In the realm of retirement planning, a hidden danger lurks, quietly eroding the foundation of your financial security: inflation.
Today, we’ll dig into the impact of inflation in retirement and explore how to build a plan that guards against its silent threat.
Inflation is the gradual increase in the price of goods and services over time. The Bank of Canada’s target inflation rate is 2%, meaning that a product worth $100 today should cost $102 next year. While this may seem modest, a recent graph (in video above) shows inflation rates surging past 8% in 2022, exceeding the target significantly. This has likely been felt in your daily expenses, from groceries to housing costs.
Inflation’s Quiet Assault
Over the Years Over the past 25 years, inflation has steadily chipped away at our purchasing power, typically ranging between 0-4%. It’s this silent, relentless erosion that makes inflation in retirement a potential killer. Even without dramatic spikes, inflation gradually eats into your spending power.
Planning to Outsmart Inflation
Incorporating inflation into your retirement plan is vital. When planning for an extended retirement, it’s essential to consider how your purchasing power will diminish over time. Certified Financial Planners adhere to guidelines that suggest a minimum inflation target of 2.1% in 2023. These guidelines ensure that your plan remains realistic as the cost of living evolves.
To illustrate this, we examined the retirement plan of Mr. & Mrs. Inflation, based on a 2.1% inflation assumption. If inflation were just 1% higher throughout their retirement, their plan’s funding level dropped by a staggering 27%, forcing them to tap into their home equity earlier to maintain their lifestyle. This scenario underscores the importance of revisiting and updating your retirement plan yearly to adapt to changing economic conditions.
Conclusion: While retirees often focus on portfolio performance, it’s the stealthy impact of inflation that poses a more significant threat to retirement funding. The lesson is clear: when building a retirement plan, always account for inflation assumptions and keep your plan up to date.
To explore more retirement tips, consult our 20 Retirement Tip Guide.
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