Ravages of Inflation

Inflation is the enemy of the retiree. In retirement, you are likely to see a drop in income compared to your wages from your years of full-time employment. Nevertheless, you will find that the costs of living continue to rise. This rise is compounded by the fact that many of us can expect to live well into our 80s and 90s.

The graphic below depicts the ravages of inflation at various average rates of inflation on a starting annual retirement income requirement of $30,000.

# of Years

0

5

10

15

20

25

2% Inflation Rate

$30,000.00

$33,122.00

$36,570.00

$40,306.00

$44,578.00

$49,218.00

4% Inflation Rate

$30,000.00

$36,500.00

$44,407.00

$54,028.00

$65,374.00

$ 79,975.00

6% Inflation Rate

$30,000.00

$40,147.00

$53,725.00

$71,897.00

$96,214.00

$128,756.00

8% Inflation Rate

$30,000.00

$44,080.00

$64,768.00

$95,165.00

$139,829.00

$205,454.00


Assuming inflation averages 2%, the cost of living has increased by approximately 50% in 20 years. If you retire at 55, this rise will impact your retirement income requirement by your 75th birthday! At 4% inflation, the cost of living will have more than doubled in 20 years!

It’s wise to use a 3% average inflation rate in your retirement modelling and calculations. The Bank of Canada’s inflation mandate is to manipulate interest rates in order to keep the inflation rate between 1% and 3%.