Trying to Understand????

[scoopsteve]

I have heard so many of you talking about the effect of inflation over time, and its impact on the purchasing power of the dollar however, here is my question, if you are debt free, (and stay that way) what is inflation going to attack?

Walk through this senerio with me, if the following items are PAID FOR, one can live quite well off of 40K a year (taking the rule of 4% into account) and with 1mill in your retirement fund you will NEVER touch the principal:

Paid For Items:
Home
Cars
Credit Cards

Fixed Payments to Make:
Utilities: $300 Month
Auto Insuranc$150 Month
Health Insurance $ 500 Month (currently)
Food $800 Month
Total: $1,750
Total Draw Monthly: $3,333
Left Over for Month: $1,583

Is there something I am missing?

 

[Cut-Throat]

Yeah you are missing a lot!

You give a budget of Utilities for $300. I don't know about you but my heat Bill has doubled this year. I'd call that Inflation!

Food will go up, gas will go up - You do continue to buy food and Gas right?

 

[yakers]

Try collecting all your costs for say three months and see where your money goes.

So lets see, entertainment? travel?
Home maintenance, car operations and replacement fund, gifts, charity, eating out, computer use & replacement.
Hobbies?
Making spouse happy, looking for a spouse, getting away from spouse...

 

[Martha]

Missing your personal inflation on the goods and services you are buying. For example, in 2004 health insurance premiums increased 11.2%, far outpacing general inflation. For a number of years, the cost of health insurance has risen greater than the general inflation rate. http://www.nchc.org/facts/cost.shtml

And as CT mentions, look at increases in costs of fuel.

There are also figures in a recent Economist which shows pretty hefty inflation on food prices.

 

[SteveR]

Also, you need to add taxes to your list. RE tax, Fed. income tax, State income tax, realestate tax, and what ever other taxes you might have to deal with.

Travel? Gifts? Repairs, maintenance, replacements etc. as stated by the others so far also need to be included in your list.

 

[uncledrz]

Inflation eats away at your ability to purchase goods and services over time.  Unless your income is inflation adjusted in some way, inflation will reduce the goods and services you can purchase each year in the future.
So your $300 a month in utilities may be, even at 6% inflation, $600 in 12 years, $1,200 in 24 years, etc.

 

[Spanky]

Fixed Payments to Make:
Utilities: $300 Month
Auto Insuranc$150 Month
Health Insurance $ 500 Month (currently)
Food $800 Month
Total: $1,750
Total Draw Monthly: $3,333

All these items go up in cost with inflation.

 

[Andre1969]

Even if you're debt free and your house is paid off, inflation will still stick it to you in other ways. For example, my property taxes were $2356 in 2004, and around $2550 in 2005. That's an 8.2% increase right there!

I paid $1.74 per gallon last year for home heating oil. This year it's market price with a $3.19 cap. I think I paid $2.59 per gallon at the last fill-up. That's a 49% increase. I just thank God this has been a mild winter so far!

Look at what's happened to gasoline costs over the years. And when gasoline goes up, food items often do, as well. I'm actually surprised that my electric bill hasn't increased over the years. I first had an account in my name in December 2004. I think the cost per kilowatt hour is about the same now as it was back then...although they do tack on fees and stuff that go up.

If you have a car, depending on your age, or changing demographics in your neighborhood, your car insurance can go up. Mine shot up when I moved a couple years ago, but then this year I went into the 35-39 age bracket, so it's come back down. Now car prices haven't kept up with inflation, especially when you factor in all the safety equipment and features that today's cars have. I could probably get a base Dodge Charger for not much more than what I paid for my base Intrepid over 6 years ago. But car repairs have definitely gone up, as labor rates continue to rise. Replacement parts get more expensive, and cars themselves just become more complex and expensive to repair, in general.

And even if your house is paid for, chances are that eventually you'll need new appliances, plumbing work, new roof, etc. Oddly, appliance prices don't seem like they've gone up over the years, especially with respect to inflation. But anything that has a labor rate attached to it, or raw materials, sure seems to.

It all adds up, and it can be pretty scary how fast inflation can get you if you don't watch out.

 

[Marshac]

10 Years @ 3.5%

Utilities 300 $356.31
Insurance 150 $178.15
Health 500 $593.84
Food 800 $950.15

 

[justin]

10 Years @ 3.5%

Utilities 300 $356.31
Insurance 150 $178.15
Health 500 $593.84
Food 800 $950.15

?? Seems low? I got $423 for utilities.

 

[danm]

You want to protect against inflation if thats what is occuring, which most people assume is the only thing that can happensince that's all they've experienced (unless they happen to live in Japan or Switzerland). However, in peacetime mild (good) deflation of oversupply (1-2%) is the norm.

The Fed, contrary to popular belief, is fighting deflation, not really inflation at the moment. They're deadly afraid of the (bad) deflation of deficient demand, which is what has caused Japan so much trouble. That's why we had a housing bubble, as the Fed a few years ago dropped interest rates below the floor to stimulate demand.

So your no debt scenario is a good deflation hedge, as effective debt increases in deflation. In the immediate years ahead we're going to have, at best, mild inflation (assuming they can keep the party going), so I wouldn't worry much about it if your retiring soon. If you retire at the outbreak of a major war then you want to load up on those TIPS.

 

[Rustic23]

? my trusty HP 17b gets different numbers
10 Years @ 3.5%

Utilities 300 $423.18
Insurance 150 $211.59
Health 500 $705.30
Food 800 $1,128.48

that was compounding anual. Would be slightly higher if monthly figures used utilities goes to $425.50, daily figures even higher.

 

[eridanus]

It can't be done. No American lives on less then $40k a year!

The 4% rule takes inflation into account (generally).


Edit: month to year

 

[Marshac]

? my trusty HP 17b gets different numbers

I used the FV function in excel.

 

[mickeyd]

An easy way to imagine how inflation affects the average person is to picture a loaf of bread that you purchese at the market today. With inflation, next year there will be one less slice of bread in the loaf, but you probably will not miss it. Year 2, same story, but now missing 2 slices from original loaf. After 10 years, you will probably begin to notice it however it is now too late as you can not afford to buy a larger loaf.

Inflation is insidious and there ain't a damn thing that you can do about it. That's why the Fed is so powerful in D.C. They can do something about it.

 

[mathjak107]

there has not been a 20 year period in our history where prices have not doubled

 

[Rustic23]

Marshac,
I am not sure where the difference is. Below is a paste from my excell FV function. It agrees with the HP. I also ran it through an HP 19bII same answer. Don't mean anything disrepectful, Just wondering where the difference is.

10 years
0.035 rate
300 amount
($423.18)

 

[Rustic23]

mathjak107

there has not been a 20 year period in our history where prices have not doubled

This appears an accurate statement. That would be about a 3.6% inflation rate. I think you will find it even higher for the past 30 years. Long term 3.5-4% inflation rate for U.S., however, I think it has been closer to 5% in the last 30 years. I think that is more due to the high inflation of the Carter years.

 

[Marshac]

Marshac,
I am not sure where the difference is.

Heck of a thing- I'm home now and using Excel 2003, and I put in the formula again
=fv(3.5%,10,,300)
And our numbers match. I'll have to check that at work tomorrow in Excel XP. Who knows... I could be totaly warped too- It was a full day of TSQL.... hopefully those numbers are better

 

[Rustic23]

I've punched FV values in the the old HP for a long time. Thought they were right, but I learned a long time ago, I can make a mistake.... just can't let the DW know that.

 

[Andre1969]

I don't know how accurate this is, but if you go by an inflation calculator, there are plenty of periods where things have not doubled in 20 years. Here's the calculator I like to use: http://www.westegg.com/inflation/

If you put in $1.00 in 1985, it comes out to $1.77 in 2005, the most recent year it can compute.
$1.00 in 1984 is like $1.80 in 2004.

Now $1.00 in 1980 is like $2.29 in 2000, so there's a case where it more than doubled.

$1.00 in 1949 was like $1.45 in 1969.

Still though, this shows how inflation can eat away at your nest egg if you don't protect against it.

 

[Yipee-Ki-O]

I'm not so sure that the official inflation figures from the Bureau of Labor Statistics correlate very well with what an individual experiences. I think your own personal rate of inflation can be much higher or lower than the official rate. For the past 18 years, I've gotten yearly raises of 4% so my income has doubled for the time period. But I don't spend anywhere near twice as much today as I did 18 years ago. So I tend to view the official statistics as being interesting but not especially relevant to me personally. Your personal rate of inflation depends on what (and where) you purchase the items that make up your own basket of goods and services. And since I'm quite cheap frugal, my inflation rate has been lower than the official rate.

 

[Craig]

Eventually, even those paid off cars will need to be replaced, for most of us ...

 

[kramer]

US prices at the dawn of WWI were lower than in the year 1800.

In fact, just taking a quick look at non-overlapping 20 year periods starting in 1800, 5 times we had *lower* prices after 20 years, 5 times higher prices.

http://oregonstate.edu/Dept/pol_sci/fac/sahr/cv2005.pdf

That being said, prices have doubled in each of the last 3 twenty year periods. Welcome to the world of fiat money.

Kramer

 

[mathjak107]

forget about the governments cpi index can you think of anything you buy that hasnt at least doubled in 20 yrs? i cant