My financial chronicle
Should I worry about inflation?
Inflation is the slow but relatively steady rise in the prices of goods and services. It eats away at our purchasing power and hits retirees even harder than you might imagine.
Why does inflation hit harder after retirement? The reason is simple. During our working years, our salary is usually adjusted annually for the rise in the cost of living. We may also be promoted to higher-paying positions over the course of our careers. And so, our salary may increase faster than the cost of living.
The situation is different for retirees, particularly those who haven't contributed to a private pension plan like the ones administered by CARRA. Indeed, 60% of working people must fend for themselves when it comes to providing for their golden years. Once retired, they'll have to withdraw a bit more money each year in a battle against the slow but certain rise in the price of goods and services. Inflation affects everyone.
For pension plan members, the situation may be less of a concern but still requires a word of warning. The annual income you'll receive through your pension plan, if it is administered by CARRA (with a few rare exceptions), will only be partially adjusted for inflation.
Thus, for people who retire around 2010 after a career of some 30 years or more of service, the annual pension adjustment will offset approximately 40% of the actual increase in cost of living. For example, with 3% inflation, your pension would be increased by approximately 1.2%, resulting in a 1.8% decrease in your purchasing power.
In a single year, this would have no noticeable impact on your daily life. But the long term, cumulative effect can be devastating. Over 15 years, your purchasing power would decline by a total of 30% due to the cumulative effect of inflation. That's when it starts to hurt.
How can you protect yourself against inflation? The only sure way to offset the loss in purchasing power is to set money aside, preferably in an RRSP, in addition to your pension plan. Once you retire, you can withdraw funds to compensate for the income you lose due to the incomplete adjustment of your pension.
Should you try at all costs to maintain the same purchasing power until death (based on your life expectancy)? Probably not. According to one line of thought in the personal financial planning world, the foreseeable decrease in activity due to aging, say, after age 75, offsets the loss in purchasing power after this age. But this theory is not set in stone!
Have concerns about this topic? As your financial security advisor, I'd be delighted to answer your questions and help you protect yourself against inflation. Contact
I look forward to meeting with you!