How does inflation impact your retirement

Canada Life - Jan 20, 2023
Inflation, which causes a rise in the cost of living, can be challenging if you’re retired
Elderly person reading to two younger people

What is inflation?  

According to the International Monetary Fund (IMF), inflation is the rate of increase in prices over a given time period, usually a year. Inflation can be a broad measure that looks at the overall price of living in a certain country, for example, or it can be calculated to measure a specific cost, such as the cost of a loaf of bread, a haircut or gas. 

According to the BDO 2022 Affordability Index, 78% of Canadians feel their personal finances have worsened due to inflation. But inflation doesn't just impact the everyday cost of living - it can also impact your ability to save for the future.  

The Affordability Index also showed that 6 in 10 Canadians have saved less for retirement in 2022 than in 2021, with 71% of respondents admitting that saving for retirement is a challenge.  

How inflation impacts your retirement  

Saving for retirement  

Early career
You may shift your financial priorities to deal with the immediate affects of inflation, such as paying bills and managing ongoing expenses.  

You may have to re-evaluate or create a budget to help you reduce your spending, and you may contribute less to your savings as a result. In some cases, you may even have to dip into savings to help with the cost of everyday living. 

Focusing less on building your savings could be helpful in the short-term, especially if you're struggling. However, if you stop contributing to your retirement savings, even for a short time, you could have a big impact on how much you'll have saved for retirement.

The money you invest will grow over time through compound interest; the less you save now, the less interest you’ll earn over time, which ultimately means less money in total when you reach retirement age.

When you look at your budget, if you feel you need to adjust it for inflation, consider reducing your contributions to your personal savings or workplace savings plan instead of stopping them completely. 

If investing is part of your financial plan for retirement, you could find that your portfolio is affected by the stock market. During periods of inflation, consumer confidence drops and interest rates often rise. Both can cause stock market volatility.  

You may be tempted to sell assets when the market dips, but the stock market is cyclical, meaning it goes through both highs and lows. If you sell during a low period, you could miss out on gains when the prices recover. Instead of selling assets, consider making consistent contributions, even when markets have dropped. This investment strategy, known as dollar-cost averaging, can help you buy more shares at a lower price point.

Because you still have some time before you retire, there’s time for markets to correct themselves and for you to recover any losses your portfolio may have experienced due to inflation. To help manage periods of uncertainty in the market, avoid emotional investing and ensure your portfolio is diversified.

Nearing retirement
If you’re nearing retirement, you may want to weigh the pros and cons of waiting another year or two before you stop working. 

On the upside, you could contribute more to your savings while the government takes measures to curb inflation and markets correct themselves. However, you may not want to continue working. You might be keen to start the next chapter of your life, regardless of inflation.

Each situation is unique, and each person’s picture of retirement looks different. To help you make the best choice for you, talk it through with your loved ones or with me.  

Already retired
If you’re already living on retirement income, you may need to consider other things when it comes to inflation’s impact.

For example, you may already have a plan in place for how long you want your retirement savings to last. You may have based your plan on receiving a set income each month to pay for set expenses. However, if your retirement income remains the same while your expenses rise due to inflation, you may find your money isn’t stretching as far as you hoped. You may need to re-examine your retirement budget. I can help you determine where and if you can make changes. 

If you’ continue to invest during your retirement, you should consider reviewing your portfolio to make sure your investment allocations and risk levels remain aligned to your goals.

While the stock market can react to inflation, the good news is government pensions such as the Canada Pension Plan (CPP), Quebec Pension Plan (QPP) and Old Age Security (OAS) are indexed to keep up with inflation. The CPP is adjusted every January, while the OAS is adjusted each quarter. These adjustments may not match inflation exactly and your payments may not be enough for you to live off of on their own, these payments will increase as the price of living does to help you manage.  

If you’re thinking about downsizing in retirement, you may find that inflation works to your advantage, especially if you’re relocating somewhere with a lower cost of living. Because house prices often rise during inflation, you could sell for a higher price and move somewhere that costs less.  

How to protect retirement savings against inflation 

Access government benefits
If you’re eligible, make sure to claim CPP (or QPP), OAS and Guaranteed Income Supplement (GIS) benefits. They can help you top up your other retirement income streams like personal savings and investments and workplace savings.  

Re-examine your budget
To start, see which expenses you can back, and if there are any that you can cut out of your budget completely.

You can review bank statements, check your banking app or online accounts more frequently, or keep a written record of everything you spend over a month.

You could spot money you’re spending on non-essentials like take-out food, coffee, subscriptions to streaming services or other online services you may have forgotten about, or other small costs that can quickly add up. 

Continue to save for retirement
Finally, make sure you keep contributing to your retirement savings, even if it’s a little less each month while you adjust to inflation. Even small amounts can add up over time to help you enjoy the retirement you’ve always dreamed about.  

What’s next? 

To help you feel more prepared about the future, you can stay up-to-date with how the BoC is managing inflation.

Contact me to discuss how you can manage your retirement plan around inflation.


Ask an advisor: The importance of continuing to contribute to your RRSP – Canada Life

Don’t let inflation and a recession derail your retirement savings plan. I can help you adjust your financial plan to keep you on track.


View video script


Description: This animated video introduces a character named Nora and her advisor with illustrated graphics to explain the importance of continuing to contribute to your RRSP.

Text: Ask an advisor: How does inflation affect my retirement savings?

Description: Nora sits at a table across from her advisor.

Nora: My grocery bill is going through the roof. Rising costs are really squeezing my budget. I’m not sure I can afford to continue contributing to my RRSP and I’m worried about how a possible recession could impact my investments.

Advisor: I understand your concerns.

Description: Fade to a hand holding a coin, then placing it on a slope. The coin begins rolling downhill, then uphill, then downhill again.

Advisor: However, not contributing to your registered retirement savings plan, even for a short time, can really affect whether you reach your saving goals. And that can affect your retirement income and lifestyle.

Description: Coin rolls into a graph on a upward slope that shows how your investments and interest dramatically increases over 25+ years of contributing.

Advisor: That’s because what you invest now will grow over time through compound interest.

Description: The coin rolls through the graph again on a less dramatic slope.

Advisor: The less you save now, the less interest you’ll earn over time, which means less money when you retire.

Description: Nora speaks at the table.

Nora: What would you recommend then?

Description: Transition to three illustrations with a word above each one – mortgage, retirement and travel. Advisor’s finger enters frame and touches the illustrations. A risk tolerance slider appears below each graphic and moves between low and high.

Advisor: To start, I can help you create a budget and if necessary, revisit your savings goals and risk tolerance.

Description: The words “on track” appear below each graphic and risk slider.

Advisor: That way, you’ll keep your retirement savings goals on-track and find opportunities to grow your investments as the economy improves.

Description: Transition to a circle graph with the heading RRSP and $300 per month. A finger enters the frame and adjusts the graph to $150 per month.

Advisor: If you’re still feeling a spending pinch, you could consider just reducing the amount you’re saving for retirement, rather than stopping completely.

Description: Transition to advisor at table talking with Nora.

Advisor: Let’s talk about ways you can stick to your retirement savings plan while managing rising costs and an uncertain economy.

Description: Text – Let’s talk. Contact me today appears onscreen with the Canada Life logo and legal line: “Canada Life and design are trademarks of The Canada Life Assurance Company. 1-888-252-1847."


The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.

Canada Life and design are trademarks of The Canada Life Assurance Company.