From 2002 to 2011 inclusively, the annual inflation rate in Canada averaged 2.13. In 2011 specifically, it stood at 2.30%. As time goes by, such increases eat away at your purchasing power, so it is important to pay attention to inflation as a factor in your retirement planning. How can you know whether you will have enough capital to cover all your expenses when you are retired without accounting for the impact of inflation on these expenses?
These days, financial planners usually apply an inflation rate of 2.25% per year in their estimates of personal retirement cashflows. This rate comes from the Projection Assumption Standards of the Institut québécois de planification financière, the only Quebec organization granting financial planning diplomas. Even though they are only approximations, the standards are established each year by financial planning experts using rigorous methods.
It is therefore essential that your forecasts take inflation into account if you want to have enough set aside for retirement. Similarly, if you are already retired your capital withdrawals will need to take this phenomenon into account, in order to avoid depleting your capital too quickly. You can ask an advisor to forecast how long your capital will last, based on different withdrawal amounts or rates.
A good retirement plan requires estimating inflation's long-term impact on your nest egg. This may be a complex exercise, but it is important to remember that an advisor can provide all the expertise you need to make realistic projections and plan for enough money for a comfortable retirement.