The real impact of inflation on Retired Folks?

[kgtest]

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]

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]

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]

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.

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?

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.

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.com/inflation/historical-inflation-rates/

Hopefully that won't happen again soon.

 

[joeea]

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?

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?

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]

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]

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]

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.

 

[Lsbcal]

I notice most here are thinking of inflation in terms of their expenditures. But what about your investments? If you are withdrawing 4% for expenses then your investments are 25x your expenses. Worthy of consideration I think.

Many retirees have a good chunk of their investments in fixed income. I personally prefer a good chunk in stocks which tend to keep up with inflation as Americans and the Fed are generally biased towards growth. During the inflationary 1970's neither bonds nor stocks were very good bets. At that time good quality real estate was a good bet.

Inflation's effect on fixed income is why I now have a majority of FI in TIPS and ibonds. In late 2018 TIPS hit a decent point to give one some assurance of beating inflation without making risky future assumptions.

 

[LARS]

I notice most here are thinking of inflation in terms of their expenditures. But what about your investments? If you are withdrawing 4% for expenses then your investments are 25x your expenses. Worthy of consideration I think.



Many retirees have a good chunk of their investments in fixed income. I personally prefer a good chunk in stocks which tend to keep up with inflation as Americans and the Fed are generally biased towards growth. During the inflationary 1970's neither bonds nor stocks were very good bets. At that time good quality real estate was a good bet.



Inflation's effect on fixed income is why I now have a majority of FI in TIPS and ibonds. In late 2018 TIPS hit a decent point to give one some assurance of beating inflation without making risky future assumptions.

Personally I only care about inflation as to how it impacts my ability to spend. Put another way I am not interested in leaving an inflation adjusted estate.

So I fully understand my assets my decrease on an inflation basis. However, as long as they keep up sufficiently to support my spending I am much less concerned.

Obviously you have to have a fair amount of assets relative to what you are spending from those assets to not care...

 

[Lsbcal]

Personally I only care about inflation as to how it impacts my ability to spend. Put another way I am not interested in leaving an inflation adjusted estate.

So I fully understand my assets my decrease on an inflation basis. However, as long as they keep up sufficiently to support my spending I am much less concerned.

Obviously you have to have a fair amount of assets relative to what you are spending from those assets to not care...

Our single heir will probably get a good sum but I too am not concerned about that. I'm thinking that there are some assets I'd be uninterested in. For instance, a 10 year Treasury now yields 2.54%. That wouldn't be my idea of a good investment for myself.

Like you, I just want to maintain our portfolio's spending power but am prepared to see some falloff in inflation adjusted terms moving forward. So far since 2005 our portfolio (basically around as 60/40 AA) has maintained it's purchasing power.

 

[audreyh1]

I notice most here are thinking of inflation in terms of their expenditures. But what about your investments? If you are withdrawing 4% for expenses then your investments are 25x your expenses. Worthy of consideration I think.

Many retirees have a good chunk of their investments in fixed income. I personally prefer a good chunk in stocks which tend to keep up with inflation as Americans and the Fed are generally biased towards growth. During the inflationary 1970's neither bonds nor stocks were very good bets. At that time good quality real estate was a good bet.

Inflation's effect on fixed income is why I now have a majority of FI in TIPS and ibonds. In late 2018 TIPS hit a decent point to give one some assurance of beating inflation without making risky future assumptions.

I simply have more than enough invested in equities that historically have kept up with inflation. So I don’t worry about fixed income keeping up with inflation at all. For me fixed income is to lower the portfolio volatility. Equities are the heavy lifters that keep up with inflation.

I’m at 50/50 so way more than enough long term to keep up with inflation. 30% equities is around the minimum AA to keep up with inflation I think.

 

[ShokWaveRider]

We calculate this in a very simple way. Firstly we do not include things like vacations as they are somewhat discretionary and we really do not care what they cost. Besides we may spend more one year by choice rather than inflationary changes.

So we take out mandatory expenses, From Taxes, all home costs, food, Healthcare etc. We have being monitoring it for about 10 years. So if year 1 (2008) cost ~$35k and 2018 cost ~$39k the difference is ~$4k over 10 years. Not too much inflation for us as these happen to be our real numbers.

Now I am on Medicare, HC cost have gone up quite a bit, but that is not really inflationary as I only started this year. Previously it was covered by DW or the ACA. It will be hard to put HC into the inflationary mix unless we start from 2019, but then again in 2024 when DW is eligible. I guess we will have to start saving for that .

 

[wmc1000]

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.

McDouble is $1 around here. I can remember a Double Cheeeseburger was $1 in the early 00's - so inflation has been 1 cheese slice since then.

 

[GravitySucks]

McDouble is $1 around here. I can remember a Double Cheeeseburger was $1 in the early 00's - so inflation has been 1 cheese slice since then.

Glad they're still on dollar menus somewhere.
My dog has me trained that I buy him one when I get my coffee when we travel.

$1.79 here last road trip.

 

[Retiredmajor]

Glad they're still on dollar menus somewhere.
My dog has me trained that I buy him one when I get my coffee when we travel.

$1.79 here last road trip.

Ha ha....that is EXCELLENT! Rover calls the shots! Dogs are soooo smart.

 

[RunningBum]

For instance, if you have a locked in mortgage rate or your house is paid off, then inflation won't have the same impact that it will on a renter or someone with a variable mortgage rate. But, housing is included in the "bucket" that helps the Government estimate the overall inflation rate.

If housing is rising at the same rate as everything else, this has no effect.

Person A has $50K of expenses, with a paid off house. Inflation on those expenses is 3%

Person B has the same $50K of expenses, plus $10K rent. Rent is increasing 3% just like the other expenses.

A & B are probably hit equally as hard as inflation. The rate of increase is the same. Presumably B has more invested because they didn't tie up some assets in a house, so it all comes out as a wash. Probably not that simple, but really what matters is if you have to have an expense that has a higher rate of inflation.

Speaking of which, retired people may be hit harder recently because health care costs are increasing faster than most expenses, and older people tend to have more medical expenses.

 

[I was misinformed]

I think the most essential daily expenses in my little world have risen significantly faster than the official CPI. According to

https://www.usinflationcalculator.com

cumulative inflation from 2001 to 2019 was 42.8%.

During that time my condo fees (which include utilities) have risen more than 100%. My property taxes have risen almost 100%. A trip on the local transit had risen 175%. My dentist's charges for an examination/cleaning have risen more than 150%.

It is hard for me to come up with a comparable number for my health insurance, as my plan, as well as employer/ACA subsidy, has changed many times over those 18 years. However, each time I had the same circumstances for a while, the annual increases in my health insurance cost always exceeded the CPI.

Typical ticket prices for the international airline routes I use regularly have risen by about 100%.

Of course some expenses have probably risen more slowly than the CPI, principally things that have been manufactured overseas like clothing as well as electronics, but these are not a big fraction of my expenses.

So the issue from a FIRE planning point of view is keeping up with the real inflation rate which I perceive to be significantly (~2%) higher than the official CPI. I certainly expect the real buying power of my Social Security pension to erode significantly over my retirement.