Q – I am planning for my retirement and would like some advice on inflation. What rate of return should I aim for to cover inflation and still see some investment growth over the span of my retirement? – Candice S., Toronto, Ontario
A – Inflation referrers to the increase of prices over time as measured by the consumer price index (CPI). If the prices of items that you purchase everyday, like milk, eggs, and bread, increases over time and the amount of money you make or the return on your portfolio does not exceed the increase, then your purchasing power has decreased. Inflation is one of the main reasons why investors often look for more aggressive investments than, say, a GIC. Your investment return will need to pay for the increased cost of goods in the future after inflation and taxes, and the current return on GICs after taxes and inflation is near zero.
The Bank of Canada aims to keep inflation at the 2% midpoint of an inflation-control target range of 1% to 3%. The inflation target is expressed as the year-over-year increase in the total consumer price index (CPI) – the most relevant measure of the cost of living for most Canadians. The BoC even has a handy “inflation calculator” that shows how much your purchasing power will erode over a given period at a given rate of inflation.
The CPI Canada was last reported at 2.0% in April 2012. This means that the cost of goods is rising at 2.0%, so your investments must be earning at least 2.0% just to break even on your purchasing power – in other words, just to stay in the same place. Any real growth would imply a return over and above that 2.0% (and remember, this was for April). In my own practice, to be realistic, I use an expected minimum inflation rate of 2.5% to calculate potential investment return targets. – R.T.
Robyn Thompson, CFP, is the founder of Castlemark Wealth Management, a boutique financial advisory firm, specializing in customized financial, investment, insurance, and retirement planning. Phone 416-828-7159 or email today to rthompson@castlemarkwealth.com for a no-obligation, no-charge Castlemark Integrity Financial Planning consultation.
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The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.
