Inflation is Up Again - Time for Financial Breaks

Evelyn Jacks

According to Statistics Canada, this Consumer Price Index (CPI) rose 3.3% year over year in July; this follows a 2.8% increase in June.  What were the key contributors to the rise in inflation?  It was the price at the pumps, groceries and mortgage costs.  And while inflation is expected to come down – perhaps two years from now amidst a lot of uncertainty – it’s a big wealth eroder for those retiring in this cycle.  It’s an opportunity for tax and financial advisors to work together with their clients.       

The statistics on inflation changes for July can be found in The Daily, a publication put out by Statistics Canada and also, good insights for the future have just been published in a Monetary Report issued by the Bank of Canada.  The forecast for inflation over the next 5 years does contain some good news. The Bank predicts a return to 2% target rates by this time, two years from now.

However, consider the plight of a retiree whose wealth is being weathered by inflation.  The drop in markets in 2022 has reduced retirement income by 7% compared to a year before.  Where to go for shelter?  Well if the retiree is tempted to be invested in higher interest bearing GICS at the moment, where should that money be?  Perhaps in registered accounts to get a tax shelter in the interim.

Money in non-registered accounts require more risk taking.  According to experts at Mercer, the probability of being retirement ready is more likely for a balanced investor over a GIC investor:   “Moving a portfolio to a guaranteed, interest-based investment for just the first three years following retirement makes it 10% more likely that a retiree will run out of money.”

Inflation is a persistent enemy of wealth accumulators.  The Finance Canada Report on RRIFs June 2023 itemized the average annual increases in CPI over a 50 year period, citing Stats Canada as the source:

• 10 year (2013-2022) 2.21
• 15 year (2008-2022) 2.06
• 25 year (1998-2022) 2.09
• 50 year (1973-2022) 3.99

What it all boils down to is that you need to save more to beat back tax and inflation erosion in the early years of retirement to preserve wealth.  Consider the following:  a basket of goods in 2023 cost 17.71% more in 2023 than it did in 2018, a period in which the average annual rate of inflation (or decline in the value of money was 3.32%. 

Back in 2018, Jonathan Chevreau wrote a piece for the Financial Post on how much Canadians thought they needed to retire comfortably.  The number was $756,000 according to a CIBC survey at the time.  Today – just 5 years later – because of inflation erosion, that number would be just under $900,000 ($889,974.68 specifically, using an inflation calculator). 

No wonder that the perception of how much money it will take to be comfortable has changed significantly. According to a February 2023 survey from BMO, Canadians believe they need $1.7 Million to retire .  But there is a significant disconnect:  the average amount held in an RRSP is only  $144,613 and the  average contribution nationally is only $6800, based on 2019 statistics released in June by Finance Canada.   

Bottom Line:  In the meantime, what will help the retiree and pre-retiree?  Everything little thing.  Save more money in RRSPs, and TFSAs. Consider an ALDA if you are converting your RRSP to a RRIF this year. Don’t get behind in filing a tax return to get refunds, refundable credits like the CAIP, CCB, CWB, GST/HST Credit.  Cut back spending and pay off high interest consumer credit cards. 

Probably most important:  set up your year end tax planning opportunities now by visiting with your financial advisors. It may be a good year for tax loss harvesting to get back some of the taxes paid on capital gains in the previous three years, and to use donations wisely, especially for high earners in advance of the new Alternative Minimum tax that’s just around the corner in 2024. 

Advisors:  stay up to date on rapid tax change.  Next professional development opportunity is the Virtual CE Summit on September 20 – a national peer-to-peer learning experience with a focus on the next big tax eroder:  CRA audits.