Inflation…..it is inevitable

Inflation is a fact of life in Canada, and the higher inflation goes, the lower your future purchasing power will be, so prepare now.

Canada’s Consumer Price Index shows that Canadians have had a low-inflation holiday for some time, creating a generation of people who have not experienced or cannot recall the days of double digit inflation.

Today, the inflation rate has almost no where to go but up, with many of the ingredients that fuel higher inflation in place. Things like a growing economy, massive government spending and rising consumer goods (food and energy prices)…sound familiar? Inflation has already reached worrying levels in many emerging nations and parts of Europe.

Stay a step ahead

The good news is that we can manage your investments in a way so you can stay one step ahead of inflation. We can start edging your portfolio towards investments that provide maximum inflation protection. This is something you should consider now, instead of waiting until higher inflation rears its ugly head.

Inflation planning is particularly important for a secure retirement plan. You need to plan today so your portfolio produces returns that help hedge against inflation, ensuring that your standard of living you envision in retirement is not compromised.

If inflation were to rise to 5% and remain at that level, today’s $100,000 salary or annual retirement income would be worth only $35,849 in 20 years! Or to look at it another way, in 20 years you would need $265,330 to buy what $100,000 buys today…….

Even if inflation were to remain at its recent levels of around 2% for 20 years, which economists concede is almost impossible, you’d need $148,595 in 20 years to equal your $100,000 income today.

While the long term impact of inflation can be devastating if your investments fail to keep up, inflation has a short term impact as well. If you have a bank account or low term “cash” investments they face the risk of quickly losing buying power because returns from many of these investments are lower than inflation.

What to do?

You can fight inflation! Holding growth investments like equities and equity mutual funds in your portfolio is one of the most efficient ways because market returns typically outpace inflation over the long term.

Another area that we can explore includes investments in sectors that benefit from inflation, such as commodities and real estate. We can also consider real return bonds or real return bond mutual funds. Real return bonds protect purchasing power because bond principle and interest payments are adjusted to reflect the rate of inflation.

If you have any questions on this topic or would like a review of your current financial plan, please call 778-478-9759, or e-mail [email protected]
 

This column is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, or life insurance, and should not be taken as providing, investment, financial, legal, accounting or tax advice.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.