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Inflation’s impact on retirement savings

Inflation is a big worry for most people heading into retirement, and for good reason: it eats away at the purchasing power of your savings.

But the problem’s worse than you may realize. One of the Bank of Canada’s preferred measures of inflation (“Core Inflation”) takes the Consumer Price Index (CPI) and strips out some of its more volatile components. These include fruits and vegetables, gasoline, natural gas and fuel oil, mortgage interest and inner-city transportation.

See the problem? These are day-to-day staples, and their levels of inflation could be significantly higher than the Core Inflation figure.

So, when your advisor factors inflation into projections of how much you can spend in retirement, and for how long, he or she should use figures that exceed the Bank of Canada’s Core Inflation forecasts.

There’s another side to inflation you need to be aware of. Companies don’t like raising prices because it can hurt sales. Instead, they maintain profit margins by changing packaging so they sell less product for the same price (e.g., less volume in a box), or by swapping higher-cost ingredients for lower-cost ones.

It’s more difficult to see this kind of creeping inflation, but it’s there. In a service economy like ours, wage inflation is even more dangerous. The cost for the chiropractor, dentist and hairdresser becomes slightly more expensive every year. Read More

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