Do you remember the good old days: $5 footlongs at Subway, Toonie Tuesdays at KFC or a BigMac extra value meal for less than $5? The price of these delicious meals long ago versus the prices now are examples of inflation. Sadly, this has drastically affected my fast food addiction. Unless you’ve been living in a cave, I’m sure you’ve noticed that hardly anything lately has been immune to these price hikes. In this blog, I am going to do my best to describe inflation, how it can hurt your future self and some options you have available to reduce its effects.
Putting things into perspective
Before I begin, let me give you some examples that do not relate to food. To start, what you could have bought 20 years ago with $100 will cost you $151.72 today. (Source: https://www.bankofcanada.ca/rates/related/inflation-calculator/) On a larger scale, if your income needs were $50,000/year 20 years ago and you were planning to retire in 20 years with the same level of income, you would need to have saved enough to generate $75,862/year by this time.
Another more common example would be the ‘COLA’ or cost of living adjustment increase many people receive from their employers at the beginning of each year. This is an increase to keep up with inflation and to ensure that your income can provide the same lifestyle as the previous year. To me, this is the most important consideration. While many defined benefit pensions are tied to the CPI (Consumer Price Index), many employers are feeling the strain of providing an adequate COLA increase with current inflation rates.
Inflation can and does change on a year-to-year basis. According to recent reports, it is under control after several interest rate hikes in 2022. It will very likely persist for some time longer before the government can get it back down into the 3-4% range they are looking for. In response to the COVID pandemic, our government announced stimulus packages, like CERB which in turn increased our money supply. This is just one of the main reasons why we are suffering the effects of high inflation at this current time.
The inflation rate is higher than Canadians have experienced in decades.
There are plenty of options and just as many variables when it comes to inflation. Talk to us and one of our advisors will work with you to create a personal financial plan that will keep you on track for your future.
So how should I factor inflation into my investing?
Okay, what if I have to spend $8.50 now on my meatball sub? What does this mean to the average investor?
Interest rates have increased dramatically over the past 8 months. But because of inflation, while a 5% GIC seems great from the outside, it is yielding less on a real return basis (gross return minus inflation and taxes) than it was before the interest rates jumped. GIC’s payout interest income, which is the least tax-efficient form of income that reduces your real return. Furthermore, for someone who has a higher income, they run the risk of losing a substantial portion to taxes and also potentially part or all of their Old Age Security (OAS) clawed back.
This means we have to look elsewhere for investment returns. One area we can look to is equities or stocks. No, this does not mean you need to trade your own stocks or try to pick the next Amazon. There are ways of gaining exposure to equities through mutual funds, ETFs and index funds while keeping your risk level relatively low. With people having longer than ever life expectancies, having your money last for 30-40 years in retirement should be just as big of a concern to investors. Those that are in their 50s or 60s may not think they have a long time horizon, but the life expectancy statistics would argue otherwise.
If we separate your short, mid and longer-term savings into “buckets” there is little reason why most investors should not have at least their longer-term savings “bucket” exposed to some equities. Of course, if you believe in the long-term wealth-building power of real estate or gold…or bitcoin…all the power to you. The point is that you need to hold something that gives you the chance of enhancing your overall returns over time so it will not get eaten up by inflation resulting in your money lasting longer. We can talk about the merits of each of these specific investments at any time, but for the purposes of this blog, I won’t.
Investing is a marathon and not a sprint. Unless you are actively trading stocks on your own, which is statistically the riskiest way to invest, investing is likely not going to be a thrilling and captivating journey for most (although 2022 in the markets may want to have a word!) Yes, neighbour Bob might not be lying about the 400% return he just made on Dogecoin in the last few months. Remember, those examples are few and far between and not the average investor’s story.
We are still moving through the effects of COVID and will be for many years into the future, but I’m sure you know about that already. Businesses have adapted as they always do, and have found new ways of doing business. The ones that innovate and create new models will thrive and the ones that refuse to change (Blockbuster Video) will die off, just like all the ones before them. There will always be businesses that are able to offer products and services to consumers, they may just not be the same ones as before.
Each person’s situation and risk tolerance is unique and should be treated as such. There is no one size fits all solution to financial planning and investing. Please feel free to reach out and book an appointment if you would like to review or chat about anything with me!
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