How To Account For Inflation In Retirement Planning

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How to account for inflation in retirement planning
Article Overview

You’ve been planning for retirement for a while. How does inflation affect your retirement plan, especially with rising interest rates due to higher inflation? This article will help you learn just that. If you are interested in learning more, just read on.

To help you succeed in your retirement goals, we have created these other articles that can help you.

Retirement planning is an important aspect of financial planning that ensures that your financial needs are catered for post-retirement. To build an impressive retirement fund, it is advisable you start early and also have a varying investment portfolio to grow your retirement savings. Do these things, and you are guaranteed a financially safe post-retirement lifestyle. However, one thing that must be taken into account during your retirement planning is inflation. Inflation is almost inevitable and when you consider the number of years between your pre-retirement and post-retirement, you will agree that the cost of living may have significantly risen due to inflation. Therefore, it is advisable to always put into account, how inflation will affect your retirement funds.

The top two priorities for retirees are money and health. To have a good post-retirement financial life, there must be enough money to take care of your daily expenses and your health. To cover for this totally, you must have a solid retirement fund to take care of your living expenses during post-retirement. To have a solid retirement fund, you must put into consideration inflation when building your retirement plan. The cost of living today will definitely not be the cost of living post-retirement. Your investment portfolios will go a long way in helping you hedge against inflation. A conservative retirement lifestyle will also help you cover for inflation. All in all, it is all about being smart and engaging professionals that will help you with your retirement plan.

To calculate inflation in Canada, the Consumer Price Index tool is used. The year-to-year difference prices are calculated using a range of products and services. While inflation is caused by different economic,  social and political events, the government tries to put it under control. For example, the Bank of Canada, through its special key interest rate regulates inflation by putting mechanisms that will hold inflation at a steady rate of 2% per year. Despite the controlled inflation rate, it has affected the value of savings and investments.

How Inflation Will Affect Your Retirement

Inflation is said to have occurred when the cost of a product or service increases compared to the value in a particular period in the past. It is important to note that inflation is not just the increase in the price of a particular product or service. It is generally the continual increase in the average price of products and services. This decreases the purchasing power of the CAD. When this happens, you will only be able to buy fewer products and services with the same amount of CAD before the inflation occurred. Your purchasing power reduces.

The implication of this is that it eats into your retirement funds budget, which is why you should always put into account the effect of inflation in your retirement plan. Your retirement fund is based on an assumption of the cost of living during your post-retirement days. Some people use the current cost of living to plan their retirement funds. This is wrong as things will most likely be different, goods and services will cost more and if you use the price of today to plan your future, you may end up short changing yourself.

Your retirement plan is your financial protection against your post-retirement years. It is a period in your life where you will no longer be active. You will not be able to work and earn as much as you do now that you are older. This is why it is advisable to always plan for retirement now that you are agile and can earn as much as you can.

Effects Of Inflation

Inflation is a big part of your retirement planning because the cost of living today will not be the cost of living when you retire. All you have as a source of income will be your retirement savings and it won’t do you any good if you planned your savings using today’s cost of living. For example, the cost of cereal today may not be the cost of cereal when you retire, how do you ensure you make provision for this potential increase in the price of cereal and every other commodity and service. This is why you should take into account inflation in your retirement planning. You may argue that your retirement savings also grow when you invest but it is important to know how much money you need to set aside to meet your retirement needs. In doing this, you need to factor in inflation. When you meet with a financial planning expert, they help you calculate how much you need to hedge against inflation for post-retirement spending. They do this with a number of formulas that will consider the inflation rate when your post-retirement days begin.

How To Account For Inflation In Retirement Planning

A retirement plan that fails to consider inflation only gives room for a decline in purchasing power when the time comes. To avoid this, your retirement savings must be outdoing the estimated inflation rate. Here are some tips that will help you account for inflation in your retirement planning:

1. Continue Working

This is based on how agile you are after retirement. If you can, maybe not fulltime, but the money you earn in a part-time job during post-retirement can help hedge against the inflation in the cost of living during your post-retirement days. This is more of a damage control method but it has proven to be effective. Additionally, the salary and benefits you receive for jobs during post-retirement will also rise with the current inflation rate. This will protect you later into your retirement years because your retirement income and benefits will be based on a higher final salary because of the extra years of work.

2. Save The Extra Cash

Generally, during your active years, your salary should always increase annually to keep up with the inflation rate so as to maintain your purchasing power. To provide for inflation post-retirement, you can save a larger chunk of the salary increase into your retirement savings. If you come across any extra cash, asides from a salary increase, you should also put a larger chunk of it into your retirement savings. It will go a long way post-retirement.

3. Keep Investing

Because you have hit post-retirement does not mean you should stop investing. Continuous investment in different portfolios will help your retirement savings keep up with inflation. There is the saying that investments, especially stocks, will out outpace inflation. This is not certain although the fact has been historically proven right. It is advisable to have conservative investments and also diversify them with varying high-risk investments and volatility. This will help protect your retirement savings against inflation.

4. Have A Real Estate Investment

This is another good way to keep up with inflation. Real estate is an investment that may actually help you beat inflation post-retirement. The first step is to ensure that you pay off your mortgages before retirement. This reduces the burden on your retirement savings and can cover for the inflation during post-retirement. You can also diversify your investment in real estate to help beat inflation during your post-retirement days. If you are skeptical about owning a property and leasing it out to avoid dealing with tenants or even a management company, you can consider Real estate Investment Trusts. This is an investment portfolio that allows you to co-own a property with other shareholders.

5. Lower Your Cost Of Living

Retirement, for some, is when you get to do all the things you could not do while you were still actively working. Some decide to travel the world, buy exotic cars they couldn’t drive while they were still working and other flamboyant living expenses that could cost you, especially with the inflation rate in your post-retirement years.

The best way to get around this is to limit your expenses post-retirement to cover against inflation and ensure that your retirement savings plan is enough to cover your post-retirement living expenses. You can cut down on expenses like shopping, cable TV packages, mobile phone plan and so many other things that you may not find interesting after retirement. If you still want to keep all of these expenses, you can negotiate a better rate with your service provider to suit your current status as a retiree. It is the time to get rid of extravagances and be prudent with your retirement savings.

6. Be Wise

Retirement planning takes careful consideration and practicable strategies to ensure that your post-retirement days are covered. It is advisable to engage the services of a financial advisor to help you with your savings and investment strategies for your retirement plan. They always have a good sense of how to take into consideration the inflation rate when building your retirement plan. It goes without saying that you should have a budget and stick to it pre-retirement and post-retirement. If you want to spend money on things you want but don’t need, be patient, and wait till you can get the best price for it.


The inflation rate you should be using for retirement planning is 2.1%.

Some retirement plans are adjusted for inflation to help maintain a similar lifestyle throughout your retirement. Some of those plans are defined benefit plans, Canada pension plans and Old Age Security.

In Canada, the Consumer Price Index is used to calculate inflation (CPI). The CPI measures the change in the price of a basket of goods and services over time. Prices of goods and services are compared to the CPI to account for inflation, and changes in the CPI are used to adjust for the effects of inflation.

The inflation rate you should be using for retirement planning is 2.1%.

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Written by:

Jim Pan, CFP, MFA-P

Jim is a dedicated, fee and advice only independent Certified Financial Planner with a focus on supporting healthcare business owners during their crucial growth phase. His expertise lies in offering comprehensive solutions to minimize taxes while embracing a holistic approach. With a career spanning back to 2010, Jim has established a strong presence in the financial industry. He proudly holds a range of designations, including Certified Financial Planner (CFP), and Master Financial Advisor - Philanthropy (MFA-P). He is currently pursuing additional designations and qualifications to better serve his clients and community. Beyond his qualifications, Jim is a member and an esteemed participant in the Million Dollar Round Table (MDRT), an exclusive global association comprising the top 1% of financial advisors. Jim's commitment extends to the community, where he spearheads numerous charitable fundraising events and plays an active role in enhancing the well-being of others. Additionally, he has contributed significantly by serving on the board of the Canadian Mental Health Association in Vancouver. Currently, he volunteers with Junior Achievement of British Columbia (JABC) to present personal finance topics to youths.

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