October 24, 2023

Inflation: What it means and how to protect yourself

By Jillian Stinson

Inflation and the cost of living is increasing at a rapid rate. What does this mean? And how will it impact your savings and retirement plan?

You’re likely feeling the effects of inflation on an almost daily basis. Not just your grocery bills, but other regular expenses as well. In general, the cost of living in Canada has been going steadily up over the past few years. 

The Consumer Price Index* is the most well-known indicator of inflation. In Canada, it rose 4.0% in August, following a 3.3% increase the month before. Last year, it rose by 6.8% on an annual average basis. That was following gains of 3.4% in 2021 and of 0.7% in 2020. To put that into perspective, inflation averaged about 2% a year over the last 20 years. It’s no wonder the topic is continually on everyone’s mind – and in the media. 

Are you feeling the effects of inflation today? Then you’re likely worried about what it means for your savings and retirement plan. Understanding how inflation can affect your future can empower you to make better decisions today. 

What does inflation mean? 

Inflation is an overall increase in prices and the cost of living. Over time, the prices of some goods (e.g. bread) increase, while others may decrease (e.g. computers). Inflation measures the average increase in prices.

What is inflation affecting the most in Canada?

The main areas that continue to experience the effects of inflation are:  

  • day-to-day basics (e.g., transportation, gas),
  • food, and
  • shelter.

Source: StatsCan, Consumer Price Index, August 2023.

How does inflation affect your money?

Simply put, when inflation goes up, the value of your money goes down. 

Inflation is like a leaky tap. It may not look like a lot of water is coming out. But its impact over time can be surprising. 

Let’s say you put $50,000 under your mattress today. And inflation averages 3% per year. If you pull it out after 10 years, it would only be worth $37,000 at present value. This is due to inflated costs of goods and services. If you wait 20 years, it would only be worth $27,000 at present value, and so on. 

Inflation rate    Today   10 years from now   20 years from now   30 years from now
 2%  $50,000  $41,000  $33,650  $27,600
 3%  $50,000  $37,200  $27,700  $20,600
 4%  $50,000  $33,800  $22,800  $15,400

Let’s break it down another way. Let’s say you received a 3% raise at the start of 2023. Then, the cost of living goes up by 5% this year. In the end, the purchasing power of your income is less, so the value of your income is less this year than it was last year.

 Your raise in January 2022  Inflation  Change to the value of your income
 +3%  +5%  -2%

While many people’s income will adjust to inflation over time, not everyone’s will. Especially people on a fixed income – like those in retirement. Some people in retirement have a fixed income which does not adjust to inflation.

How is inflation a risk for your retirement?

One of the biggest risks to retirement savings is inflation. Inflation may be a bigger risk to some, and less of a risk to others. This depends on your circumstances – like your age and when you need your savings. 

Unfortunately, just because you’re retired doesn't mean the cost of property taxes, gas, groceries, etc. will cease to rise. Inflation is a powerful force, especially over a long period of time. And higher costs of living mean you’ll pay more for things you need in retirement. This isn’t great timing when you’re likely not earning an income. But there’s a lot you can do to help protect your retirement savings from inflation.

Are you on track to meet your retirement savings goal?

Use our Retirement Savings Calculator to find out.

What does inflation mean for your investments?

Inflation is only one factor in investing that you and your advisor need to consider when planning your retirement. A diversified portfolio,* including investments with growth expected to be higher than inflation, is a great way to combat the effects of inflation.

How can you protect yourself from inflation?

No one can predict the future of inflation. However, there are a few things you can do now to give you the peace of mind you need:

  • Budget and keep track of your spending. A budget can let you see your spending habits and help you find ways to save. 
  • Make a financial roadmap. A financial roadmap is a good way to help prepare for a risk like inflation. Historically, we’ve experienced periods of both high and low inflation and interest rates. A good roadmap accounts for a range of possibilities.
  • Stick with your financial roadmap. A roadmap is only good if you follow it. And it’s a good habit to revisit it as your needs change and evolve. You’ll want to build flexibility into your roadmap and check in often.

Worried about inflation? Don’t have a financial roadmap?

An advisor can help you make a plan that helps protect you from inflation.

Find a Sun Life advisor

How can an advisor help?

When it comes to planning for the risk of inflation, an advisor can: 

1. Assess your finances and suggest strategies that may help offset the threat of inflation. 

An advisor can work to: 

  • understand what your risks, and
  • build a diversified investment portfolio that helps meet your goals.

2. Help you understand products that provide income that may increase each year (accounting for inflation).

For example, a payout annuity or Guaranteed Investment Funds (GIFs) that offer inflation protection, can help maintain your purchasing power.

  • How much retirement income can you get from an annuity? Find out with our Annuity Calculator

3. Determine your sustainable spending rate.

This is the amount you can spend in retirement while maintaining your lifestyle. This approach helps you enjoy your retirement knowing your savings will last – factoring rising inflation.
How does it work?

  • You’ll set a percentage of income you can withdraw each month. 
  • Each year your sustainable spending rate will increase slightly to keep the pace with rising costs. This helps give you a level purchasing power to protect against inflation. 

4. Check in and reassess your financial roadmap, adjusting as unknowns become clear or your needs change. 

If you have a roadmap in place – it likely already considers the risk of rising inflation. If you don’t have one – that’s ok! It’s never too late to start. A Sun Life advisor can help.

Need help figuring out what’s right for you?

An advisor can help put together a solid plan that suits your goals.

A1A 1A1

*Definition of terms:

  • Consumer Price Index (CPI) is where Statistics Canada publishes changes in prices as experienced by Canadian consumers.
  • A diversified portfolio includes various assets like stocks, fixed income, and commodities. These assets may react differently to the same economic event. The value of one may rise while the value of another may fall. This lowers your overall risk because no matter what happens in the market, some assets will still have gains.

This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation. 

Sign up for FREE personalized tips, tools and offers.

I understand I can unsubscribe at any time and acknowledge that this email address belongs to me. Learn more about privacy and how we collect data to provide you with more relevant content.

Tools & calculators

Retirement savings calculator

Find out how much you will need to save for retirement and if you're on track to meet your retirement savings goal. 

RRSP calculator

This tool will help you see how changing what you put in your registered retirement savings plan (RRSP) can affect your retirement savings. It will also show you what would happen if you took money out before you retire.

Annuity calculator

A life annuity can offer guaranteed retirement income payments for as long as you live. This annuity calculator will estimate how much income you can get and compare it to income from a GIC or RRIF. 

Need financial advice?

Make well-informed decisions with helpful advice. Talk to your advisor or find one near you - there is no cost to talk to an advisor.

Get a quote

You can buy some of our insurance products online.