Retirement Inflation-Retirement Challenge #3
Inflation can derail anyone’s finances during those golden years of retirement. As you redefine retirement, working to age 70, living healthier more active lifestyles your money faces a monumental crisis. How can you maintain your purchasing power to support ageing, without higher growth and risk in your savings and investments? YOU CANT is the short answer.
How much should you increase your spending each year? How much additional risk does your portfolio need to generate growth or income? How should you invest in an era of declining consumption due to ageing and changing consumer tastes? How should you invest during times of deflation, inflation and slowing global growth even though there are 200 million souls are added to the planet each year? What type of insurance do you need? Where should your insurers invest the surplus premiums? Challenges you never thought you would never face are now asking for answers. Investing in GIC's wont help you last longer than your money.
Answers are not yet forthcoming from the financial service industry or government’s as they resist clinging to the old outmoded ways of thinking when it comes to your ageing. In retirement you need asset growth to protect future purchasing power. Insurance and Investment companies resist placing retired folks money in high risk asset growth investments discouraging the advisers and distributors from facing up the upcoming economic shortfalls to genuinely help their ageing customers from outliving their money.
Asset growth comes with its own unique emotions as more not less volatility is felt, and allowing time to recover becomes part of retirement. There are investment and income layering strategies to manage this. But the risk appetite and journey may not be suitable for every investor. We are faced with an uncomfortable decision; accept declining purchasing power having less spending money or increase asset growth, risk and volatility in your portfolio.
For these reasons we decided to examine how inflation and purchasing power is measured by economists which we conclude is largely bogus:
“What is the CPI? The Consumer Price Index (CPI) is a measure of the rate of price change for goods and services bought by Canadian consumers. It is the most widely used indicator of price changes in Canada. Your Guide to the CPI page 1
Imagine our amazement when we looked at 50 years data. As the chart below shows that prices tracked in the CPI in Canada changed by 648.7% from 1964 to 2013. That means that prices increased by an average of 12.97% per year. (CAUTION HERE averaging averages is never good statistical technique so for arguments sake the real number is probably closer to 9 or 10 %.) And these price increases are cumulative as CPI is calculated on a price per period. Cumulative Inflation reported on the same web pages was around 200% for the same 50 year period. It becomes easier to understand why everyone is complaining about rising prices in an economic era defined by central bank concerns about deflation, low inflation and declining consumption rates.
Go look at the data on STATISTICS CANADA website: http://inflationcalculator.ca/historical-rates-canada/
We wondered if these CPI numbers were spurious or if we were interpreting them wrong so we decided to check other interesting data from the Survey of Household Spending conducted by Statistics Canada in the chart below. When you compare the average change per year the percentages are in the 5 to 10% range, higher than the official aggregated rates published by the government.
For comparisons maximum monthly CPP in 2007 was $863.75 is now $1,114.75 or a 29.05% increase over 10 years averaging a 2.9% increase per year. OAS maximum monthly was 2007 was $491.93 in 2017 is now $585.49 or 19.14% averaging a 1.91 % increase per year. When you compare CPP and OAS annual increases to the actual increases of food, housing and taxes the purchasing power of government benefits are declining by 5 to 8% per year. Your investments returns need to increase by more than 5% to 8% just to afford the price increases of chicken and beef over the next 20 years.
Inflation or the erosion of purchasing power should not be underestimated during those golden years.
For retired Canadians over 65 spending on income taxes increased by 42% OR 8.4% per year in the latest 5 year period according to the Survey on Household Spending,
Property Tax 2007 was $3075.26 per year in Durham Region and in 2017 is $4,838.37 a 57.33 % increase over 10 years or an average increase of 5.7% per year
Income Tax claw backs of 15% on top of the regular income tax combined with taxes on RRSP withdrawals and taxes on RIF/RRSPs when the last spouse passes create one of the heaviest tax burdens in the world. The way we tax the elderly is borders on the criminal
Regular unleaded gasoline was 68.91 cents per liter in April 2000 and in Oct 12 2017 was 1.13 per litre a 68.91 % increase over 17 years or an inflation rate averaging 4 %
Health Insurance in 2007 was $50 per month is now $102.34 increased by 100% over 10 years
Single Detached Residential Houses in the Greater Toronto Area
The average price in the GTA was $25,000 in 1966, and $375,000 in 2008. The average price increase for the 42 year period was 13% from CREA numbers in the chart below.
Compared to the 47 year period from CMHC/ Statistics Canada for ALL CANADA price increases from 1956 to 2013 were 5.26% for all of Canada.
“The CPI is frequently used to estimate the extent to which this purchasing power of money changes in Canada. For these reasons, it is a widely used measure of inflation (or deflation)”. Your Guide to the CPI page 1
“The CPI is defined, more precisely, as an indicator of the changes in consumer prices experienced by Canadians. It is obtained by comparing, through time, the cost of a fixed basket of commodities purchased by Canadian consumers in a particular year. Since the basket contains commodities of unchanging or equivalent quantity and quality, the index reflects only pure price movement”. Your Guide to the CPI page 1