Michael James on Money started it. Then BigCajunMan took over— trying to estimate how much income he could draw out of a retirement nest egg based on various factors including inflation and the rate that the investments grow before withdrawal. As he says, it is very hard to pick what percentage to use for inflation. CPP is also “indexed” to inflation at a rate picked by the government so your monthly check can go up. I’ve generally found our bills go up more in a year than that government rate, though. So for my personal retirement planning I wondered what rate of inflation I should use.
Being an Information Pack Rat Has Some Uses
I’ve always been an information pack rat. In fact, I could tell you how much income tax I paid for working for the public library one year while in high school. (I can guess how few people are actually going to ask that.) For this exercise, it’s handy though. I know how much we’ve paid each year, actually each month, for most of our billable household costs.
From that information, I can calculate an approximate rate of inflation.
Estimating Inflation When Costs Don’t Always Increase
It gets a bit tricky because costs don’t actually always increase. Our Natural Gas costs, for example, are significantly lower now than in the past. (Thanks to shale gas frac’ing: We now have cheap nat gas but one day when we can’t get any clean drinking water at any price we may not be so thankful.)
During the interval 2001-2012:
- Highest Natural Gas year: 2006: $1727
- Lowest Natural Gas year to date: 2012: $924
What should I use to estimate the rate of inflation if it’s actually deflation?
Well, if I estimate inflation too highly I will have extra money to spend on the occasional rutabaga; if I estimate it too lowly I will have to forfeit my semi-annual clementine: I vote over estimate. So I will cheat and pretend the price of natural gas rose from $924 to $1727.
Car insurance can also dip for some people as their car ages. Not for us of course! We live in a “car accident capital of Canada” so we pay almost identical insurance on our brand new Camry as we do on our 15-year-old Corolla. Go figure. We’re insured basically against what we can do to someone else. (Good thing we usually walk to work.)
Our Personal Planning Inflation Estimates Based on Costs from 2001 to 2012
Not all the numbers are in yet for 2013 so these estimates are based on payments from 2001 to 2012.
Our Property Tax Inflation
Our mayor has made a valiant effort to keep these increases as low as possible. Even so our property taxes have increased: 2.9% per year
Our Home and Car Insurance Inflation
I’m lumping these two together since we buy both from the same company and there is a discount involved.
Our insurance costs have increased: 0.46% per year
(Yes, that was surprising! Please remember though that the replacement value for one car in that time has dropped 12 years worth to basically 0.)
Our Natural Gas Inflation
NOTE: This is not the increase in cost per BTU. This is the increase in our total bill. It includes tax increases and if we had any increases in consumption per year.
This is the one I’m lying about and flipping from deflation to inflation. This is my “mad rutabaga” money.
Our natural gas rates have (decreased) increased: 5.8% per year
Our Electricity Inflation
We use more electricity now than we used to. I blame the kids.
Again, this is not the increase in cost per megawatt. This is the increase in our total bill including all the lovely surcharges added by the government and the time of use rates.
Our electricity costs have increased: 1.7% per year
Our Water Inflation
Strictly speaking, we pay for both water, waste water and water infrastructure based on how many m3 of water we use per year.
Our water costs have increased: 4.1% per year
Our Cable TV Inflation
Well, this is a bit misleading. We got rid of our cable this year when they tried to raise my rates again. However, in the interests of historical accuracy, and shock, here goes.
Our cable TV costs had increased: 3.5% per year
Our Telephone (Landline) Inflation
We aren’t really cell phone users having simple pay-as-you-go emergency phones only. So luckily, there’s only one number to report here.
This cost includes our long distance charges. We barely make any long distance calls and when we do we use one of those “dial 10-10-xxx” things so they only cost 25 cents.
Our telephone costs have increased: 0.8% per year
OK, I admit I was surprised by how low that is, too.
Our Internet Inflation
We were “early adaptors” to using high speed internet so we’ve always paid too much.
Our inflation rate is probably lower than people’s because when you start at the top, there’s less distance to climb.
Our internet costs have increased: 2% per year
Our Gasoline Inflation
This one is a bit tough to calculate too. I’m not interested in the percent increase in the cost per litre, although I could tell you that if you forced me to. I’m interested in the percent increase in total annual spending. The problem is that we only go on a major cross-Canada road trip every second year. And after someone totaled my car last year, we went down to one car for 6 months. So I think I’ll just have to skip this one.
It’s not really a mandatory retirement expense anyway, as we’ll probably have to walk everywhere when we retire because we’ll be too broke to afford a car. Unless there’s some way we could power one off those extra rutabagas….Hmmmmmm.
An Overall Personal Rate of Inflation Based on 2001-2012
So what do I get if I try the same overall calculation but based on the sum of our costs for
- natural gas
- property taxes
- house and car insurance
Our overall personal rate of inflation for 2001-2012 was: 2.3% a year
OK, I admit it again. I’m surprised. I was expecting more like 4%.
If you want to know how that compares to our single-year rate of inflation for 2011-2012, please see: Budgeting for Retirement Requires a Good Estimate of My Personal Rate of Inflation for 2012.
- Ontario Hydro Rates Make Retirement Planning Pointless
- Why an Ontario Pension Plan Might be a Good Thing
Have you ever tried to calculate your personal rate of inflation? (No, I don’t mean pre- and post-turkey dinner!) Please share your horrific results with a comment.