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Inflation and life expectancy

At the beginning of the 20th century, few Quebecers could hope to live past 55 years old. Given « old age » was an exception rather than a norm, retirement was not a concern for most households. Today, women can live on average 30 years longer than before, whereas for men the average is 26 additional years. This new reality forces us to save more in order to ensure a comfortable retirement while maintaining purchasing power.

Life expectancy at birth in Quebec over time

 

Men (years)

Women (years)

Towards 1850

40

40

1930

53

56

1965

68

74

2006

79

83

2030

82

85

Today, three out of eight women aged 65 will reach 90 years old. For men, it is one in five. As such, the retirement period is much longer than before. Given this fact, it is likely that inflation will have a significant impact onto our purchasing power during that period of our lives.

Over the past decade, the annual inflation rate has steadily been below 3%. The Bank of Canada aims to control it by keeping it within a range of 1% to 3%, averaging around 2.5%. As many of us know however, we have experienced periods of time in the recent past when inflation was very high. In 1981, for example, the annual inflation rate reached a high of 12.5%. Since 1971, the average inflation rate in Canada has been 5%.

Below is a chart which clearly demonstrates the long-term impact of inflation onto our purchasing power. It is showing the scenario of a retiree who has an annual income of $ 40,000. We assume this income will be stable, and not be indexed in time. The table shows the impact inflation will have onto his retirement income. You will note that his current salary of $ 40,000 today will be worth $27,619 - today’s dollars- in 15 years time. This is significant reduction in spending power, hence the importance of putting sound financial strategies in place to beat inflation over time.

 

Decreased purchasing power (2.5% indexation)

Years

$40,000 Income

1

$39,024

5

$35,354

15

$27,619

25

$21,576

35

$16,855

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