How Inflation and Income Tax Affect the Return on a Safe Investment - ARCHIVED

For decades, Canadians have been living in an inflationary environment. Everyone remembers that at some point in the past, consumer goods and services cost less. Even young people know that a candy bar cost less five or ten years ago than it does now. Thus the purchasing power of the Canadian dollar has gradually declined over the years.

Even though everyone knows that things cost more now than in the past, there are situations in which this seems to be forgotten. The purpose of this article is to present a situation that shows the illusion of wealth that fairly long-term inflation can foster. We begin by looking at how inflation and income tax affect a retired person's interest income for a given year. Then we look at the effects of inflation and income tax on interest income over a longer period. When taxation is not factored in, the situation is one of investing inside a registered retirement savings plan.