Episode 65 – How Inflation and Rising Costs are Impacting Retirement (Part 1: Inflation Series)

It’s no secret that inflation and rising costs are making it more difficult for people to save for retirement. But how does this impact your plans?

The effects are vast, and they’re not going away anytime soon. It’s essential to understand how these changes are impacting your retirement plans so that you can make adjustments for them now.

In this episode of Heart of Your Money, we’ll discuss the effects that inflation and rising costs have on your retirement planning—and what you can do to put yourself in a better position for the future.


Show Notes:


Hey there. Welcome back. Are you feeling the pinch of rising costs right now? Are you worried about inflation today? I’m gonna give you a few tips and hopefully settle your mind. Just a little bit about this thing inflation out there right now, and its impact on your retirement. So what is inflation?

Well, it’s commonly referred to as a measure of the rate at which the price of goods and services increase over time. Basically it’s when you go to the grocery store and you still have two bags, but now instead of a hundred dollars, it’s 140. That’s inflation. Things are just costing more. As inflationary measures increase.

This implies a decrease in the purchasing power of your money. In other words, this has an effect on your purchasing power. As you can now purchase less with the same amount of money. Therefore we need more money to do less things, boy, that doesn’t feel so good. The result is that it takes even more time for your earnings to grow in order for them to keep up with the rate at which prices are rising.

That sounds kind of like dooming gloom. You know, it hasn’t always been this way before 2021. Our average inflation for the last 30 years was hovering around 1.8%, 1.9%. And so that’s just an average, that’s a good run of low rates and keeping a low price of goods. That might be why right now feels like such a shock because we’re way over that average.

And for the last 30 years, we haven’t been used to this. When we complete financial plans for you, meaning we map out our future retirement income needs. We calculate an inflation amount each year. That means that each year we make what you need for retirement, increasing by around 2% right now. So if this year you need, I’m gonna throw it there, $80,000 in your pocket spending money each year, you’re gonna actually need 80,000 plus 2% next year. And then compounding that 2% every year. We do that until your age, 96. So inflation isn’t anything new? It’s just the amount right now feels new. The goal for Canada is to try and reduce our current inflation back to that two, two and a half percent.

So this huge jump of what things cost right now is hopefully going to settle down a little bit over the next few years. In the meantime, what should you be doing? Invest, invest, invest. I know you might be tired of hearing this, but one of the best ways to protect against inflation in retirement is by investing.

This is because if you hold a lot of your money in cash, then generally interest rates on cash are well below the rates of inflation. Cash is going to be a negative return because it just won’t buy as much each year. If you hold it in cash, it’s important, you gotta be comfortable with investing your retirement funds.

And this doesn’t mean investing all of your cash in one single asset. I’ll just throw out there, you own only real estate or you only own one stock and it’s all in one specific sector, like maybe tech – a better option is to be diversifying your asset portfolio.

For example, some in cash, because cash is still queen in my books. But it has to be a small amount. Some in equities, some in different fixed income, you get the idea, don’t put all your eggs in one basket. One of the main reasons you invest is to protect your purchasing power. 

What if you also have a defined benefit pension plan, that’s the type of pension that pays you a set monthly amount for the rest of your life?

Well, You can’t see right now, but my hands are going over my head and I’m doing a little whoop whoop if you have a defined benefit pension.  Inflation’s impact on a pensioner that has a defined benefit pension kind of depends on the terms of that pension plan. A retiree with a fixed pension payment. Can be at risk from higher inflation, if that pension plan does not increase with inflation. 

So I’m really hoping out there that all of you guys that have your defined benefit pension, know if there’s a rise in inflation each year, that would be fantastic. Not all of them have that though so you have to really pay attention and note the rules of that pension plan. Being invested on top of having your own pension plan will provide somewhat of a hedge against higher prices.

So the best answer would be that you have a defined benefit pension that pays you monthly income for the rest of your life. And you also did your own savings and you have your own investment portfolio.

The Canadian pension plan, (CPP), and the old age security, (OAS) are indexed to inflation and adjust annually for CPP and quarterly for OAS. By waiting until age 65, or even later you can lock in an increased fixed amount and this is gold by matching inflation is going to be your hedge in retirement. 

There are many benefits to deferring these two pensions, particularly given the break even age, when a recipient will have collected more lifetime income is much lower than the average life expectancy for seniors, but because the pensions are indexed to inflation this recent spike in the cost of living highlights, a powerful inflation hedge that is available to almost all.

Canadians who opt to defer, increase their pensions. So this is golden. 

A few things to remember that you can do and can control right now in this time: Keep contributing. If you aren’t experiencing a reduction in income and you’re not quite retired, continue to contribute to your retirement plan with the matching employee and employer plans out there.

Take advantage of the dollar cost to averaging off your paycheck, each biweekly or monthly. You’re adding, your employer’s adding and so you’re able to scoop things up on sale right now. And over the span of monthly, biweekly, you’re gonna get an averaging price.

 And then the other thing to do- is that while you’re contributing, thinking about tax diversification, you’re building a bucket of tax free income- definitely something you need to consider. And that bucket is called the Tax Free Savings Account. By having that TFSA in there on top of your pension savings, this is gonna really help. And it really will help with inflation over time because you’re not gonna have to pay tax. You’ve already paid tax on it when you put it in.

When you go to take it out you don’t have to pay capital gains or losses in that TFSA bucket. So use that TFSA as a retirement plan as well. So keep contributing. That’s the number one thing you can do right now. And the next one is to still hold on to a little bit of cash. It’s important to have some cash reserves in the event of an emergency by having a savings account, separate from your investments. You don’t want to have to tap into any equities or  assets. If you need any money, especially if (investments)  priced low right now, you can just let them sit there and use your cash reserve.

The last thing that you can do right now is check the emotions. Getting caught up in the drama of a volatile market is easy and it can lead to emotional decisions that can potentially affect your retirement savings.

It’s best to check emotions at the door. You know my saying, check yourself before you wreck yourself. So, on top of being diversified and using your CPP and OAS, there are some things in here that are like a silver lining in the short run. Higher inflation is concerning and it does lead to the uncertainty and the volatility right now. 

The bank of Canada is likely to continue to increase interest rates to counter that higher cost of living. There is a risk. The rate increases have taken too long to start, or may now happen more quickly than expected. And that may have implications for, you know, saving, retiring economy, the stock market. Expect some volatility, but remember – this is short term and it might feel like it’s taking forever, but give it some time.

Remember your retirement is possibly 30 years. That’s the long game, stay the course. That’s it. If you have any questions, send me a note until next week. Take care.