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May 18, 2011

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Adam

The mistake many make during retirement is investing too conservatively. C.D.’s, bonds, and money markets have a place in any portfolio. During low interest rate cycles, these interest bearing investments make it difficult to keep up with inflation. A diversified investment portfolio will help increase market performance, and mitigate risk.

deegee

It is tough for me to calculate my own personal inflation rate from 2009 to 2010, my two full years of early retirement, because I would have to adjust for things not related to any "basket" of goods. For example, I had a spike in my investment income due to a large, unexpected short-term cap gains distribution from one of my investments. This is taxable as ordinary income and it ended up nearly doubling my income taxes. Also, I increased the limits on my car insurance policy, something I do not expect to do again for a very long time, if ever again.

My individual health insurance premium rose by 20% in 2010 but the rest of my expenses (excluding income taxes) were up only a little. However, after a 25% increase in 2011, I switched to a hospital-only plan this month which will reduce that expense by $6,000 per year. How do I calculate my personal inflation rate with this midyear change and for 2012 when the lower premium applies to the entire year?

The very hot summer in 2010 drove up my electric bill a bit. How do I factor this into a personal inflation rate if 2011's summer is not as hot? Some years, my co-op gets a property tax refund covering several years of overpayments. How do I factor a lump-sum refund like that into my personal inflation rate?

Retired Syd

@Adam: Well you could do it on those assets, but you'd need an nest egg of nearly double what you'd need if you balanced it 50/50 with equities. That's a pretty big hill to climb.

@deegee: That's just it. I'm viewing the "basket" to be 100% of my living expenses each year, whatever that basket is--which, as you point out changes. No one has the exact basket that CPI covers, so the inflation rate (or the rate of increase on your individual basket of living expenses) will probably vary greatly from the official inflation rate (both because of actual price changes and because of behavioral changes.)

Retired Syd

One more comment. I would point out that the higher the percentage of your discretionary budget, the better you are able to respond to price changes. If 100% of your budget is for necessities, it's pretty hard to make a significant impact with behavioral changes after a point. If you have built a good cushion for discretionary purchases in your retirement budget, you are much more able to make year to year adjustments to respond inflationary pressures.

fred doe

hi ms syd. i think the answer to the inflation problem was in your last blog post. part time work(as in your consulting gig). if you make 10% of you retirement income and inflation is 3.37% then i guess you get to keep the change, that's what i do :) i love that little cooper. it's a bobo boomer mobile:) i'm lookin at toyota yaris myself.

Sightings

How/why did your property tax go down by 11 percent? Mine went UP 4 percent. The only thing that's gone down for me is a movie ticket, since I now qualify for the over-60 senior citizen discount of $3.50. I'm not too proud to take it; but it sure doesn't affect my budget much.

Retired Syd

@Sightings: Well one of the "benefits" of falling housing prices. We purchased our home in 2004, right before the bubble pop. So 2 years ago, we applied for a reduction in our taxes and have received it both years. We may try for an even lower valuation this year, since I think values have fallen even a little further in our area.

@Fred: As it happens, we do keep the change (not spend it), so having a little extra income while our expenses have been going DOWN makes even more change to keep! (P.S. That's my dad's mini-he's not a boomer but very young for his age.)

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