Are You Beating Inflation?

Another way to compare portfolios is by assessing the odds of beating inflation and by how much. If inflation is 2.1% and your GICs are paying 1.75% interest, you have a problem. Your money is losing its value faster than it’s making money and that’s before tax; after taxes, you’ll be left with even less.

If you make $600 and inflation is $300, you’re still ahead. If your investment makes only $300, you have only matched inflation, not beat it.

To see what your theoretical chance of beating inflation is, use the chart below and assume inflation is 2.1%. Target returns are higher when portfolios hold more equities. The assumption is that equity growth is protection from inflation. 

Are you Beating Inflation?

  Conservative
Income
Portfolio

Conservative
Balanced
Portfolio

Balanced
Portfolio
Growth
Balanced
Portfolio
Cash (%) 20 20 0 0
Fixed Income (%) 60 40 40 25
Equities (%) 20 40 60 75
Gross Target Return Inflation + 4.25% Inflation + 4.79% Inflation + 5.50% Inflation + 5.90%

Suggested asset mix based on research conducted by iA Investment Counsel Inc. 
Inflation of 2.1% and target rates of return are based on Financial Planning Standards Council guidelines.

Did you notice that target returns are higher when investors allocate more money to equities? The assumption is that equities are a good inflation hedge. With a long-term target return of 3 to 4% over inflation (total return of 5 to 6%), balanced investors could assume they have better odds of beating inflation than their more conservative friends.

Use the "inflation plus" rule of thumb to explore:

  • Whether you have an appropriate asset mix
  • Your comfort and capacity with the portfolio’s risk-return trade-offs
  • Your investment strategy with your investment advisor

Make Conservative Assumptions

When developing a plan for sustainable income, it pays to be conservative in your assumptions. The range of the Bank of Canada’s inflation target is 1-3%, using 3% is a more conservative assumption for the rate of inflation.

Savings, Taxes, and Inflation Calculator

The value of your savings can be affected by both taxes and inflation, especially if you are saving for a long-term goal. Use this calculator to determine how much your investment or savings may be worth with this in mind. Click the “View Report” button to get more information and an indicative year-by-year savings schedule.


Information and interactive calculators are made available to you only as self-help tools for your independent use and are not intended to provide investment or tax advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.