Random musings on inflation and retirement

[ejman]

Since retirement a little over 12 years ago we have been deriving our living expenses from our after tax portfolio and SS which both my wife and myself started at age 62. In nominal terms our taxable fund has increased by 50% since ER after all the draws.

Over that time our expenses and perceived standard of living have remained remarkably level and satisfactory (normal middle class living - no Learjet parked at the end of our private runway) but we don't really deprive ourselves of anything we want.

I don't know if it's a substitution effect, lack of inflation, Bernicke (and Bernanke) effect or all of these combined. The end result however is that the IRA portion continues to zoom upwards to where it's now considerably bigger than the taxable nut. and as mentioned earlier it appears that the RMD's are going to be toe curling.... Makes me wonder why we both contributed the maximum we could to tax deferred (IRA's and 401K's) investments that appear unnecessary at this stage anyway. Maybe we should have partied on earlier...

 

[NW-Bound]

... Maybe we should have partied on earlier...

Uh Oh! Do you have offsprings to whom to bequeath the stash?

In any case, it's better late than never to party! Travel, fancy cars, exotic booze, more loudspeakers?

Or is it true that the Bernicke effect is so potent that one cannot escape its grip once geezerdom is reached? One stops caring about "stuff" or even "experiences", and just wants to sit on the rocking chair in the front porch, waiting to see his flowers bloom?

 

[ejman]

Already h have a nice stereo in every room of the house. Me thinks if I bring another set in the paddy wagon will show up. Travel? Nah got my fill on megacorps dime. Watching flowers grow is most appealin...and rather inexpensive.

 

[old woman]

Much of my income goes to my mortgage payment which isn't affected by inflation. I have only been retired 18 months but my SS is only slightly more than my mortgage. Even if everything doubled my mortgage principal wouldn't so my total inflation would be less than a young person trying to buy a house or car, my used house and used car would be worth more so it wouldn't hurt as much. I could also substitute my big old house for a little condo with less taxes and insurance and maint so still afford more expensive food and gas.
Many of us older retired people while not be needing things like a car, house, education that really inflate. I am 67 with a car with 43K miles on it I drive 6K miles a year it might last 25 more years and not be replaced or I could buy a new one but get a decent trade in.

 

[NW-Bound]

I thought I already spent too much when my recent annual expenses run 36% above what I originally thought it would be.

Then, when I sat down to figure out SS plus some other fine tuning, I found that I could run 82% above that original number. And that original number included some expenses that I could cut if in hardship.

Of course, the market may just crash, and all that safety margin can disappear overnight.

 

[Lsbcal]

...
Of course, the market may just crash, and all that safety margin can disappear overnight.

Yep, safety margins are fickle. That's why I've more carefully tracked basic expenses as opposed to the "fun + discretionary". Basics for us still include weekly restaurant visits and stuff that makes life fun.

 

[RAE]

My sense is our lifestyle is as enjoyable now as when I retired, but our spending – the basket of goods and services we enjoy – is totally different. Our wants and needs are constantly evolving, and we are continuously adapting to changing prices in the marketplace by shifting and redirecting our consumption so easily that we hardly recognize the effort. A real life example of the substitution effect.

Interesting observation, and I can say that my wife and I have had a similar experience (after 5 1/2 years of retirement). It seems to me that we enjoy life more than ever (and certainly want for nothing), yet our spending has not really increased much, if at all. Some of it probably has to do with having the time to find bargains on virtually everything we buy now, some of it probably has to do with our tendency to spend much of our time doing things that don't cost a whole lot (yet bring us great enjoyment). I haven't really taken the time to analyze it, and I guess it doesn't really matter. The bottom line is that our expenses are easily within the budget I set up for us when I retired, so we are actually accumulating a little bit now, rather than spending down. That may change in the future, but if does, we should be prepared for it.

 

[daylatedollarshort]

Interesting observation, and I can say that my wife and I have had a similar experience (after 5 1/2 years of retirement). It seems to me that we enjoy life more than ever (and certainly want for nothing), yet our spending has not really increased much, if at all. Some of it probably has to do with having the time to find bargains on virtually everything we buy now, some of it probably has to do with our tendency to spend much of our time doing things that don't cost a whole lot (yet bring us great enjoyment). I haven't really taken the time to analyze it, and I guess it doesn't really matter. The bottom line is that our expenses are easily within the budget I set up for us when I retired, so we are actually accumulating a little bit now, rather than spending down. That may change in the future, but if does, we should be prepared for it.

Time for bargain hunting and freebies has made life much cheaper for us. I enjoy the thrill of the hunt. It is kind of wild the difference in local prices even on groceries. For example, Chinese eggplant prices here varied recently from 3 pounds for $1 (33 cents a pound) to $3 a pound, depending on the store.

 

[marko]

Time for bargain hunting and freebies has made life much cheaper for us. I enjoy the thrill of the hunt. It is kind of wild the difference in local prices even on groceries. For example, Chinese eggplant prices here varied recently from 3 pounds for $1 (33 cents a pound) to $3 a pound, depending on the store.

DW and I have come to the conclusion that we've been getting ripped off for the past 30 years!
With time to 'hunt' there's a whole world out there of equal/"just as good" things available. $25 'hanging around' khakis at Costco vs $140 at Brooks for example.

 

[growing_older]

Inflation hasn't been an issue for me in the last few years. I do notice my discretionary spending tends to rise over time, regardless of prices. Meanwhile, when I look at some notes I had from comparison shopping 10 and 20 years ago, prices are considerably higher. It's not something I just notice because it's so slow and subtle. It's a good reminder that I need good inflation protections in my retirement budget. Both price inflation and demand inflation will likely be a factor for me. Oh, sigh, that also leads to OMY.

 

[NoiseBoy]

I am still working, but I have 5 years of spending history in a spreadsheet that I summarized recently to see if I could spot any trends. I was somewhat surprised to see that, for the 19 line items that I track, most of the 2014 totals were close to their 5 year averages.

There was one standout item; the insurance row (home & car) was almost 20% higher and showed a steady increase year over year. Most of the rest of the rows had a lot of variability from year to year, but nothing that couldn't be explained, for the most part. The grocery row, which includes most household items (soap, lightbulbs, etc) has increased the past 2 years, but 2014 was still below the 5 year peak, so I don't know if I can conclude that my food costs have gone up.

 

[unclemick]

Inflation hasn't seemed that bad to me thus far in retirement, although some things are higher.

With the market surging as it has, and considering that life is short, I decided to spend more this year anyway and buy my dream house. Maybe this is a reverse substitution effect? I'll be upgrading my lifestyle.

21 yrs of ER. We pay more in fed/state taxes than it cost to live early in ER when I was really cheap.

A good part was crossing 70 1/2 aka RMD and increasing awareness - you can't take it with you.

heh heh heh - at least I don't think you can.

 

[NW-Bound]

... you can't take it with you.

heh heh heh - at least I don't think you can.

See: Take it with you.

 

[Markola]

It is fascinating and no small relief to see ER commenters on this thread actually living out what the book "Your Money or Your Life" described about inflation being much lower and far more manageable than the government CPI. Also, I wonder if ERs commenting here are experiencing a surprise savings dividend from their previously substantial costs of going to work everyday? I was laid off a few summers ago and, with a healthy pruning exercise plus no job-related costs, our spending dropped like a stone - like half. I really didn't appreciate how much it costs us to go to work every day until that experience and it seems now a small, tantalizing glimpse into ER.


Sent from my iPad using Early Retirement Forum

 

[audreyh1]

It is fascinating and no small relief to see ER commenters on this thread actually living out what the book "Your Money or Your Life" described about inflation being much lower and far more manageable than the government CPI. Also, I wonder if ERs commenting here are experiencing a surprise savings dividend from their previously substantial costs of going to work everyday? I was laid off a few summers ago and, with a healthy pruning exercise plus no job-related costs, our spending dropped like a stone - like half. I really didn't appreciate how much it costs us to go to work every day until that experience and it seems now a small, tantalizing glimpse into ER.


Sent from my iPad using Early Retirement Forum

I think a lot of savings do come in initially from no longer having to pay a premium for stuff because you don't have time for cheaper alternatives while working. And then another leg as retirees start finding bargains that take time to find or flexibility in time to take advantage. Some bargains require a bit of research to find.

 

[imoldernu]

Interesting subject.
We retired in 1989 at age 53. A 35 year timeline, to age 88. We're about 80% there.

Rather than looking at the past 25 years on the basis of how prices have risen, our view has been to maintaining our net worth with a lifestyle that is comfortable. Until age 70, we did everything we wanted to do, spent what we wanted to spend. Travel, entertainment and indulging in hobbies were all suited to our lifestyle. Without analyzing the costs in dollars or percents, our net worth has remained the same since 1989.

Since age 75, our expenses have slowly gone down. Again, not looking at the dollars, we simply don't spend as much. Travel almost nil, which means we can keep our older cars, but with virtually no operating and maintenance cost. We go out to eat much less often, and even our food bill has slowed, as we eat less and healthier. Clothing costs are essentially zero.

When the question comes up: "What have you bought recently?" ... we're hard pressed to think of any major purchases. No new decor, new appliances, or any kind of housing upgrade. Buying a newer CCRC designed home put us in a position where upgrades, repairs, or any major expenses have not been necessary.

Medical costs after age 65, when we went on to Medicare... are a known factor.. a roughly $10K figure that has not materially changed.

So... as to inflation... Basically, the effect of inflation will only be on our costs of food, utilities, base housing taxes.

Our investment dollars are in semi safe long term inflation adjusted I bonds.
...................................................................

Enough... Re: the OP:

This leads me to wonder if we overestimate inflation in retirement, or if perhaps the CPI itself overstated as it affects us, and if we underestimate our own ability to deal with increasing prices. This is not an argument to increase the withdrawal rate, but it does raise the question of just how much portfolio risk do we need to take.

I would say that this has been our situation. Real life often supercedes mathematics. In our case, money has not been a major concern. The real life changes in what we do, have just normally seen a reduction in expense.

Perhaps we just slipped in to old age "stuff" early. Most of our members seem to believe they will not slow down, and have plans for travel and social activities well into their 80's and 90's. Planning for this will require more attention to the details. If the costs of leisure and travel rise substantially, then inflation will certainly be a major concern.

Looking at persons who are around our age, it appears that most are in situations similar to ours. A few, perhaps 10%, continue to travel, upgrade their cars, and spend lavishly on their homes and lifestyles. For us, the slowing of our lifestyle has more than compensated for any actual inflation.

Overall, I think we can handle a 30% to 40% inflation without making major changes to our plans or lifestyle. At age 65 I would have had a different outlook.

 

[kaudrey]

I'm still w*rking, but my parents have been retired for 20 years. They are 77. Their experience mirrors what imoldernu describes. They traveled a lot in the early years, and for 17 years rented a place in FL for 3 months in the winter (they live up north). Now, my mother's health is not the best, and they no longer go to FL, they don't travel, she gave up golf etc. Their expenses are way down. My dad said last year they lived on his small pension and their SS, which they didn't used to do. He also said their portfolio is higher than it was 20 years ago.

I am 46. I want to make sure I travel extensively in my 50s and 60s (while we are working and after - hope to retire at 57). My MIL recently passed at 74 from cancer; you never know what life is going to throw at you...

 

[daylatedollarshort]

DW and I have come to the conclusion that we've been getting ripped off for the past 30 years!
With time to 'hunt' there's a whole world out there of equal/"just as good" things available. $25 'hanging around' khakis at Costco vs $140 at Brooks for example.

Yep, same here. We were getting ripped off on everything, both products and services. Especially car repairs. I mapped the cost of 60K service on my car by dealer location. The quoted price dropped about $100 every 5 - 10 miles further out from the metro area center.

I ended up saving something like $400 on service for one car alone by having the time to have the minor work done by a local mechanic and then driving 40 minutes from my house to a dealer further out of town to do the rest. The local dealer not only would not budge on the price, he in fact loaded up extra work beyond what was in the factory recommended servicing and refused to do only the factory recommended servicing.

So that kind of savings on groceries, car repairs, insurance, cable bill, and everything else all add up to quite a bit of lower run rate than we used to have for the same basic lifestyle.

 

[Alan]

I haven't kept track of what goods and services have gone up with inflation and how we may have substituted, but our biggest line item non-discretionary increases by far since we retired in 2010 has been healthcare. Although able to keep the same insurance as we did while working the premiums immediately went up by 25% which is our marginal tax rate. I also lost the FSA and the HI policy doesn't qualify for an HSA so all our OOP expenses went up by 25% including prescriptions, eye tests and glasses, dental etc.

In the following years the HI premiums have also increased way above inflation, although the HI is still very good so no way would I consider substituting it for something else.

 

[Koolau]

I've noticed significant inflation on car, health and LTC insurance, HOA dues, and especially food. Part of this increase is due to the cost of Paradise. Prices go up quickly when fuel costs increase (hey, Matson has to pay for all that fuel to bring us "stuff".) Funny how the costs do not go back down when fuel prices crater. Even our electricity is still in the $.30++/kwh range, even though fuel has gone down. So it's difficult to say whether "overall" inflation has been on a tear, though sometimes it feels that way locally.

The good news is that I retired considerably later than I had planned (how is that good news, you ask.) Doing so set us up for having a larger nest egg, allowing us to to take less risk and (so far) leading to a favorable spend rate vs plan.

We have more or less automatically adjusted to inflation where possible (CFLs and LEDs and air-drying, etc.) Still our electric bill is what it was 7 years ago. We've dropped collision on both cars with the result that our insurance is now similar to when we started 7 years ago. We've made substitutions on food, but mostly because we can't stand to spend so much on "frivolous" such things as fresh beef, etc. It's not that we couldn't afford it.

In reality, we are in good shape at this time. SS at 70 is "looming" (as are RMDs, unfortunately) so we have "plenty" to meet the current plan. I suppose the worst thing about seeing significant price increases is not that we can't afford them, nor even that we "have" to adjust our living experience. I think it's more thinking back to the "hyperinflation" of the late 70's/80s that is disquieting. Those were frightening times - and I was w*rking then. Now, I'm more dependent on the whims of markets as well as gummint. I can't imagine that we have another 30 years to plan for, but there is a decent chance of another 20 or even 25 years. 15 to 20% inflation could wreck our current plan in that time period. I would find a way to adjust, but it wouldn't be pretty. So, If I have a point, it is "yes", there is significant (reported by gummint or not) inflation. "No", it won't affect us much going forward at current rates. "Yes" I do worry about the future inflation (and other effects of - just for instance and without references to bacon - doubling the national debt in less than 8 years.) YMMV

If I've wandered too far from MichaelB's original point - it wouldn't be the first time.