Concerned That Inflation Will Affect Your Retirement Plans? We have some advice A recent study1 by the Bank of Montreal found that 74% of Canadians are concerned about how current economic conditions, most notably inflation and rising prices, will affect their financial situation, and 59% believe these conditions will impede their ability to meet their retirement needs. The study also reported that Canadians say they require $1.7 million in savings for retirement, a 20% increase from the 2020 figure of $1.4 million. With rising inflation there can be a significant impact on your returns and your retirement plans, by decreasing the real value of your investments. This means that even though your investments may be growing in nominal terms, their real value can decrease due to inflation. For example, let’s say you invest $1,000 in a mutual fund with an average annual return of 6%. In a year where inflation is at 3%, your investment will have a “real” rate of return (i.e., adjusted for inflation) of 3%. That is, your money will only be able to purchase $1,030 worth of goods, despite having a nominal value of $1,060. This effect compounds over longer periods, resulting in a significant reduction in the purchasing power of your investments over time. Inflation is on everyone’s mind after having hit a 39-year high of 8.1% in the summer of 2022. This sharp increase exceeded wage gains, resulting in a significant loss of purchasing power for most families and businesses. Not only does inflation impact our regular trip to the grocery store and the day-to-day running of a practice, it can also have a long-term effect on your portfolio’s value. 1. BMO Annual Retirement Study: Canadians Believe They Need $1.7M to Retire — Up 20% from 2020 - Feb 7, 2023. (newswire.ca) 36 | 2023 | Issue 2
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