Factoring Inflation Into Your Retirement Strategy

Have you ever looked back and thought, “I can’t believe how much everything costs now compared to when I started out”?

In 1996, I bought my first house for $40,000 with a $350 monthly mortgage payment. Today, that same house would sell for eight times as much. This is inflation in action – and it’s quietly changing everything about your money.

We often think of investment risk as market ups and downs. But sometimes the biggest danger is not investing at all. While your money sits “safely” in the bank, inflation is steadily eroding your purchasing power.

Even mild inflation at 3% cuts your buying power in half over 24 years. If you’re planning for a 25-30 year retirement, this could be devastating.

Ready to learn how to protect your retirement from inflation’s silent threat? Listen to the full episode now.

Show Notes: Factoring Inflation Into Your Retirement Strategy

Hey there. Welcome back to the Heart of Your Money. Have you ever looked back and thought, “I can’t believe how much everything costs now compared to when I started out”? In 1996, I bought my first house with Ian and it was $40,000. Our mortgage was $350 a month. Now, that was a stretch back then for us. Today, that same house would sell for eight times as much.

This is inflation. It’s not just a number economists talk about. It quietly changes everything about your money, and it’s the biggest threat to your retirement. We often think of risk as the ups and downs of investing, but sometimes the biggest danger is just not investing at all. Let’s look at why. Let’s talk about the last hundred years.

A Century of Inflation in Canada

So inflation in Canada has had huge swings. During the Great Depression in the thirties, prices actually fell. They called that deflation. That sounds good at first, but it created mass unemployment and made things worse. Then came the forties after the Second World War. Pent-up demand and shortages pushed prices up quickly.

And then the seventies – the oil crisis hit, inflation soared to over 10%. By 1981, mortgage rates reached over 20%. I have clients telling me about their first mortgage at 24% and 29%. That meant borrowing money to buy a home or build a business was almost impossible. In the nineties, Canada finally brought inflation under control with the formal target. You know, when we hear about that 2%, 2.5% – for decades, things stayed stable until they didn’t.

And so 2008, 2009, we know we had the financial crisis. That was not inflation. That was actually when interest rates went and plummeted down. When the pandemic hit and governments poured trillions into the economy, inflation came roaring back. We got so used to low interest rates that by 2022 we saw rates over 8% – the highest since the early eighties. Just go back three years. Remember the panic over these interest rates?

The Reality of Rising Costs

This isn’t just history, it’s a reminder that prices go up and they usually don’t come back down. Even mild inflation at 3% cuts your purchasing power in half over 24 years. That means if you live 25 or 30 years in retirement, what seems like plenty of savings now may not cover your costs later.

And inflation doesn’t hit everything equally. Think of our food, our utilities. So when I went on Stats Canada, this is quite a while ago, but when I see that food increases in certain products – in food, like whether it’s meat or fruit – we’re talking like 8%, 9%, 11%. Utilities, property taxes, they rise faster than general inflation. I tell my clients, and especially my adult daughters who are starting out and people that are just first buying houses: in your cash flow, in your budget, just assume utilities and property taxes will go up every year by 4%, 4.5%. That is higher than that 2% or 3% increase that we see every year.

Healthcare costs especially tend to increase more quickly. Even in Canada where our healthcare is covered, retirees still face rising costs for prescriptions, home care, private care homes – they increase every year. So these expenses often show up later in life when maybe we’re a little bit more vulnerable.

The Longevity Factor

So when we talk about inflation, it affects us also because we’re living longer. I know I talked about this already, but for example, a 65-year-old couple today has a high chance that at least one of them will live into their nineties. That means more years for inflation to compound. This is why simply putting money in the bank and relying on interest doesn’t work anymore. Over 30 years, you could see your living costs more than double. And that’s what I love to map out in our financial plans – we can see how much money we need in our pocket in 30 years to replace our purchasing power today. We always factor in our inflation.

The New Reality of Interest Rates

So another factor is the new reality of interest rates. And so when I think of back in – after the financial crisis, we saw really low interest rates. So for over a decade, people got used to borrowing at really low rates. I am seeing, and I don’t know if it’s just coming up or it did, but I’ve seen clients who are coming up for renewal right now, and they had a 1.89% or a 1.79% interest rate on their mortgage. Now they’re jumping into about 4%, 4.5%. Rates have climbed fast.

Higher borrowing costs don’t just affect us. They impact our adult children trying to buy homes or start businesses. And sometimes this leads to unexpected family support later in retirement. If interest rates are bringing their mortgage payments up higher, sometimes family members – parents – are helping their adult kids out.

We’re also seeing some of the global pressures we’re seeing: supply chain issues, geopolitical tensions, shifts in resources. All of this can cause inflation spikes and shortages. It’s a reminder that even in a stable country, prices can jump when the world economy shifts.

What Can We Do About This?

Well, this is about diversifying to keep pace with inflation. It’s never been more important than to know what you’re invested in and why, and to stay diversified. Having all your savings in one place or just in one type of investment can leave you exposed. When prices rise, a good plan spreads your money across different assets that can respond differently to inflation.

For example, companies that pay steady dividends often have pricing power – they can pass higher costs along to customers. We get the brunt of it as consumers, right? The price to purchase something, an item, goes up. But that’s helping that company’s profits. So I actually want to be a part of that. I want to be invested in that company that is still making billions of dollars and they’re just passing on the inflation to the consumer. I want to keep pace with rising prices that way.

Holding a mix of investments also means you’re not relying on any single trend or market condition to protect your purchasing power over the long term. You know, buying only into one sector or one asset class, or you’re only holding one thing, you’re now at the mercy of that one company.

Planning for the Long Term

So we talked about retirement lasting 30 years or more. And so this means your strategy can’t be static. You need a plan that adapts as you age – more growth early on and more security later.

So back when I told you about 1996 when we bought our first house there, and it was really hard to make that $350 a month mortgage payment – and because that house is costing way more, it went up in value. If we had left that $40,000 – if, you know, we never had $40,000, but let’s just assume we took the equal price of that house in 1996 and left it in the bank – it would still only be worth $40,000, not the $320,000 that it is worth today.

That’s the lesson. It’s not to go out and buy real estate. That was just an example. But the lesson is that time and inflation change everything. What feels safe in the short term, like cash in the bank, can be the riskiest choice over the long term.

The Bottom Line

The world has changed. The old idea that investing is too risky doesn’t hold up anymore. When you look at history, smart investing is the only way to keep up with inflation. So the real risk is not being invested. The risk is watching your money slowly lose value while prices keep rising.

Protecting your retirement isn’t just about avoiding losses. It’s about making sure your savings grow enough to keep up. If you’re not sure whether your plan can handle inflation or you feel nervous about getting invested, let’s talk. Send me a note. Our specialty here in the office is retirement income and planning. And don’t worry, we plan for the inflation. Send me a note. Thanks for listening.