There has been a lot of talk in the news surrounding inflation lately; although anyone wanting to buy lumber this year already knows first-hand about inflation.

By definition, Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy. Inflation occurs when the cost of every day goods go up in price, essentially decreasing the purchasing power of your money.

Statistics Canada recently reported inflation rose 3.1% in June; although lower than May’s 3.6%, still higher than Bank of Canada Governor Tiff Macklem 1-3% control range. Policy makers expect inflation to creep up to an average of 3.9% by the end of September.

Why is it important? 

An inflation rate of only 2% can reduce the purchasing power of your money by 40% over a 25-year time period. Put another way if you earn $50,000 today, you will need to earn $87,000 in 25 years just to maintain your lifestyle.

At the turn of the century in Canada, the life expectancy was only 56 years old.  In 2018 the average life expectancy for Canadians rose to 82 years. The average retirement age in Canada is 63; with people wanting to go earlier and earlier every year. The fastest growing segment of the population is the 90+ age group, there are now more centenarians than any other time in history. With better education, better hygiene and medical advancements, this trend is expected to continue.

It’s important to pay attention to inflation because retirees need their investment portfolios to not only keep up with the rate of inflation but grow beyond the rate of inflation in order to sustain their retirement income.

For anyone who has come to me for a Retirement Income Plan, inflation is always one of the key considerations. The average inflation over the past 30 years has floated around 2% and that is what we use for projections. If the long-term forecast for inflation goes up significantly, plans may have to be adjusted.

However, The Bank of Canada believes the higher inflation this year is a result of supply chain disruptions during the pandemic and expects the recent price increases to be short lived. In an article in the Financial Post Macklem wrote “Inflation should move back inside our target range next year as businesses work through these temporary factors and the people who lost their jobs during the pandemic rejoin the workforce.”

As always, if you have any questions or would like to review your retirement plan don’t hesitate to give me a call.

Have a great week,

Tracey

Sources: Original article by Shelly Hagan, posted on Bloomberg News 07-29-21, Investopedia.com Statscan.gc.ca

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