Recent reports indicates that the rate of inflation is slowing, but consumers are still seeing increases in the prices of basic needs like gas and groceries. The rate that things are becoming more expensive has decelerated and has been for some time. But things are still becoming more expensive. Surely, you’ve noticed this at the pump and in line at the grocery store.
If you are headed toward retirement or are currently retired, it can be very important to keep an eye on inflation.
Time Frame Adds Perspective
Small increases in prices are expected over time. In a stable inflation environment, you probably wouldn’t notice very much difference day-to-day. Over short periods of time, steady inflation is almost invisible. However, you will undoubtedly notice that there has been a significant increase over the course of your entire lifetime. For example, you used to be able to buy a candy bar for nickel, and now a single candy bar can cost about a dollar (or much more, depending on where you buy it). Although that change is obvious and significant looking back 60 years, it took a long time for us to get to the one-dollar candy bar.
With Inflation, Slow and Steady Wins the Race
A slower rate of inflation is obviously good for retirees because you will be making the exact same amount of money for a long time. Using the example above, let’s say you need one candy bar a week to be happy during your retirement. And let’s say your retirement plan will pay you $1 a week for the rest of your life. So, you can afford one candy bar a week at the start of your retirement. (We’ll leave the cost of dental insurance alone for the moment!)
After 20 years of retirement with slow inflation, a candy bar now costs about $1.10. But your retirement plan is still paying you $1 a week. This means that you’ll still be able to afford a candy bar most weeks. You may have to skip a candy bar every now and then, but that’s probably better for your waistline anyway. So, slow inflation rates are good for retirees: It means your money can still buy you the things that you need.
But large increases in inflation can be a major headache for retirees. Going back to the candy bar example, let’s say after 20 years of retirement with high inflation a candy bar costs $4. You are still only getting $1 a week in retirement income. This means you’ll only be able to afford a candy bar every four weeks. But wait a minute, you’re probably thinking that in retirement Social Security provides cost-of-living adjustments that are based on inflation rates, right? That’s true, but Social Security is not guaranteed to cover everything. Social Security is only meant to cover about 40% of your income needs.3 That is why high rates of inflation are bad for retirees: In an high inflation economy your income doesn’t always rise with the cost of goods, and it can become difficult to afford what you need.
Work Still to Be Done
The recent news that inflation increases are slowing is certainly positive. It could mean that things are headed back in the right direction for retirees. But we are not quite where we need to be yet. You still need to pay attention and manage all your income sources and assets accordingly.
By Brian W. Kelly, MoneyLetter Publisher