The real enemy of the retiree

A dollar today won’t be worth as much 20 years from now. Bruce Sellery explains how inflation can derail your retirement plans.

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Question

I want to understand what the purchasing power of a dollar will be in 20 years when I plan to retire. Assuming a 3% inflation rate, how many dollars will I need in 2032 to have the same purchasing power as $1 has today?

Answer

Bad hips and stiff joints are two things many of us can look forward to as we age, but the real enemy of the retiree is inflation. High fees and low returns are only part of the problem. The rising cost of goods and services can really impact your ability to enjoy yourself in retirement.

Your grocery bill is going up. Way up.

Take this example: say you spend about $100 on groceries a week. In 20 years that same basket of goods will cost about $149, simply because of inflation. Prices go up, on average, about 2% a year. That might not seem like a lot, but because of compounding, it works out to an increase of 49% over two decades. Ouch.

Another way to say it is that the value of your money declines by about 2% a year because of inflation. If you left your retirement nest egg in a bank account that earned no interest, your purchasing power would decline by 2% every year, or 49% over twenty years. Ouch again.

Purchasing power in the year 2032

If inflation is 2% per year you would have to have $1.49 in 2032 to have the same purchasing power as you have today with $1. Now your question assumes an even more devastating rate of inflation of 3%, which is higher than the historic average. Based on that assumption you would need to have $1.81 in 2032 to have the same purchasing power of $1 today.

There are two resources online that make this calculation simple.

Historic Inflation Calculator from the Bank of Canada

The first place to go is to the Bank of Canada’s inflation calculator. It uses actual inflation rates to see how purchasing power has changed over time.

Inflation Impact Calculator from Sun Life Financial

The second place is the Sun Life Financial Inflation Calculator. A quick internet search will show you that a number of financial institutions have calculators that address inflation. This one in particular allows you to enter in your own rate of inflation and the number of years that will elapse.

Whichever tool you use, you are not likely to be enamoured by the results. But better to understand the impact of inflation now so that you can prepare for it. Lest you be unable to afford the groceries you need to feed you in your golden years.

ask@moneysense.ca

2 comments on “The real enemy of the retiree

  1. We would all be ecstatic to find out in 20 years that the inflation rate had only been 2 to 3% per year. The goverments of the US and Canada would love that people believe the inflation rate will be so low. I found it interesting that in the article, it states "your question assumes an even more devastating rate of inflation of 3%, which is higher than the historic average." In 20 years, people will find out the true meaning of the word "devastating" when a much higher than 3% per year of inflation turns their retirement savings into peanuts.

    The government has good reason to inflate the money supply and to lie about the true rate of inflation. Social Security payments are adjusted for inflation, So, if there is 10% per year inflation, but the government says it is only 2%, they only have to raise Social Security payments by 2%. Also, when the government pays back dollars that are now worth 25 cents, or 50 cents, it reduces the debt burden of the government.

    So, keep dreaming about 2 or 3% annual inflation! We should only be so lucky. That would only happen in a dream folks.

    Reply

  2. This article closes with: "But better to understand the impact of inflation now so that you can prepare for it. " Okay, I understand inflation's impact, but how am I supposed to prepare for it? You're suggesting to readers that they'd better prepare for a moving target…will inflation average 2%, 3%, or 10% over the next 20 years? Who knows with any certainty. Instead of suggesting that we "better understand the impact of inflation" so we can prepare for it, why don't you suggest some methods to hedge against it?

    Reply

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