Retirement Planning: What Rate of Inflation Should I Use?

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
  • electricity
  • water
  • property taxes
  • cable
  • telephone
  • internet
  • 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.

Related Reading

Join In
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.

9 thoughts on “Retirement Planning: What Rate of Inflation Should I Use?

  1. I have started tracking my spending, but have not really looked at inflation. Still accumulating, so just saving as much as I can. Will probably have to keep it in mind for .. 20-30 years down the road..

    So.. how much income tax did you pay for working at the public library? [I was spoiled in my teens, my elder sister was an accountant. Essentially ‘sign here’ get $100.]

    • As you can probably guess, I was under the tax-paying annual limit! My parents made me fill out my own income tax return (the trusty T1-Special) though. I’m glad they did because it showed me doing your taxes yourself is not actually very hard. Or at least not unless you have a tangled web of income sources and obscure deductions.

  2. Pingback: Mad Dog, English Men, I’m OK and #Shoutouts

  3. So me, being one of those engineering types, I too have data going back… Simplistically I look at yearly spending to get estimate our personal inflation rate, which will include then efficiencies in our lives to counter inflation. So for the period of 2000 to 2013, I get a 1.7% inflationary rate. Now in that time period we also introduced a kid (in 2003), and a second property (in 2009)… Interesting exercise. It tells me even with increasing life complexities, we have managed to arrange our lives to keep inflation in check. – Cheers.

  4. I’ll throwyou one you might not be able to calculate…
    I drive a 2004 Toyota Echo – currently has 300K on it, and costs with all in car costs (bought new, maintenance, accessories, fuel and insurance), $0.1741/km & a 2003 Subaru Impreza – currently has 370K on it, and costs all in at $0.2555/km. We engineering types are a crazy lot =P – Cheers.

    • It’s true! Did the CAA (over-)estimates of what it costs to keep a car annoy you enough to figure this out, or do you just enjoy realizing how much you are saving each year?

      Our last Corolla lasted 14 years before it had any trouble at all. This one is just passing 15 years and still not so much as a check engine light. Some cars are worth paying slightly more to buy and hold than others.

  5. No influence from CAA, I just like to know “true” costs of things. everyone is seemingly so cash strapped or in debt, but I truly wonder how many actually know what things truly cost and where they spend their money. I read a book way back called “Your Money or Your Life” and from that day on I was hooked at tracking every penny in or out of our pockets. Learned lots, and have 14 years of data now. – Cheers.

    • Yes, it can be quite enlightening to see where your money is *really* going. I remember reading in the Star once that the writer was astonished and a bit embarrassed to discover that he spent more on eating out with friends than he spent on activities/meals/gifts etc for his living-with-the-Mom son.

      I think I’ve read the book, but I’m not sure so I’ll check for it at the library this week. Thanks for the suggestion!

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