Inflation is a reality. The higher inflation goes, the lower your future purchasing power.
Canada’s Consumer Price Index as of spring 2011 shows that Canadians have had a low-inflation "holiday” for some time. This created a generation of people who have not experienced or cannot recall the days of double-digit inflation.
Today, the inflation rate has almost nowhere to go but up. Many of the ingredients that fuel higher inflation are in place, such as:
- A growing economy.
- Massive government spending .
- Rising food and energy prices.
Inflation has already reached worrying levels in many emerging nations and parts of Europe.
The impact of inflation
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.
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 nearly impossible—you’d need $148,595 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. Anyone with a bank account or low-return “cash” investments has faced the risk of quickly losing buying power because returns from many of these investments are lower than inflation.
Stay a step ahead
The good news is that you can manage your investments to stay one step ahead of inflation. It's possible to start edging your portfolio toward investments that provide maximum inflation protection. That’s something to consider now, instead of waiting until higher inflation is here.
Inflation planning is particularly important before you retire. Planning your portfolio to produce investment returns that help it stay well ahead of inflation will protect the standard of living you envision in retirement.
How can you fight inflation?
- Hold growth investments such as equities and equity mutual funds in your portfolio. This is one of the most effective ways to buffer inflation because stock market returns typically beat the inflation rate over the long term.
- Explore investments in sectors that benefit from inflation, such as commodities and real estate.
- Consider real return bonds or real return bond mutual funds. Real return bonds protect purchasing power over extended periods because bond principal and interest payments are adjusted to reflect the rate of inflation.
Get started today on inflation-proofing your investments. Talk to an advisor about your specific situation.
Servus Wealth Strategies Ltd. is a subsidiary of Servus Credit Union Ltd. offering financial planning, life insurance and investments. The information contained in this article is provided as a general source of information and should not be considered personal tax advice or investment advice.