The real impact of inflation on Retired Folks?

[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]

Quote:

Originally Posted by 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.

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]

Quote:

Originally Posted by LARS 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]

Quote:

Originally Posted by 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.

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]

Quote:

Originally Posted by ziggy29 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]

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Originally Posted by wmc1000 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]

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Originally Posted by GravitySucks 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]

Quote:

Originally Posted by Retiredmajor 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.

[brucethebroker]

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Originally Posted by Aerides As with all things "it depends." Inflation includes so many factors, and most categories float above and below the curve every year. Some stay predictably close to inflation, mainly, Food Some don't: Electronics - TV's, for example, have trended down for years. Healthcare, the opposite. Tuition is way over inflation, and may be the one biggest thing that most of us don't have once retired. I wouldn't spend the energy to try to parse if I should plan for 2% or 2.5% inflation in firecalc or my budget though. I'd rather go with the macro estimates, and if my personal reality is a bit less, then... great.

Well said.
I recently read an opinion that there are two categories of costs: those that inflate, and those that deflate. The author said that anything that can be produced (product/service) that is tech related, or can be completed with a robot/AI, (electronics, auto hamburger flippers?) will most likely deflate. Those products/services that require humans at work, or specialized skills, (plumber? Health care? Min. wage workers?) will inflate.

[marko]

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Originally Posted by audreyh1 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.

Agree, however my fixed income (high yield bond fund) has been paying ~5%-6% for the past decade with a total return of 7-8%.

It is only a small contributor to our total income--equity dividends cover the bulk--but I think that sort of payout and total return should keep me ahead of the inflation curve for a good long time. No?

[marko]

[Edit] Comment deleted by marko. Off topic/irrelevant.

[Dtail]

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Originally Posted by marko Agree, however my fixed income (high yield bond fund) has been paying ~5%-6% for the past decade with a total return of 7-8%. It is only a small contributor to our total income--equity dividends cover the bulk--but I think that sort of payout and total return should keep me ahead of the inflation curve for a good long time. No?

Yes makes sense coz you are also taking on more risk than is typical on the Fixed Income side.

[arch57]

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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.

The hidden inflation really pisses me off. Not a big fan of over-regulation BUT government should make manufacturers say “New Smaller Size...Same Price” it’s such a hidden rip-off.

[meleana]

Pretty much everything goes up every year no matter what and life gets harder and harder to afford. No getting around it.


Just the school and property taxes will kill you in places like NY.

[audreyh1]

Quote:

Originally Posted by marko Agree, however my fixed income (high yield bond fund) has been paying ~5%-6% for the past decade with a total return of 7-8%. It is only a small contributor to our total income--equity dividends cover the bulk--but I think that sort of payout and total return should keep me ahead of the inflation curve for a good long time. No?

I avoid high yield bond funds because they are strongly correlated to equities and thus do not provide good diversification against equities. Thus I rely on equities to keep up with inflation, not riskier fixed income classes.

[Oz investor]

i have one interest-bearing security left ( in 2011 to 2015 i had somewhere over 15% of the portfolio in this asset still )

the remaining debt equity is a floating rate style

my observation in previous decades ( before i started investing ) is the inflation leads the resultant ( investor ) i interest rises ( and the lag can be disappointingly long .. unlike the cuts when rates fall )

high interest rates increase the risk of payment default ( late or non-payment ) or borrower bankruptcy ( even if regional government entities )