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Personal Wealth and Finance


How does inflation risk my retirement?

January 1, 2022

Statistics Canada releases inflation figures regularly to determine the health of the Canadian economy. Increasing inflation indicates that the economy’s overall prices are rising. On the upside, this can mean good economic growth is pushing these numbers higher. Some inflation is necessary for a strong economy. Rapid increases in the index percentile can spark the Bank of Canada to raise our interest rates to keep the costs of goods and services in check.

When you go to the pumps or the grocery store, ask yourself, “will my retirement investment portfolio create sufficient income to pay for all these rising expenses?” By accumulating assets in your pre-retirement years, you increase your net worth, leading you to financial independence. The cost of our basic retirement needs will increase.

Over the years, inflation has radically reduced our buying power. When increasing as a policy to reduce inflation, interest rates can also increase our debt repayment load as a percentage of income, putting a strain on our budgets. In this respect, both inflation and interest on the debt are the foremost enemies of wealth creation.

How is inflation calculated? Canada’s national statistics are weighted to reveal increases for the basket of goods and services in the Consumer Price Index (CPI).1 Statistics Canada assess consumer spending patterns month by month.

Over the 12 months up to October 2021, three of the eight major components saw unprecedented growth in their basket weights, the statistics agency said, led by home shelter, which grew to 30% as a basket share. This was due to soaring house prices during the pandemic. Household operations, furnishings and equipment increased to 15.21%, and alcoholic beverages, tobacco products and recreational cannabis increased by 4.86%. The Bank of Canada targets overall weighted inflation at 2%, with a 1%-3% control range.2

You can get ahead of inflation now by investing. A healthy investment fund portfolio can give you a sense of financial security earned by continued discipline and adherence to the principle of saving. Saving on a month-to-month basis while purchasing investment fund units can help you realize your goals and objectives in life (such as: acquiring a home, making significant purchases, travelling, putting children through college or university, or going back to school yourself ). Finally, your investments must outpace inflation—the rising cost of goods and services—the investor’s worst future enemy. Ask your financial specialist to do a complete analysis of your retirement income potential.

1 StatsCan
2 Reuters

 

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