension plans are indexed to inflation. So these sources of income already have some built-in protection against inflation.

Your personal investments, on the other hand, do not. Take a look at the performance of your Registered Retirement Savings Plan, as well as any other registered and non-registered savings you may have. Are they consistently outpacing inflation? By how much? Are they on course to continue doing so? If not, now’s the time to make some changes.

Call our office today, and I’ll work with you to create a plan to protect your retirement savings from the impact of inflation.

Bank of Canada 
Statistics Canada

The Burton Team

29 West Street South
Orillia,ON, L3V 5G2
Phone:705.329.4466
Fax: 705.329.4029
E-mail: info@burtonfinancial.com
Web: http://www.burtonfinancial.com