Everyone has some sort of dream retirement mapped out in their minds – if not on paper – whether it’s wintering in warmer climates, playing endless golf or travelling the world. But after a period of higher inflation, uneasy markets and higher interest rates, some are wondering if they will have to scale back their plans.

In 2022, inflation – the annual increase in the price of goods and services – reached levels not seen since the 1980s. Toward the end of that year, food prices were up nearly 12% over the year prior, while other items, such gas and mortgage carrying costs, also increased significantly during the year.

With more money going to basics, you may be wondering how much you’ll have left for everything else. Two-thirds of Canadians are asking themselves the same question. According to the 2022 Fidelity Retirement Report, 62% of pre-retirees worry they aren’t saving enough because of inflation.

Inflation may be on everyone’s radar today, but it’s something a financial plan should account for, as prices always tend to rise at least somewhat year-over-year. For instance, in 1995 a varied basket of goods, including items like toilet paper, toothpaste, fruit, bread, milk, meat and more, cost about $150. That same basket of goods is now above $300.

Rising prices are just one of five risks you need to consider when building your retirement plan, says Michelle Munro, Director of Tax and Retirement Research at Fidelity Investments. Outliving savings, withdrawal rates, asset allocation and the cost of health care are other factors that can alter your path. “We know that life is going to throw us curveballs. The important message is that by having a plan, we have different ways to deal with challenges as they arise,” says Munro.

Still, inflation is a big risk, and it may also have an impact on other elements of risk. With that in mind, here are three ways to protect your retirement goals from rising costs.

Withdrawal rate

Withdrawal rate is the estimated percentage of savings you’re able to withdraw each year throughout retirement without running out of money. As an estimate, aim to withdraw no more than a set percentage of your savings in the first year of retirement, and then adjust that amount every year for inflation.

Our Fidelity U.S. colleagues did the math, looking at history and simulating many potential outcomes, and landed on this: “For a high degree of confidence that you can cover a consistent amount of expenses in retirement (i.e., it should work 90% of the time), aim to withdraw no more than 4% to 5% of your savings in the first year of retirement, and then adjust the amount every year for inflation.”1

As inflation rates have increased recently, there has been some debate over whether withdrawal rates should be revisited, and many feel this could be a short-term adjustment. “Whether you’re withdrawing 4% to 5%, or some other figure, the takeaway is that these rates are just guidelines,” says Munro. “Often retirees spend more in the first years of retirement due to increased costs for travel or home renovations; working with a financial advisor can help you create a withdrawal rate that’s right for your individual needs.”

Control your spending

Reducing your spending is another financial strategy you can use to protect your retirement savings. For instance, cutting back discretionary spending and delaying your larger purchases can help ensure your retirement savings last, says Munro. As well, putting off travel or major purchases while prices are inflated may be a short-term decision that can have long-term benefits.

For instance, airfares rose faster than the rate of inflation in between January and August as COVID-19 travel restrictions started to ease.2[1] While prices remain elevated, they did decline by almost 20% in the final quarter of 2022. When faced with unusually high prices, consider waiting a few months to see if prices fall.

Watching costs is especially important early in retirement. Many retirees see a surge in spending in the first few years after receiving their last full-time paycheque. More frequent travel, as well as lifestyle changes like eating out more and splurging on entertainment, can significantly increase spending in those years. It’s also common for retirees to move or renovate as part of the transition to retirement, which can ratchet up their expenses even more.

Bucket your wealth

If you are concerned about losing sleep over issues like inflation, there are steps you can take now to offset this risk. One way is to use a bucket system to ensure you have a clear line of sight on your discretionary and non-discretionary spending.

The three-bucket system works like this: The first bucket is for enough funds to cover up to three years’ worth of essential living expenses not covered by your pension, Old Age Security or other guaranteed fixed income you may have. This money should be accessible to investors, so the funds should be in lower-risk investments, such as a money market fund or a short-term bond fund.

The second bucket is for funds you may need over the next decade or so, and perhaps to cover a specific goal. Because you have a longer time frame, the funds in this bucket may be in more moderate-risk investments that could potentially earn a higher return, such as intermediate-term bond funds or conservative balanced funds.

The final bucket is meant for funds you won’t need for a decade or more. With a longer timeframe at your disposal, you can afford to invest in moderate to higher-risk assets that have the potential for long-term growth, including more aggressive mutual funds and exchange-traded funds (ETFs that hold stocks). An example could be a neutral or growth-oriented balanced fund.

The guidelines in the bucket system are just that – guidelines – and they will change depending on your circumstances. For instance, it might be tempting at times to keep more of your funds in the first bucket, says Munro. But the tradeoff is that you could limit long-term growth that might otherwise offset the effects of inflation and increase the risk that you may run out of money by the end of retirement.

With most risks, we only worry about them when they’re staring us in the face. Today, inflation is one of the top risks on people’s minds. However, there are other risks that can affect your retirement dreams. While it’s hard to predict what challenges may arise, working with a financial advisor can help you create a comprehensive financial plan that takes these risks into consideration so you can achieve your retirement goals.


1 Fidelity Viewpoints. “How can I make my retirement savings last?” Fidelity.com. August 3, 2022 https://www.fidelity.com/viewpoints/retirement/how-long-will-savings-last

2 Lee, Michael. “Where do airlines stand in 2023? Industry observers on airfare trends and margins.” CTVnews.com. December 7, 2022 https://www.ctvnews.ca/business/where-do-airlines-stand-in-2023-industry-observers-on-airfare-trends-and-profit-margins-1.6185000