Inflation is an expected part of our economic reality, but periods of significant inflation can be as harmful to a retiree as a stock market tumble. Some people worry that the Fed’s “printing of money” will lead to runaway inflation. So far, the reality is that the money supply has increased by less since the Fed began easing (5.51% per year), than it had during the period from 2000-2007 (6.22% per year). Inflation was actually negative in 2009, and 1.64% in 2010. But recent spikes in gas prices have sparked those fears again.
Inflation has averaged 3.37% each year over the last century. There’s no getting around the fact that inflation will have an impact on your retirement budget. The basket of goods that you would have been able to purchase 30 years ago for $100 will cost you $283 today. At that rate, the dollars you have now will only cover 35% of the basket of goods in 30 years that they buy you today. Your retirement plan has to take inflation into account. But your individual mileage may vary.
That’s because your own basket of goods may not look exactly like the basket of goods in the official inflation rate. So far, my actual inflation rate has been negative each year of retirement instead of positive. While I had assumed an inflation rate of 3.5% per year, my actual expenses have deflated, the second year being 1.5% cheaper than the first, and the third year being .5% cheaper than the second.
While our health insurance premiums have gone up by 26% over the last three years, our property taxes have gone down by 11%. At first glance, it would seem like this would have caused our expenses to go up. But property taxes represent a much larger percentage of our budget than health insurance does, so the absolute dollar savings on those taxes far outweighed the increase in medical costs. Gas prices have increased lately too, but that only represents 3% of our total budget, so they only have a marginal effect on our cost of living.
The other reason your year-to-year results may vary is because of your own behavior. While 70% of our budget is for essentials like food and shelter, 30% is for discretionary items. Like many folks, when the stock market dives or when gas prices increase, we cut back a little on discretionary expenses, like travel and entertainment. It’s this behavior part of the equation that I talk about today at my U.S. News post, A Smarter Approach to the 4% Rule.
This is a post from Retirement: A Full-Time Job