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Overspending a significant risk to retirees I nflation is a significant risk for retirees. The result could mean confronting the dreaded fear of running out of money. On a positive note, inflation is under control. Historically, over the last 85 years since the figures have been recorded in Canada, the inflation rate has been close to three per cent. Recently, Statistics Canada announced the annual inflation rate was only 1.2 percent for the 12 month period ending in May. That was a decline from two per cent from the previous month. Inflation is the measure of how much more things cost now compared to the previous period. If the goods and services you purchase are slightly more expensive than last year that is usually not a significant issue. What is significant is that the cumulative effects of inflation can make things unaffordable over the long term. Retirees with limited income have to curb their spending and in some cases will run out of money and turn to others for financial support. As an example, we will consider the cost of a birthday dinner. To celebrate turning 60 you drive to downtown Oakville and pick your favorite restaurant. Dinner for two costs $100. Next year, you return and your birthday dinner would cost $103 if inflation had been three per cent. At the time, this increase appears insignificant. Three decades later, however, at the age of 90, you return to the same restaurant for the same type of meal. After 30 years of annual inflation at three per cent, your birthday celebration cost $243. Not exactly a celebration if that was a meal you could not afford. Younger people would not think the meal was expensive because they would be plugged There is a solution. Learn the value of future dollars and how that relates to your financial independence and your ability to protect your desired lifestyle. Do not wait until you are 80 or 90 years old to discover the dramatic change to the By Peter Watson purchasing power of your money. When you are reviewing your retirement cash flow projections with your investment advisor ask to see the numbers adjusted for into the current day economy. Their incomes inflation. would likely be much higher than the income To protect yourself against the risk of of your working days. inflation ask that your projected retirement Everything is adjusted for inflation including their income and the relative value of money. The problem is that your financial wealth came from a different era and unless your investments keep pace with inflation you will lose your purchasing power. One might say the simple solution is to stay home for dinner because restaurant dining is a luxury. That is fine; however, what about spending on necessities such as food, clothing and housing where costs are also escalating? Consider the possibility that inflation was more than the historic average, such as five per cent annually. Your birthday dinner that cost $243 at three per cent inflation, would now cost $433. You can see how depleting your financial resources is easier than you may have imagined. This is why the main financial worry for all people planning for retirement is running out of money. If you think the transition from working to retirement is challenging then imagine the transition to being financially self-sufficient to becoming a dependent. 9 · Thursday, August 2, 2012 OAKVILLE BEAVER · www.insideHALTON.com Dollars & Sense cash flow include inflation at several different levels. Then ensure that a part of your investments is positioned to protect you from the long-term erosion of purchasing power caused by inflation. This theme of the increasing cost of goods and services and the potential running out of money will continue next week. We will discuss the risk of overspending and see how that trend has become a significant risk. -- Submitted by Peter Watson, MBA, CFP, R.F.P., CIM, FCSI. UP TO Oakville bike ride starts at 9 a.m. The Oakville Cycles `Rediscover Your Bike' cross-town bike rides from starting points at Hopedale Mall and Towne Square to the Taste of Columbia coffee shop at 67 Bronte Rd., on Sunday Aug. 5, will begin at 9 a.m. A previous story about the bike ride did not indicate the start time. The Oakville Beaver regrets any inconvenience this may have caused. Oakville Cycles, a grassroots group representing local business, community groups and governments interested in promoting cycling in Oakville, has held two `Rediscover Your Bike' rides this summer and will host a new one Sunday. Anyone interested in leading a cycling group can e-mail Ward 2 Councillor Pam Damoff at pam@pamdamoff.ca for details. 50 % * LIMITED TIME OFFER! *With Purchase of Prescription Lenses ALL FRAMES OFF Kevin Flynn, MPP­Oakville Do you have a question or concern relating to the provincial government? Please don't hesitate to contact me at my community office­we're here to help. We moved! Community Office: 2318 Lakeshore Road West, Unit 2 Oakville, ON L6L 1H3 Tel: 905.827.5141 kflynn.mpp.co@liberal.ola.org Join us on Facebook! 125 Cross Avenue, Oakville (Across from Home Depot) 905-842-2821