You need inflation in a balanced form to grow your income: too little or too much of it could vapourise your retirement savings. In June 2022, the end of lockdown created demand-pull inflation of 9.1%. Today, the world faces cost-push inflation as trade wars and geopolitical risks disrupt global supply chains, and artificial intelligence (AI) data centers drive up electricity and semiconductor prices.
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The curious case of inflation
You can’t predict the next 20 years, how your life or daily needs will change. Even if you manage your expenses well and plan your retirement pool with 3% inflation in mind, you don’t know how market prices will change. I used the Bank of Canada inflation calculator to get an idea of how the value of the dollar fell in the medium and long term.
| Beginning of the period | Starting Point | Value of Dollar in 2026 | Average annual inflation rate | Years |
| 2020 | $100 | $124.18 | 3.68% | 6 |
| 2016 | $100 | $131.99 | 2.81% | 10 |
| 2006 | $100 | $155.68 | 2.24% | 20 |
| 2000 | $100 | $176.90 | 2.20% | 26 |
The inflation rate accelerated in the short term. While we can say that things average out over time, we cannot deny that the 2.2% inflation rate is not the reality for the next 20 years. Your retirement target has to consider two things:
- the monthly income you need when you retire 20 years from now.
- the monthly income you will need for the 20-25 years of your retired life.
That is a 45-year expense estimate.
How inflation can change your retirement target
BMO’s Annual Retirement Survey showed that average Canadians have increased their retirement target by $160,000 in just one year to $1.7 million in 2026. We can debate over this number, whether it is for an individual or family, for someone living in an expensive province, or someone retiring with a mortgage. In any case, retirement targets are shifting, and inflation has a big role to play.
| Year | BMO survey retirement target | Annual Inflation | Annual 4% withdrawal |
| 2025 | $1,706,000 | 2.07% | $68,240 |
| 2024 | $1,541,000 | 2.38% | $61,640 |
| 2023 | $1,671,000 | 3.90% | $66,840 |
| 2022 | $1,743,000 | 6.80% | $69,720 |
| 2021 | $1,638,000 | 3.40% | $65,520 |
| 2020 | $1,437,000 | 0.70% | $57,480 |
| 2019 | $1,349,000 | 1.90% | $53,960 |
I compared the retirement target from BMO’s retirement survey with annual inflation and found that the target increased when inflation surged significantly. This increase makes sense because if you planned a $1 million retirement pool today and 20 years from now the need is $2.5 million, it will create a meaningful gap. This gap could:
- Delay your retirement
- Reduce your standard of living
- Force you to shift to a smaller home or maybe to a less expensive neighbourhood
What is the solution for the moving retirement target?
The simple solution is to review your retirement target periodically. Break down your retirement target to what your portfolio can give annually if you withdraw 4% of it and match it with your current annual income. As shown in the table above, the target increased when the annual income need changed.
This gap analysis will work for both retirees and those 20 years away from retirement.
If you have already retired, you have already switched to a Registered Retirement Income Fund. However, you have a Tax-Free Savings Account (TFSA) to grow your investment and fill the gap.
If you are 20 years away from retirement, consider stocks that can grow your money 10-fold in 15-20 years. Constellation Software (TSX: CSU) could make this happen with its new strategy of acquiring bigger vertical-specific software companies. Constellation has long-standing relationships with founders and offers a retirement exit for their company that provides stable cash flow. It pays a decent value for the company while ensuring a minimum 7-8% internal rate of return. The cash flows are sticky as it comes from maintenance cost of legacy software in mission-critical applications. Constellation uses this cash flow to acquire more companies. It is expecting the next growth phase to come from software business carve-outs of big companies.
Instead of chasing the future like most AI stocks, Constellation is chasing tried-and-tested software companies with assured cash flow. The addition of such companies compounds Constellation’s portfolio and drives up its share price.
