Meet The Erosion Twins. . .Inflation and Taxes

Meet the Erosion Twins, Inflation and Taxes. Inflation has been out of the country for a while; Taxes is a homebody. They have a voracious appetite, respectively, for capital and income, and they need your support.

Take Inflation for example. He's a growing boy. A June 19, 2008 news release from Statistics Canada confirmed that consumer prices rose 2.2% in May compared with May 2007, up from the 1.7% increase reported in April. According to the release, the 0.5 percentage point acceleration in the all-items Consumer Price Index (CPI) was the sharpest since September 2007.

The main culprit? Over the past year, crude oil prices almost doubled. As a result, gasoline prices increased substantially across the country, rising the most in Quebec and Ontario.

Higher mortgage interest costs were also a contributing factor to the rise in consumer prices in May; however, new housing prices continued to exert more upward pressure on this index than mortgage interest rates themselves.

Canadians paid 1.9% more in May for store-bought food items compared with the same month last year, up from the 0.9% increase posted in April. Those households with a sweet tooth were most heavily burdened: prices for bakery products increased 13.2%, the fastest 12-month rise since October 1981.

Inflation and Taxes together are big dependants in any household. Consider this scenario, as computed by The Knowledge Bureau's Retirement Savings Planner, (you can try a free demo at www.knowledgebureau.com/evergreen)

Savings: $1,000 invested each year for 30 years at an average 5% return $69,761
Taxes: What's left after an average effective tax rate of 30% per year $38,513
Inflation: What's left after an average inflation rate of 2% per year $29,497

The Erosion Twins have been expensive. . .together they've eaten $40,264 of savings in a generation!