What Does Inflation Mean for Your Retirement Plans?
It makes sense that after two years of dealing with a global pandemic the economy will look a little different. At the moment something at the top of everyone’s mind is inflation. This past year has seen a surge in inflation, but why is that? One of the largest factors is the effect that the pandemic has had on consumer prices, also known as a base effect by economists. Put simply, when Covid-19 ravaged businesses in March 2020 the global economy saw a decreased demand for many goods and services that normally keep the economy afloat. This causes prices to go down as well. As the lockdowns and restrictions have eased, prices have bounced back quite quickly. Demand did not slowly and quietly creep back, rather it skyrocketed in every sector and the world (manufactures, distributors, small business owners, etc,) frankly cannot keep up. Not to mention the new trend of “stockpiling” resources in case another situation were to occur. Supply shortages, supply chain issues, and even lack of raw goods all cause prices to escalate, and inflation appears.
Inflation is not expected to return to the usual 2% until 2024, or even later, meaning we may likely start to see some changes in our society. Higher inflation rates mean prices for goods and services rise, therefore consumers get less for what they are used to spending. With eroding purchasing power comes the desire to spend more. This seems counterintuitive, but it makes sense that if people think their toilet paper will be more expensive in the coming months, they would want to stock up now. Unfortunately, this trend makes inflation even worse. In turn, banks try to raise the cost of borrowing to de-incentivize spending. By raising interest rates the banks consequently make mortgages and loans more expensive. This cycle is nerve-wracking, and can severely impact an economy. At NYF we like to think about how current economic trends will impact our clients, specifically our clients retirement and estate planning.
Inflation does not only affect the current cost of living, but it can affect the way your investments will grow. CNBC has found that 71% of retirement aged investors worry that this inflation will negatively affect their plans for the future. We don’t blame them. Inflation will likely change the purchasing power of your retirement savings. So how can we combat this? One way is to maximize your benefits, meaning wait as long as possible before taking your CPP or OAS, and withdrawing savings from RRSP. Planning is the next step; plan for your presumed costs of living, so that you can ensure you can afford the lifestyle you are wanting to lead after retirement. This includes trying to plan for unforeseen experiences such as medical emergencies. Considering the cost of long term care is another step.
Life throws curveballs, nobody would have predicted that we would be dealing with a global pandemic that had the ability to impact retirement plans of citizens years in the future. What are you doing in your portfolio to combat inflation? If you would like to learn more about how NYF Wealth Management plans inflation affecting your retirement plan, we would love to talk.
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