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Inflation -- A threat to Retirees
Old 06-26-2008, 02:39 AM   #1
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Inflation -- A threat to Retirees

It seems that we are looking at fairly large inflation.

I know that fuel prices are somewhat influence by speculation, but they increase 100% in the last year or so... that the kind of inflation we see in South America usually... not at home.


Inflation is the most significant threat to retirees standard of living. Aside from lowering spending power it destabilizes the economy in general.


Are you concerned?


I am not making any investment strategy moves... I am sticking with my traditional investment approach. But I am keeping a wary eye on it and hoping some of our leader geniuses somehow get it under control. I am not sure how I would approach protractive large inflation other than continuing to w*rk for a while.
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Old 06-26-2008, 04:31 AM   #2
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It seems to me that retirees with a paid off home, and a COLA pension, paid or highly subsidized medical insurance are probably less impacted by inflation than the average American.

This doesn't apply to many of the board members certainly me.

I have a small amount of inflation bonds but actually sold most of my TIPs bonds over the last 6 months, so I am not doing anything special investing other.

The one positive thing about inflation is will help reinflate the bursting housing bubble.
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Old 06-26-2008, 06:18 AM   #3
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It seems to me that retirees with a paid off home, and a COLA pension, paid or highly subsidized medical insurance are probably less impacted by inflation than the average American.
I will be in that position when I reach ER. I envision the largest impact to me might be in inflated food prices and in inflated energy prices.

So, what can one do about high food prices? Start a vegetable garden and learn to can. Get to know a farmer from whom to buy eggs and other foods. Eat a little less meat. Bake your own bread.

What can one do about high energy prices? Live in a walkable neighborhood. Live in a well insulated house that is not overly large. Dress for the weather.

I am not personally too worried because my planned SWR is so low. But I will probably combat inflated prices in these ways anyway, just because I can.
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Old 06-26-2008, 06:47 AM   #4
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Are you concerned?
No. You will always have inflation over the long term, just like your investments will probably increase over the long term.

For example, I've increased my budget (May to May) by 6% from last year (my first full year in retirement). Did my expenses actually increase 6% due to inflation? No - it increased due to "actions" that I took since last year to "enhance my retirement lifestyle".

A couple of examples: Upgraded my cable to satellite (my cable provider does not provide HD service, even though I've had an HD receiver for the last 5+ years) and ordered more channels than I had previously.

Also, I have an increase in car insurance (since I bought another "toy", and have yet to get rid of one of our cars).

When we look at health insurance, it went from $461/month to $465/month (slightly less than 1% increase), even though my "main planning tool" (Fidelity's Retirement Income Planner) defaults to an expected 7% increase.

I guess I look at it this way. When I had a j*b , inflation was there (even though my annual increases never considered whatever the current level was). In retirement, it's the same thing.

So, speaking for myself (in my short retirement "lifetime") I see no impact. Also, since it looks like I "over prepared" (financially that is) for retirement, I'm not "near the edge" where price increase (even gas ) is of little/no concern.

BTW, my wife just booked our '09 trip to "down under" yesterday. We don't have the final numbers yet (we needed to book the land portion to "lock in" the '09 price) due to the airline/fuel situation, but it still is within our budget (we've kept our travel budget the same as when we were wor*ing, so we really haven't increased our expenses in this area).

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Old 06-26-2008, 07:36 AM   #5
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Inflation will have it's own benefits and opportunities.

When interest rise beyond a certain level, people will make a shift in their investments. For example, at about the 7% level and rising, I would tend to sell off more equities and invest in bank CDs and possibly long-term bonds if rates get really high like in the early 80s. Rising interest rates will also cause real estate prices to drop. I would rather buy into rental property at a low price with high interest rates than at a high price with low interest rates.


In other words, it's always a good market.....somewhere.
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Old 06-26-2008, 07:54 AM   #6
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The great concern with which the energy/food inflation has hit everyone is mostly in the rate at which it had occurred. Concerning energy prices alone, demand for energy isn't ENTIRELY inelastic, even though it is pretty unresponsive to changes in price. People will move closer to a city, take less trips, etc., so even if long term demand for oil is increasing, it will increase at a slower rate. I would be beyond surprised if we saw another 100% increase this next year in oil ($270?).
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Old 06-26-2008, 08:08 AM   #7
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Inflation is the most significant threat to retirees standard of living. Aside from lowering spending power it destabilizes the economy in general.


Are you concerned?
Well I'm concerned about dying but realize I can only try to manage it a bit by eating well and exercise. I think the same approach is valid for inflation. It's something we cannot avoid so just try to manage it the best we can.
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Old 06-26-2008, 08:30 AM   #8
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Somewhat concerned but not very much. We have a paid-for home and a pension with 100% COLAs, medical/prescription coverage for life and I'm very much aware of how rare that is now. In a way I feel like I won the lottery because I certainly wasn't thinking about it when I started the job when I was 22.

The spikes in fuel and food affect us - almost $100 to fill the pickup truck so we don't drive it casually but I expect the COLAs will eventually make up for some of it. And we're essentially homebodies anyway, spending most of our outside time locally or with family. All the essential stuff we've already bought and paid for, the only foreseeable major expenses being vehicles when the ones we have wear out, and we've planned for that.

But it does look a lot like the late 70s - early 80s with inflation following energy costs increases.
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Old 06-26-2008, 08:39 AM   #9
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So, what can one do about high food prices?
What we humans have been doing since the beginning of time -- find a way to stretch relatively rare (expensive) ingredients (like meat and seafood) by mixing them with abundant (cheap) ones (like rice). Like so many of the world’s classic and beloved dishes — Paella and Arroz con Pollo come instantly to mind. So does anything out of the Caribbean countries and the southern US.
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Old 06-26-2008, 08:49 AM   #10
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I was not able to find where I learned this, but I read one analysis that accelerating inflation hurts stocks in the short term, but actually increases their value after about 9-18 months as businesses re-price and burn through existing inventory, for example. OTOH, TIPs react by definition to soften inflation, though they are lackluster most of the time otherwise. Finally, REITs usually rise with inflation in fairly short order. Granted all of these are historic generalizations.

When I figured out my AA I decided to keep about a year of expenses in public REITs, another year or so in TIPs, and at any rate, a hefty cash and short-term bond slice. I am hoping that smooths inflation as needed. Maybe I should be more concerned, but inflation doesn't worry me too much given that.
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Old 06-26-2008, 08:54 AM   #11
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Maybe I should be more concerned, but inflation doesn't worry me too much given that.
Rich, you appear to have truncated your last sentence. Allow me to complete it for you: "...given that I'm going to keep working for just one more year, just one more year, just one more."
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Old 06-26-2008, 09:06 AM   #12
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Allow me to complete it for you: "...given that I'm going to keep working for just one more year, just one more year, just one more."
Great! My SS is insured ...

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Old 06-26-2008, 09:08 AM   #13
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I was not able to find where I learned this, but I read one analysis that accelerating inflation hurts stocks in the short term, but actually increases their value after about 9-18 months as businesses re-price and burn through existing inventory, for example. OTOH, TIPs react by definition to soften inflation, though they are lackluster most of the time otherwise. Finally, REITs usually rise with inflation in fairly short order. Granted all of these are historic generalizations.

When I figured out my AA I decided to keep about a year of expenses in public REITs, another year or so in TIPs, and at any rate, a hefty cash and short-term bond slice. I am hoping that smooths inflation as needed. Maybe I should be more concerned, but inflation doesn't worry me too much given that.
problem with inflation is that in the end if not controlled it will cause very severe economic problems, especially in the US where so much of the economy is disposable income and purchases not really needed for living.

if inflation is not controlled and people cut back then a lot of companies will see their earnings destroyed as people stop buying their products and services
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Old 06-26-2008, 09:18 AM   #14
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Rich, you appear to have truncated your last sentence. Allow me to complete it for you: "...given that I'm going to keep working for just one more year, just one more year, just one more."
Matter of fact, I just learned I'm up for a raise at the end of the summer. Should cover inflation for 2009, no problem.

Al, I agree with you that bad, persistent inflation can bring the economy to a screaching halt. At that level of global stress nothing is truly safe and I'm not sure it can be planned for, unless you have a zillion dollars (or a Brazilian dollars, for REW's sake).

When I look back to the early and mid-1980s - when many of my loans were tied to prime, and the mortgage interest on my house was 13.5% - it astounds me how oblivious I was, as were most of my contemporaries. We just kind of kept working, paid the bills, and adjusted our lifestyle. We were too busy building careers, raising kids, and otherwise making our way in the world to worry much about it.
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Old 06-26-2008, 09:25 AM   #15
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Wow. I’m concerned that my view on inflation is so different. IMHO inflation is a huge threat to a retired person – right up there with major portfolio loss.
Rising prices of basic necessities – like gasoline and food, impose a non-negotiable shift in budget priorities. Inflation cycles usually start with negative, rising interest rates and falling asset prices – just when an increased withdrawal rate is called for.

The uncertainty of the strength and duration of inflation combined with the unwillingness of political and financial leadership to deal with it in short order combine for a poor outcome. 1% additional inflation (before tax) equates to 1.34% additional return needed (25% marginal tax rate) to make up the loss – usually at the moment one is seeing falling returns and shortening durations.

I see inflation as a stealth killer – as attested by the fact that it has damaged the retirement plans for so many people in the past.

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Old 06-26-2008, 09:35 AM   #16
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Matter of fact, I just learned I'm up for a raise at the end of the summer. Should cover inflation for 2009, no problem.

Al, I agree with you that bad, persistent inflation can bring the economy to a screaching halt. At that level of global stress nothing is truly safe and I'm not sure it can be planned for, unless you have a zillion dollars (or a Brazilian dollars, for REW's sake).

When I look back to the early and mid-1980s - when many of my loans were tied to prime, and the mortgage interest on my house was 13.5% - it astounds me how oblivious I was, as were most of my contemporaries. We just kind of kept working, paid the bills, and adjusted our lifestyle. We were too busy building careers, raising kids, and otherwise making our way in the world to worry much about it.
Rich, the difference was you were working. A big difference. Even though there is a lag between wages and inflation, wages do rise, eventually catch up, overshoot a bit. Especially for professional worker-bees.

Totally different situation for pensioneers, FIRE'd, retired, etc. More so when the portfolio tends to fall just when it needs to rise.

Michael
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Old 06-26-2008, 09:35 AM   #17
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I see inflation as a stealth killer – as attested by the fact that it has damaged the retirement plans for so many people in the past.
It's probably true that you can't completely 'inflation-proof' a portfolio and that high inflation is generally not good for retirees, especially the growing number which will not have COLA-adjusted pensions.

But it does show the importance of constructing a portfolio that is somewhat more resistant to imploding under higher inflation.
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Old 06-26-2008, 09:53 AM   #18
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In a normal inflationary situation, those on fixed incomes
would be hit hardest and wages would increase to match
inflation... but these are not normal inflationary times.
Today the American worker must compete with third world
labor abroad and those on workers' visas [or illegal] within
the country - this will keep wages low.
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Old 06-26-2008, 10:01 AM   #19
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Oil is cheap … at least in comparison with some other "liquids". According to USA TODAY, crude oil is a relative bargain on a per barrel (42 gallons) basis. For example,


ITEM
COST PER BARREL

Chanel No. 5 Perfume
$102,144

Jack Daniel's Whiskey
$3,568

Louisiana Brand Hot Sauce
$520

Bud Light Beer
$302

Tropicana Orange Juice
$226

2% Milk
$147

Crude Oil
$124.31
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Old 06-26-2008, 10:05 AM   #20
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Oil is cheap … at least in comparison with some other "liquids". According to USA TODAY, crude oil is a relative bargain on a per barrel (42 gallons) basis. For example,


ITEM
COST PER BARREL

Chanel No. 5 Perfume
$102,144

Jack Daniel's Whiskey
$3,568

Louisiana Brand Hot Sauce
$520

Bud Light Beer
$302

Tropicana Orange Juice
$226

2% Milk
$147

Crude Oil
$124.31
Memo to self: Drink less Whiskey and Beer. Drink more Orange Juice and Milk. Easy on the Hot Sauce and Perfume.
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