Inflation lives a tormented existence. We want our homes to appreciate, but yet we want our food cheaper and cable TV for less. Both changes in the price stem from inflation. One side loved, and the other deplored.
Inflation is a necessary part of a growing economy. The question is, what is the right amount of inflation, and why does it matter to you?
The issue within the realm of retirement regarding inflation is purchasing power or being very clear, how much will a dollar buy today versus another time period. Inflation has been measured and reported by the Bureau of Labor and Statistics since 1913 currently in the form of the CPI (Consumer Pricing Index.)
The number is based on a collective of goods – things you buy – and services – things you need. Rarely does the reported CPI number reflect the life of one of our retired families.
Aging changes our wants and needs. As we age we typically need to purchase fewer goods. We have accumulated the items we need and only replace them due to wear and tear or technological upgrades.
The opposite is true of services – taking care of your yard, medical assistance, and dry cleaning for instance – are all services rather than goods. As we age, we simply need more service assistance. You can purchase a TV made in Korea, but your barber needs to be in the same town. The true cost of services is inflating at a faster rate than the CPI would indicate.
Life expectancy is another part of this series, but suffice it to say that the probability of you living longer than you expected is on the rise. The longer you live, the greater the impact from inflation or said another way, the less your previous dollar can stretch. You have the same income from a year ago, and yet it can buy less. That’s inflation.
Your job as a retiree then is making sure your investments and retirement accounts have the ability to keep up with the “real” cost of living. In order to maintain purchasing power, you not only have to have what you started with regarding income a year ago, but you also have to grow it by that inflation rate.
Over three or four years, this isn’t a significant issue, but over a 30-year retirement this becomes one of the four deadly horsemen trying to separate you from your expected future. Your inflation rate is individualized based on your standard of living and chosen location. Prices tend to rise faster where demand is higher.
Embracing inflation is important because then you will learn to respect the awesome power of compound interest. You place your retirement in jeopardy without paying due respect to the natural and mighty force of both price and asset appreciation. How you invest your nest egg is more than just the awareness of volatility.
This is the 3rd article of a 10 part series.
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