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Inflation Indexing and Present Value

Updated: Jul 3


 

Understanding Inflation Indexing and Present Value Reporting in Milestones Retirement Insights


Question: My clients Defined Benefit (DB) pension, Canada Pension Plan (CPP), and Old Age Security (OAS) are all indexed to inflation, yet when I check the year-to-year ledger, the values for these pensions appear constant each year, rather than increasing by the 2% inflation rate as expected. Did I overlook something, or is there a way to account for this within the software?



Answer: Milestones Retirement Insights calculates annual disposable incomes, which are inflation-adjusted each year according to the strategy implemented. The tool reports all income and savings in "today's dollars" by applying a present value calculation with a 2.0% annual inflation rate. This method applies to CPP/QPP, OAS, pensions, annuities, custom income sources, and more, unless specified otherwise in your settings.


Despite inflation indexing, the ledger displays each year's amount the same—for example, $49,000 annually for a DB pension—because it uses today's dollars for comparison. This means all indexed payments maintain consistent purchasing power over time within the reports. Non-indexed payments, conversely, will appear to decrease over time due to inflation's impact on purchasing power. Essentially, the benefits of using present value dollars allow for straightforward comparisons across different years without needing to adjust for inflation manually.


For example, planning to buy a $30,000 car in ten years can directly use the $30,000 listed in your 2030 disposable income, even though the future sticker price is expected to be higher due to inflation.


If you wish to adjust the inflation rate used in the software, you can do so under the Advanced settings. This flexibility allows you to customize the tool according to specific household inflation expectations, which typically range from 2% to 3%.








Keywords:

Inflation Adjustment, Present Value Calculation, Retirement Planning


 

For more information or to clarify any questions about using the Milestones Retirement Insights tool for comprehensive retirement income planning, reach out to us at info@milestones-retirement.com 

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