Inflation is an enormously important component in planning (Wealth Forecasting), because your actual or "real" rates of return of growth have to take inflation into account.
If your annualized rate of return (after fees and taxes) on your savings is growing at or about 2.5% (our benchmark 60/40 balanced return as of last Tuesday was 3.25%, after fees, before taxes, although High Rock clients are getting a significantly better rate of return) and the basket of goods that Statistics Canada follows, as it was announced this morning, is growing at an annualized rate of 1.5%, the net or real rate of return is 1%.
Statistics Canada's "basket" of goods and services may not necessarily be your "basket", so it is relatively important to understand your own basket when planning your family budget:
Here's what Statcan suggests:
And this is what they show as to what represents the annual growth in the prices:
You can decide for yourself what weights you should prescribe to your own personal basket, but if you like a glass of wine more than the "average" or travel a little more than average, you may find that your personal rate of inflation is a little higher than the average. This could very well impact your real rate of growth as well and when you project it out over a long-range period of time, this could be significant.
As painful as it may be, the whole budgeting thing that is, it is absolutely essential in determining how you are going to reach your financial goals and an extremely important part of forecasting your wealth.
That is why we are adamant about preparing a Wealth Forecast for our clients, because how can anyone begin to know how to build a strategy for achieving those goals if they do not understand your lifestyle and the costs of that lifestyle and the impact of that lifestyle on your projected net worth?
If you have an advisor, ask her/him how they know what your strategy should be?
If they are just popping you into a standard plan (that everybody has), they are not doing their due diligence appropriately.
And that my friends is what happens when you get "Robo-style" advice and portfolio management.
Don't settle for it, there is a better alternative.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist