The real impact of inflation on Retired Folks?

[Retiredmajor]

I'm reading about inflation and the inflation rate, and it seems to me that inflation will hit different demographic groups differently. 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.


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.


Your thoughts?
Major

 

[Col. Klink]

If you do an itemized budget, you could take categories such as food, gasoline, entertainment and determine the cost increases over time. Or, you could do some w*rk and research the CPI increase for the categories that affect your situation. I am too lazy to do that because the inflation is out of my control. So, the only thing I could control is my spending / consumption. I could cheapen my lifestyle but choose not to do so.

You are correct that many in this this forum are debt free and not as subject to inflation. I am content that FireCalc tells me I am good to go and that includes a factor for inflation.

 

[Dtail]

Curious here, if one pays $100 for "X" product and then the next year the product goes up to $110, then a 10% inflation increase.
But if the $100 product stays the same price, but one now buys a more expensive version of the same product at $110, is it considered the same 10% inflation increase?

 

[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.

 

[Bigdawg]

Curious here, if one pays $100 for "X" product and then the next year the product goes up to $110, then a 10% inflation increase.
But if the $100 product stays the same price, but one now buys a more expensive version of the same product at $110, is it considered the same 10% inflation increase?

No, that's called budget creep.

 

[Dash man]

I think the big inflation hit on retirees is in the cost of health care. This tends to rise faster than most other items.

 

[Red Badger]

No, that's called budget creep.

Or, lifestyle inflation - the killer of many retirement dreams...

 

[Retiredmajor]

I think the big inflation hit on retirees is in the cost of health care. This tends to rise faster than most other items.

I'm not on Medicare yet, but if one is on Medicare and has a decent Supplemental plan how does healthcare inflation factor in other than premiums going up? I know that healthcare is a concern but shouldn't Medicare and a good supplemental plan mitigate some of the impact of health care increases?

 

[Spock]

Mortgage debt (30 year fixed rate) is frequently used as an inflation tool. In the later years you are paying it off with cheaper inflated $. Very high levels of debt require inflation in order to be paid off at all.

 

[audreyh1]

Our personal spending has not really tracked inflation but has been influenced by many other things. When we first retired we spent quite aggressively on travel, and we had set aside extra funds just for that purpose.

Then we settled down a bit, did other kinds of travel and our spending dropped quite a bit and stayed rather flat, not tracking inflation. It didn’t start creeping up again until almost 10 years later when we made some lifestyle changes.

At some point we decided to spend more as our income from investments had increased quite a bit.

So undoubtedly there are areas of our expenses that are driven by common inflation measures, but our choices about spending, much of which is discretionary, has way overwhelmed as a driver of our spending.

I track our net worth versus inflation for benchmark purposes - just as a measure, something to know. Maybe it would raise a red flag about spending if we fell far behind.

 

[HadEnuff]

a few years ago I heard a government official being interviewed about a method of evaluating inflation that the federal government was adopting. I can't remember what it was called but it worked like this:

Apples go up 15%, but oranges stay flat. People stop buying apples, and buy oranges instead, hence, the inflation rate is not really 15%. I can't remember if that means it is zero, or something in between 0 and 15%...

The question I wanted to hear was, "OK, so what if the next year oranges go up 15%, and apples are flat. Now, over the two year period, they've both gone up 15%, so what is the inflation rate now, measured over those two years?

I never have read an explanation of that.

I'm figuring someone here can explain this further for me.

 

[marko]

Our personal spending has not really tracked inflation but has been influenced by many other things.

So undoubtedly there are areas of our expenses that are driven by common inflation measures, but our choices about spending, much of which is discretionary, has way overwhelmed as a driver of our spending.
.

Agree.

To me, what matters is how inflation impacts one's withdrawals.

Our personal situation is one of 'deflation' where DW will be taking SS (a $20K reduction in withdrawals and Medicare (a $12K net reduction).

We have other deflation options such as getting a smaller boat (10K in maintenance alone) and perhaps migrating from two luxury car leases to more reasonable costs (but maybe not).

We also have future additions (sale of a third house, inheritance) to our portfolio which will reduce the percentage of withdrawals.

As such, actual inflation might be the least of our concerns. Just DW's SS and Medicare reduces our taxed withdrawals by almost 40K alone...that would represent a lot of inflation!

 

[MichaelB]

a few years ago I heard a government official being interviewed about a method of evaluating inflation that the federal government was adopting. I can't remember what it was called but it worked like this:

Apples go up 15%, but oranges stay flat. People stop buying apples, and buy oranges instead, hence, the inflation rate is not really 15%. I can't remember if that means it is zero, or something in between 0 and 15%...

The question I wanted to hear was, "OK, so what if the next year oranges go up 15%, and apples are flat. Now, over the two year period, they've both gone up 15%, so what is the inflation rate now, measured over those two years?

I never have read an explanation of that.

I'm figuring someone here can explain this further for me.

That’s probably “Chained CPI”. An oversimplified view is, when the price on one good increases, and you replace / substitute that good with another whose price did not increase and from which you derive similar satisfaction, there is no inflation. The net effect is a lower CPI number.

Here are some links
CBO https://www.cbo.gov/publication/44088
Brookings https://www.brookings.edu/blog/up-front/2017/12/07/the-hutchins-center-explains-the-chained-cpi/
Wikipedia https://en.m.wikipedia.org/wiki/United_States_Chained_Consumer_Price_Index

In the example you mention, the inflation I,pact of apples and oranges would be 15% over 2 years

 

[Dash man]

I'm not on Medicare yet, but if one is on Medicare and has a decent Supplemental plan how does healthcare inflation factor in other than premiums going up? I know that healthcare is a concern but shouldn't Medicare and a good supplemental plan mitigate some of the impact of health care increases?

I’m not on Medicare either, but that is not the magic bullet for health care costs. Assisted living expenses aren’t covered by Medicare or Medicaid. Nursing home costs are extremely high, and require you to spend down assets to use Medicaid if you can find a decent place that has Medicaid beds open when you need it. My MIL is in a nursing home, and my FIL lives with us. He couldn’t afford to live in a place by himself after they spent down their assets while she was in assisted living, and even less so now with her in a Medicaid bed in the nursing home. Fortunately we found a good one, but they have few Medicaid beds. FIL has his small union pension and social security check. It wouldn’t pay the rent anywhere near us.

 

[Retiredmajor]

Our personal spending has not really tracked inflation but has been influenced by many other things.

So undoubtedly there are areas of our expenses that are driven by common inflation measures, but our choices about spending, much of which is discretionary, has way overwhelmed as a driver of our spending.

That's exactly what I'm thinking will happen with us. Our lifestyle choices will be the major driver of our expenses. Our SS and my pension are COLA'd so presumable will keep some pace with inflation.



Thanks for weighing in!

 

[jkern]

I track expenses and it's relatively easy to track the inflation rate of essentials. Property tax, insurance premiums (medical, home, auto), utilities etc. Some recreational and entertainment cost are easy to figure out too (golf, skiing, dinning out).

Overall what I've noticed is items that require local labor tend to be higher than the CPI and items that labor can be off shored tend to be lower.

Since purchasing new items (things made overseas) doesn't dominate my cost of living, my personal inflation rate tends to be higher than the CPI.

 

[tb001]

I’ve wondered about this too. We have a fixed rate mortgage and property taxes are capped at a sub inflation rate rise, so a big piece of our budget is not subject to typical inflation.

I also think as you get older that our price point for things tends to drift down because of perceived expense. I remember seeing my grandparents pull back on spend because things had become ‘so expensive.’ I don’t think it was a lack of money, but more that the value vs perceived cost wasn’t there.

 

[MichaelB]

Once retired, most of us have the ability and discretion to vary our spending, preventing it from increasing sharply while maintaining our lifestyle and standard of living. I think two factors would qualify as inflationary, have a significant detrimental effect, but not appear in the published CPI numbers. The first is tax increases. Not just federal income tax rates, but state and local taxes as well. The second is health care expenses not covered by insurance. Personally, I feel more confident about being able to manage the impact from taxes.

 

[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.

 

[Bir48die]

a few years ago I heard a government official being interviewed about a method of evaluating inflation that the federal government was adopting. I can't remember what it was called but it worked like this:

Apples go up 15%, but oranges stay flat. People stop buying apples, and buy oranges instead, hence, the inflation rate is not really 15%. I can't remember if that means it is zero, or something in between 0 and 15%...

The question I wanted to hear was, "OK, so what if the next year oranges go up 15%, and apples are flat. Now, over the two year period, they've both gone up 15%, so what is the inflation rate now, measured over those two years?

I never have read an explanation of that.

I'm figuring someone here can explain this further for me.

In the real world, once everyone moved to oranges then the price of oranges would go up. Simple supply and demand. Apples would lower their price to gain sales again and we would see the same scenario with apples.

In my budget analysis I did factor inflation into my models for basic needs. However, I am also in the court of flexible spending to combat inflation creep.

I'm not as concerned with inflation at this point versus potential portfolio losses in the future.

 

[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?

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]

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]

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.