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Allowing for Inflation
OAS and CPP/QPP benefits are indexed for inflation, but your supplementary income estimate is not.
You must adjust
that part of your projection from
“current” to “future” dollars to account
for the inevitable loss of purchasing
power. Even at relatively low inflation
of 3% – the top target level set by the
federal government and the Bank of
Canada – one dollar 25 years from now
will buy less than half of what it buys
today. This table assumes inflation will
average 3% a year. That’s higher than
the current rate, but lower than the
average 4.8% rate prevailing over
the past 40 years.
So, the $40,000 annual gap projected
for Richard and Suzanne will actually
be $72,244 when they retire in 20 years.
Suppose they have no pension plans
at work and expect to exhaust their
savings over 25 years. How much retirement
capital will they need?
Richard and Suzanne figure they can
continue to earn 6% on their money
and want their withdrawals fully
indexed for 3% inflation. This table shows the approximate capital needed
to fund $1 of annual income. Find the
point for 25 years, 3% indexing and
6% growth. You’ll see it takes just over
$18 in savings to fund each dollar
of income. Multiply 18.10 by $72,244
and you’ll find they need just over
$1.3 million.
|
Capital Required to Fund $1
of Retirement Income
|
|
Level of annual indexing
No indexing 3%
Years of
income required Average annual growth of remaining money
|
| |
6%
|
8%
|
6%
|
8%
|
|
20
|
$12.16
|
$10.60
|
$15.44
|
$13.23
|
|
25
|
$13.55
|
$11.53
|
$18.10
|
$15.00
|
|
30
|
$14.59
|
$12.16
|
$20.40
|
$16.39
|
|
35
|
$15.37
|
$12.59
|
$22.40
|
$17.49
|
| |
Assumes full withdrawal made at start of year
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