The real impact of inflation on Retired Folks?

[Earl E Retyre]

Interesting thread. I agree with a lot of the points made above.

My house is paid for so inflation related to real estate does not impact me. Other than real estate taxes - which does go up each year.

The cost of many items such as computers, TVs, cars, etc often either decrease in price, or you get better products at about the same price. And, we rarely buy these anyway as they last a long time.

The cost of groceries goes up but we eat in a lot more than going out which is so cheap to begin with. Clothing goes up, but we rarely buy clothes anymore.

So, I find the primary inflation impacts to me include medical insurance (which should be minimized once I hit 65), the cost of my cable/internet, and my vacation/travel budget which eventually will go down.

I still put 2% in my spreadsheet for non-medical inflation and 5% for medical inflation until age 65. But, I suspect the 2% is added pad to my budget.

[Andre1969]

My guess is that as long as you stay fairly healthy and don't run up big medical bills, inflation shouldn't be *too* big of a deal. If you have a mortgage, it will stay the same for the most part, although property taxes and insurance will go up over time.

As expensive as they might seem, I'm convinced car prices also don't keep up with inflation. The problem is, they keep building nicer and more upscale vehicles. And they come with more standard equipment than in the past. But also, most people, as they get older, also don't replace their cars as often, so even if the cars are more expensive, the expense doesn't come around as often.

Although, yesterday I got smacked with an example of sticker shock. I went into a McDonalds, and noticed that all of their "Value meals" start at something like $7.79! $8+ with tax for a Big Mac, fries, and coke just seems like overkill to me

[sengsational]

Those are "combos", not value meals. What's the price of just a mcdouble?

Quote:

Originally Posted by kjpliny Official CPI is lower than real inflation since they use substitutions and other financial gymnastics. There is also hidden inflation where many foods and products are smaller than they were in history (notice some of the "half-gallon" orange juice containers are now 52 ounces instead of 64, the size of Girl Scout Cookies boxes are smaller, etc.) and are also of lower quality in many cases. This may be offset in other areas of purchase due to technology improvements (electronics and cars for example) but overall costs are increasing while quality (especially food) is decreasing in my experience.

This systemic difference is why portfolios should include equities.

[kjpliny]

Quote:

Originally Posted by Andre1969 Although, yesterday I got smacked with an example of sticker shock. I went into a McDonalds, and noticed that all of their "Value meals" start at something like $7.79! $8+ with tax for a Big Mac, fries, and coke just seems like overkill to me

I haven't gone to a McDonalds in about 5 years...the quality of their food is just awful and their prices are just as horrible. When I did go, I used to get two cheeseburgers and a small fries from their dollar menu and it was just over $3 with tax. No drink. I always wondered why they charged so much for a Big Mac when it is just two patties, cheese and one less piece of bread when compared to the two cheeseburgers from their dollar menu. I guess the marketing fools people.

[scrabbler1]

Quote:

Originally Posted by Earl E Retyre Interesting thread. I agree with a lot of the points made above. My house is paid for so inflation related to real estate does not impact me. Other than real estate taxes - which does go up each year. The cost of many items such as computers, TVs, cars, etc often either decrease in price, or you get better products at about the same price. And, we rarely buy these anyway as they last a long time. The cost of groceries goes up but we eat in a lot more than going out which is so cheap to begin with. Clothing goes up, but we rarely buy clothes anymore. So, I find the primary inflation impacts to me include medical insurance (which should be minimized once I hit 65), the cost of my cable/internet, and my vacation/travel budget which eventually will go down. I still put 2% in my spreadsheet for non-medical inflation and 5% for medical inflation until age 65. But, I suspect the 2% is added pad to my budget.

After reading through this good thread and mentally writing my reply, the last post here by Earl E Retyre (terrific screen name BTW!) very much reflects my views.

My co-op apartment is paid for, so inflation there is minimal. My co-op's maintenance rises little, if at all, even if the property tax part rises. Other parts of the maintenance, such as the co-op's mortgage interest, have fallen a lot over the years through amortization, lower interest rates, and shrewd refinancing by my co-op board and managing agent.

As he and others have pointed out, the cost of some items such as electronics have declined a lot over the years while their quality has risen.

There is a substitution effect which can put downward pressure on one's own inflation rate. In the food area this is pretty common and easy to do.

Like Mr. Retyre, I split my inflation rate into two parts - one for medical and one for everything else. In my spreadsheet, I can try many what-ifs to see the effect, especially on medical, a higher inflation rate has on my medium-term ER budget plan (through age 65). I have been using 10% for medical and 3% for everything else. With recent ACA plans going haywire the last few years, that 10% may be too low. Medical expenses have risen over the years to take up nearly 1/3 of my spending.

[kgtest]

Quote:

Originally Posted by MichaelB Personally, I feel more confident about being able to manage the impact from taxes.

Along with paid FAs lol. I asked an FA what ER risks were and he said...the x factor is Health Insurance. Many either fail to plan appropriately or don't expect health to decline (denial).



As for that McD comment and marketing...of course it's about marketing. What cruel mother would eat a happy meal at the dinner table in front of there children who are just eating chicken nuggets. It's the single most effective marketing ploy in human existence IMHO!


Yeah I have an idea let's create a Happy Meal, that way when the pissed off kid doesn't get one, he can assume that it's because he doesn't deserve to be happy, essentially forcing the parents to succumb to our brilliant marketing tactics. YES! That's it, we'll call it a HAPPY MEAL, nobody wan's to eat a SAD MEAL! Excellent point, hey let's color it BRIGHT RED AND YELLOW and put it in a box with cute little handles so the kids feel EXTRA special.

[Andre1969]

We ended up loading up on two fish sandwiches and three McChickens, for something like $9.72 total. I can remember, back in college, you could get a combo meal with a sandwich (like a Big Mac, Quarter Pounder, or one of the decent-sized McChickens they had back then) with fries and a drink, for $3.14 with tax, here in Maryland. Now, that was maybe around 1990 or so, so it's been a few years!

But, adjusting for inflation, that $3.14 would be $6.07 today, so in this case, the prices have out-paced inflation. Also, Maryland raised their sales tax a few years back, from 5 to 6%.

I don't really keep track of groceries that much, because my house mate handles most of that. But, we tend to go to places like Aldi, or BJs when we bulk up. So that keeps the prices down a bit. I can remember, back in the 90's, paying around $2.50-2.75 for a gallon of whole Vitamin-D milk. At Aldi, you can get a half gallon for something like $1.55. So, $3.10 for a gallon. I can remember back in the 90's, getting a Tombstone Pizza for $3. And nowadays, you can still find them for that, on sale. So, some things have stayed cheap, although milk and pizza probably aren't the best product samples in the world!

[scrabbler1]

Quote:

Originally Posted by MichaelB The first is tax increases. Not just federal income tax rates, but state and local taxes as well.

I am not worried if my federal or state income taxes spike once in a while. Because those are based on one's income, a spike in my income will trigger a spike in my income taxes due, so I will always have the money to pay for them. In my budget, I split my income taxes into 2 parts. The first part is a "basic" part, based on the more consistent monthly and quarterly dividends I get from my mutual funds. The second part is an "excess" part, based on the irregular and more erratic cap gain distributions. Those can rise one year and disappear the next year, masking any inflationary effect.

Local taxes such as property taxes, are not based on income. So if they rise, it's an expense I am not guaranteed to be able to cover the way income taxes are. As a percent of income, my property taxes fell in the late 1990s as my income rose. After I retired, they rose. My state introducing and expanding property tax rebates in the last ~20 years have helped, but those are dependent on the local taxing authorities keeping their tax increases low so we can still get those rebates.

[Looking4Ward]

I have to admit that when I run FireCalc, I do not include a percentage for inflation. I leave it at 0. But then, I don't include Social Security benefits or any increases to them so I suppose that's my hedge.

The reality is I definitely notice inflation extremes in some items but not in others. I too remember the days 25 years ago when Big Mac's were "2 for $2" and now I'm amazed they are kissing $6 each around here. Needless to say, I haven't bought a Big Mac in a long time. But I've been buying boneless, skinless chicken breast for $1.99 a pound for years. I've noticed some staples (bread, milk, cheese, etc) actually lower in price at our local HEB grocery stores as they promote their house brands.

Cars? I bought a brand new Suburban in 1996 for close to $40K. Today, I can still buy a lot of car or truck for that amount.

Clothes? Walmart has decent jeans for $15.

I could go on and on but my point is I think I have a lot of control over how inflation affects or doesn't affect me over the next 25 years.

[W2R]

In almost ten years of retirement, inflation has had far less of an impact on me than my rather huge, but irregular, dental bills.

I guess what I am saying is that if you have bad teeth, it might be good to allow some wiggle room in your retirement planning, in case of big dental bills.

Here's my annual spending for the past ten years (see graph below, which only includes regular expenses and does not include the costs of buying my Dream Home in 2015, fixing it up, moving in, etc). I have been living the same lifestyle as always and buy whatever I want.

See what I mean? The "up years" were during the time when I had multiple dental implants done, but I didn't have any dental work last year except for cleaning.

[joeea]

Quote:

Originally Posted by Retiredmajor So, if your home is paid off, cars are paid off, no Credit card debt, etc, etc. how can we estimate the real impact of inflation? I know inflation will impact food costs, repair costs, insurance rates and many other products and services, but I'm thinking the impact of inflation is reduced for a lot of folks like us.

Depends what "like us" means.

Many folks are dependent on fixed income and social security. Given that social security doesn't actually keep up with inflation's impact on their actual cost of living for many folks, but instead tracks CPI-W, their spending power is diminished over time by inflation.

Maybe you aren't in that category. I'm not. Only a part of my income is fixed, so I am less dependent. Inflation would clearly impact me, but hopefully not severely.

To estimate the real impact of inflation, you'd need to look more closely at the components of your expenses and income. For example, your house may be paid for, but taxes may rise in the face of inflation, as well as home repairs, utilities, and everything else that goes into housing.

[joeea]

Quote:

Originally Posted by Earl E Retyre The cost of many items such as computers, TVs, cars, etc often either decrease in price, or you get better products at about the same price.

In the face of inflation, don't expect car prices to decrease.

Quote:

The cost of groceries goes up but we eat in a lot more than going out which is so cheap to begin with.

But the cost will still go up with inflation. Over time, it will go up a lot. Remember when hamburgers used to be $0.19?

Quote:

So, I find the primary inflation impacts to me include medical insurance (which should be minimized once I hit 65), the cost of my cable/internet, and my vacation/travel budget which eventually will go down.

I think you are missing a lot of items that would be impacted by inflation.

Quote:

I still put 2% in my spreadsheet for non-medical inflation and 5% for medical inflation until age 65. But, I suspect the 2% is added pad to my budget.

2% is low.

Historically, inflation is more than that. Average long-term inflation is over 3%. At that rate, prices will double every 20 years. In some periods, inflation was much higher. Do you remember the late 70's and early 80's?

This might help: https://www.usinflationcalculator.co...flation-rates/

Hopefully that won't happen again soon.

[joeea]

Quote:

Originally Posted by scrabbler1 My co-op's maintenance rises little, if at all, even if the property tax part rises.

Recent years have seen extremely low inflation.

Certainly you don't expect your maintenance fees to stay low in the face of a heated-up inflationary period, do you?

Quote:

As he and others have pointed out, the cost of some items such as electronics have declined a lot over the years while their quality has risen.

How much does your cell phone cost?

Quote:

I have been using 10% for medical and 3% for everything else.

Very reasonable, assuming we don't get into a high-inflation period. If that happens 3% would be low.

[LARS]

Seems to me for most of us on a forum like this (we being generally belt and suspenders type folks) there are four areas where inflation can have an impact overtime.

First, and foremost, is healthcare. Both year to year increases (down the line); and, for the unfortunate few Assisted Living/Nursing Home.

Second, could be housing to the extent you are considering a move (and haven’t made it yet) to a desirable local (e.g. ocean property, or its equivalent).

Third, next area could be high end travel.

Fourth, property taxes could also be a wild card.

In the end, the only one of real consequence is #1 and possibly #4. Generally speaking all other inflation will be noise in budget I would think.

[ShokWaveRider]

As I have mentioned before and as OP states, Personal Inflation is very subjective. (Like when to take SS LOL, and probably debated as much).

For us personally, home paid for, no debt etc. Based on my record keeping over the last 10 years our Total cumulative (Not Annual) inflation rate for the last 10 years has remained within 1 - 2% for the complete 10 year period. Some years it goes down. This is based on how much we spend/spent on the mandatory items of life over the period.

[joeea]

Quote:

Originally Posted by ShokWaveRider Based on my record keeping over the last 10 years our Total cumulative (Not Annual) inflation rate for the last 10 years has remained within 1 - 2% for the complete 10 year period. Some years it goes down. This is based on how much we spend/spent on the mandatory items of life over the period.

The past 10 years have seen unusually low inflation rates for everyone in the US. I'm not sure I'd count on that continuing.

[scrabbler1]

Quote:

Originally Posted by joeea Recent years have seen extremely low inflation. Certainly you don't expect your maintenance fees to stay low in the face of a heated-up inflationary period, do you? How much does your cell phone cost? Very reasonable, assuming we don't get into a high-inflation period. If that happens 3% would be low.

Actually, I do expect the maintenance fees to stay low. In the period from 1990 (the first full calendar year I have been here) to 2017 (the latest year I have annual co-op spending data), my monthly maintenance has risen, after netting out state property tax rebates, 21%. That's 21% in 27 years, less than 1% per year. Including this spending in the 3% inflation bucket is, if anything, pessimistic, and helps to offset greater increases in some of the other, smaller parts of my non-medical spending. Furthermore, if I remain here another 5 years, I will qualify for additional state property tax rebates (age 60).

I paid about $30 for my simple cell phone back in early 2015. If I trashed it today, it would have cost me less than $1 a month amortized over the 50-month period. I pay about $4 per month to replenish my minutes, buying a blob of ~200 new minutes every ~9 months or so. My cell phone costs me a trivial amount of money.

[wmc1000]

I try to cover our bases in my spreadsheet analysis by using across the board 4% inflation rate and only a 2% investment return. Should allow enough padding for intermittent high inflationary periods.

[ziggy29]

Quote:

Originally Posted by sengsational Those are "combos", not value meals. What's the price of just a mcdouble?

Right now, at least locally, they are 2 for $3. But eating a lot of them will probably more than offset their low cost in higher medical expenses.

[Retiredmajor]

Thanks for all the responses thus far, lots of good information and opinions! I'm seeing that inflation can be a large concern depending on your situation, or it can be a small concern if you have enough assets or wiggle room to adjust spending. No doubt that if someone is on a fixed income with few assets then inflation might have a large effect on them.