budgets | Financial Crooks

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

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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.

Sometimes I think there’s no point in planning for retirement. I think it would be better just to save everything humanly possible and hope for the best. Today’s announcement in Ontario of the new (increased of course!) hydro rates are just one example of why planning for retirement seems pointless.

My Cost of Living Increases Always Exceed “Their” Cost of Living Increases

Every time I read one of those articles in the Star, the Globe or the Post that review someone’s finances and their retirement readiness, I see them use “2 %” for inflation. When I look at the government of Canada’s monthly inflation updates (courtesy of the Big Cajun Man) I see numbers around 0.7-2%.

So why when I flip open the newspaper do I read that Ontario’s hydro rates for all 3 times of use are going to increase by 0.5 cents per kilowatt hour starting November 1?

According to the Toronto Star that’s about a 3% increase in the cost of hydro for that never-seen-like-Bigfoot “average” customer.

That’s 1% over the planned inflation for the *year.* And this is not the only increase we’ve had this year. The rate for off-peak went up 0.2 cents in May, mid-peak went up 0.5 cents, and on-peak went up 0.6 cents. Yes, that’s right: off-peak rates are up 14% since Nov 1 last year!

No problem, you are probably thinking. I’ll just move even more of my electricity usage to the “off peak” time period. That almost looks like the worst thing you could do.

According to that same article, the price of off-peak power is increasing 7.5%, versus 4 and 4.8% for on-peak and mid-peak. (OK, you’re right. On a total $$ paid basis, it’s still much better to use power during the off-peak times. Beware of percentages: they may not be telling you what you think they are saying.)

Hydro Increases are Not the Only Ones that are “Above Average”

It’s not just hydro that does this to me.

Property taxes are up 4 % this year.
Water is up 6.9% even though we’ve used the exact same number of m3. (We pay for waste water and infrastructure based on how much water we use.)

Since Planning for an Actual Cost of Living in the Future Is Almost Impossible, I’ll Save More

Given that I can’t predict or control the increases in cost for the things I more-or-less have to buy to survive, I won’t even try. I’ll just ramp up our savings a little bit higher and hope for the best.

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What’s your strategy to deal with this kind of mis-match between actual inflation and the government’s published rate of inflation? Please share your views with a comment.