The conventional model for retirement planning requires estimated assumptions ranging from retirement age to expected retirement expenses, life expectancy to portfolio size, and inflation to returns. The future is not the past, but to create the highest estimate for retirement savings group the most optimistic assumptions together i.e. Low inflation to high investment return, and early death to low portfolio size. Market value can fluctuate a great deal over periods and substantially its performance has a direct impact on the funds that reduce retirement savings. The performance in the stock market can sway the overall value of a pension fund, either positively or negatively (rise or fall). Pension fund capital is devoted almost entirely to the financial markets. Aggressive mutual funds usually contain mostly stocks, and some funds contain only stocks and diversified mutual funds contain a mixture of bonds, stocks, and cash equivalents.
Allison Cowan, Director, Total Rewards, HR and Labour Relations Research, The Conference Board of Canada “Over the past few years, we have seen wage increases among the lowest they have been in the past two decades. We are now seeing an improvement and compensation planners are looking to offer increases in 2019 that remain ahead of inflation,”. Statistics Canada tracks the prices for a long list to measure inflation every month. No two individuals are facing the same inflation and will have their own experience based on what they buy each month ( “basket” — of goods and services). Canadians rarely pay much attention to inflation, but it needs serious consideration while designing both plan sponsor and government retirement. In 1991, the Bank of Canada and the Canadian Government had an agreement to have low, stable and predictable inflation for the betterment of Canadians. Even low rates of inflation can seriously erode the well-being of retirees who live for many years. After this agreement, the bank of Canada has brought inflation down to about 2% and keeping it within 1 to 3%. The magic of inflation works best if the rise in price comes with an increment in wages of employers and workers to compensate for the higher cost of living. Inflation should be an ongoing concern for anyone living on a fixed income.
The economy can devastate by high and unpredictable inflation. High inflation means that prices are climbing quickly and retirees may find themselves with less money than they expected. When these costs rise, companies raise prices, but if incomes don’t increase along with the high inflation, the economy slows down. In this situation, there are misbelieves that if there is a drop in some prices can boost demand for those items but it works totally in the opposite direction as with a persistent fall in prices will deeply affect the economy. In reality, most of the time people may postpone major purchases because they think prices will continue to fall or when people’s salaries are not going up, they save more and spend less. The effort trying to protect themselves from the effects of rising costs will further shrink the economy. For example, CPP and OAS are both taxable benefit plans and are adjusted for inflation. The CPP and OAS clawback upper and lower limits annually based on the consumer price index, which should offset inflation.