How Can Inflation Affect Your Retirement Income?

Inflation is the rising cost of goods and services. In Canada, it’s measured by the Consumer Price Index, which measures changes in prices of over 600 goods and services over time.

Inflation can be felt in two ways. It increases the costs of the goods and services you buy, and it reduces the purchasing power of your money. Basically, it causes money to lose value over time. For example, if inflation is two percent annually, $50,000 today would only be worth $41,000 in 10 years and just $27,600 in 30 years.

What does this mean for your retirement?

It means that you may have to save more money than you initially planned.

Having different avenues of retirement savings can be helpful. In addition to your STRP pension, you may want to save money in an RRSP, in a tax-free savings account or through voluntary contributions to the STRP. The sooner you can start saving, the sooner the money you invest will grow through compound interest.

The good news is that when the STRP is healthy, the Plan can grant conditional upgrades for eligible active members and conditional cost-of-living allowances (COLAs) in addition to the guaranteed COLA for retired members, which means that your monthly pension may be increased to account for inflation. The Canadian Pension Plan and Old Age Security are also designed to increase according to changes in the cost of living.

We don’t know what inflation will be from year to year, but what we do know is that it’s never too early to start saving for retirement.