Inflation Concerns are on the Rise
Inflation in an economy means that your purchasing power is reduced bit by bit. Inflation results in the cost of goods such as groceries, cars and housing rising steadily and, in the future, you will need more money to buy the same goods. Think back to when you were a child and how much cheaper things were; inflation is the reason prices have gone up.
In recent years, Canadians have not had to worry too much about inflation as it has been consistently under 2% which is relatively low. But, as a fallout from the pandemic and the government printing of money, this is widely expected to change. Many experts believe that the years of low inflation are ending, and we can expect to see prices rising going forward.
Factoring inflation into your retirement planning would be a very prudent move. With Canadians living longer, and therefore having a longer retirement, this is definitely something to pay attention to. Essentially, you want your retirement savings to increase, at the very minimum, at the same rate as inflation.
Morgan Stanley’s global strategist, Andrew Sheets, estimates that there will be a 7.4 per cent real global GDP growth in 2021. He also believes that US Treasury yields are on their way to moving higher, expecting Canadian bond yields to follow suit, thereby ending that era of extremely low inflation.
As inflation goes up, so does your need for a flexible income in retirement. This is another reason why taking advantage of the power of compounding over time is such a powerful tool. By investing and keeping your returns slightly ahead of the curve, you are setting yourself up for success by ensuring your retirement income will be sufficient given rising inflation rates.
In the past, investing in the stock market has rightly been one of the most trusted strategies for retirement planning. This is because the average historical returns of the stock market have beaten inflation by some distance, and enabled people to grow their wealth steadily. For example, the average historical return of the S&P / TSX 60 index is 6.7% annually, and the Canadian government’s inflation target is 1% to 3% annually.
Inflation certainly has a big impact on savings over time, everyone who is planning retirement should keep this in mind. Everyone should be aware though of the changes that expedited inflation could have on our savings, investments, and your future retirement.
Now is a perfect time to take a look at your retirement plan. Being prepared for the future with the right investment exposure is the best way to set you and your family up for success. Rising inflation is just one aspect to keep in mind when planning for retirement, but be sure to highlight this next time you speak with your financial advisor.
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