Inflation for the retired

[eytonxav]

only-inflation-matters-retirees-moneywatch: Personal Finance News from Yahoo! Finance


Wishing that medical care cost containment could be achieved

 

[donheff]

To summarize the article: you can control spending for most stuff and thus the CPI doesn't necessarily apply to retired you. But you can't control health care costs so prepare for the worst.

 

[W2R]

Yes, we can all eat Ramen noodles, go nowhere, and buy our clothes at GoodWill. After all, we must be used to it since we cut back to save for retirement all these years, and besides, what do we matter.

 

[LARS]

Unless we start seeing real wage inflation in the economy there is no way that healthcare costs will increase at 5-8% p.a. as suggested by the article.

Personally, I see nothing on the near term horizon (meaning next 3 to 5 years) that would suggest wage inflation is an issue.

 

[Independent]

Yes, health care costs are the biggest risk to retirees on the spending side.

Note that the BLS has an experimental CPI-E which uses a different market basket of goods which is supposed to be more representative of the way elderly people spend money. http://www.bls.gov/opub/mlr/2008/04/art2full.pdf

 

[MasterBlaster]

Yes, health care costs are the biggest risk to retirees on the spending side.

Note that the BLS has an experimental CPI-E which uses a different market basket of goods which is supposed to be more representative of the way elderly people spend money. http://www.bls.gov/opub/mlr/2008/04/art2full.pdf

It looks to me like the elderly-CPI pretty much tracks the normal CPI over several years. There are some up and down years but overall they seem fairly close.

That (bls.gov) document kind of conflicts with the premise of the original post that senior cost of living is off the charts compared to the normal cost of living index.

 

[traineeinvestor]

I strongly disagree with the premise that inflation should not be of material concern to retirees.

There are too many expenses over which either (i) we have no control or (ii) we can only control by lowering our standard of living:

1. health care
2. food
3. rates (aka property taxes) - just increased by 10% here in HK
4. home repairs and maintenance (if you own a home)
5. rent (if you do not own a home)
6. utilities
7. transport
8. holidays (doing without a holiday is not avoiding the impact of inflation, it is lowering my lifestyle because of it)

And for some early retirees

9. education costs for children (an estimated 18 years worth in my case)
10. mortgage interest (most of the of world uses floating or short term fixed rates rather than long term fixed rates as in the US and at least some retirees do carry mortgages into retirement - possibly including myself)

Wage inflation in is very real accross Asia (especially in China and India which have a combined population which of about 7x that of the US). That wage inflation is going to translate into (i) higher production costs which will eventually be reflected in higher selling prices for many goods and (ii) higher demand which will make it unlikely that competition will keep prices down. Inflation in the 4%+ range is already here for a number of developed and developing markets - UK, HK, South Korea to name a few - and non-discretionary items such as food, transport, housing (ex UK) and health care are all big contributors.

Global demand for energy and food is still rising and is expected to continue rising as the developing world catches up to the developed world in terms of incomes, living standards and consumption. Unless supply grows even quicker, rising prices will follow. If prices of basic necessities keep going up, then wages will follow - if for no better reason than to suppress civil unrest.

Things may be a little different in countries suffering from recession, but (i) most food and energy prices are set globally and (ii) currencies of the countries in recession would normally be expected to be weaker than those which are still growing. While this is not always true (e.g. Vietnam), where it is true, it points to a higher cost of living.

I put 4% inflation into FIRECalc (instead of the lower default) and saw my success rate drop noticably. At 5% it was telling me I shouldn't retire.

Inflation matters.

 

[Gone4Good]

Unless we start seeing real wage inflation in the economy there is no way that healthcare costs will increase at 5-8% p.a. as suggested by the article.

That is probably true in the aggregate, but that doesn't mean YOU (or I) won't see increases that high.

There are two things (off the top of my head) that can potentially drive individual health care costs higher than the average.

1) You age. Whatever you're paying now is based on your age. Even if health care costs don't go up from here, your individual costs will go up as you get older. Said another way, you migrate over time to the group who is paying above average rates (old) from the group that is paying below average rates (young).

2) Subsidy cutbacks. There are all kinds of subsidies that individuals benefit from, both from their employers and from the government. We're seeing a big debate in Washington right now about pushing more health care costs on to individuals. Again, even if health care inflation is zero from here on out, you're probably going to be picking up more of the tab, so your costs will likely rise.

Considering these factors, if average health care costs rise by a certain percent, I don't see how individual inflation isn't much higher than that.

 

[MasterBlaster]

The other thing that is driving healthcare costs up is new expensive procedures and medications. They often cost a lot and can be very effective.

We as a society are getting more and better healthcare than a generation ago. If this trend continues then costs will continue to go up.

 

[Gone4Good]

I just did a quick check on ehealthinsurance.com. A 30 year old Texan would pay $230.18 per month for a certain HSA insurance policy whereas a 60 year old would pay 898.61 for the same policy. That works out to be 4.9% annual inflation. Our hypothetical 30 year old will suffer that increase even if health care costs don't rise a dime for the next 30 years. Any increase in overall costs is additive to the 5% he'll have to pay just for getting older.

Pretty scary stuff.

 

[eytonxav]

The other thing that is driving healthcare costs up is new expensive procedures and medications. They often cost a lot and can be very effective.

We as a society are getting more and better healthcare than a generation ago. If this trend continues then costs will continue to go up.

Agree, but if we benchmark US healthcare expenditures against other countries are we getting good ROI. See graph in link:
USA Inc. Slideshow 12 - BusinessWeek

 

[rescueme]

Back to the original post (beyond discussing H.C. ), IMHO any inflation in retirement (or before) should be done on a case by case analysis, not blindly following any "study".

Being retired (4 years), and being very anal (yes, I forecast and track everything), my "personal inflation rate" comes out to just under 2%, on average for that period of time.

I set a budget in January, increase/decrease categories based upon actual change in required expenditures during the year (examples: increase to health care & R.E. taxes, reduction in cost due to stopping daily newspaper and reduction in fuel costs due to driving less - yes, it all adds up) and regardless of any published numbers, this is reality in my life.

I guess I'm saying that depending on the specific individual/family, what is in the news is not necessarily "reality".

BTW, as far as H.C. cost increase? That's only part of your budget forecast. Any projected increase (for example 7%/year) is not an increase of 7% of your total budget. Sure, it may increase your total personal rate of inflation, but not 7% by itself overall.

Just my $.02....

 

[kyounge1956]

This makes me wonder if there is an asset class or sector fund that's highly correlated to health care costs. I think it's here at E-R that I've read about people buying a sector or individual stocks and using the returns to fund that portion of their budget, e.g. using dividends from utility stocks to pay the electric, phone & gas bills. Is the same thing possible for health care costs?