inflation in retirement

Inflation: The Silent Killer Of Retirement

How much have you thought about inflation as you prepare for retirement?  If you’re like most folks, probably not enough.  Today, we’re going to address the silent but deadly risk that inflation presents to your retirement.

Today, we're looking at Inflation: The Silent Killer Of Retirement. Don't plan for retirement without recognizing it's impact. Click To Tweet

Inflation – Why It Matters

For a little fun, we’re going to start today’s post with a quiz.  Later in this post, I’ll provide the answer and demonstrate why inflation matters as you prepare for, and live through, your retirement.

First – A Quiz:  

Imagine for a moment that you retired on January 1, 1970.  Your annual spending for 1970, based on your previous year’s history, was planned at $60,000 per year.  Now, let’s jump ahead and guess how much money would be required to have the same standard of living in 1990 (20 years later), considering inflation during the same timespan.  Enter your guess below:

[Total_Soft_Poll id=”2″]

 

(Please answer the quiz above before proceeding.  It took me a while to figure out to add that cool little poll to my site, I hope you enjoyed the quiz!)

Since you took the poll, you’ve seen what others have “voted”.  As I’m writing these words, I don’t know what folks will pick, but I do know the correct answer.  In a moment, I’ll reveal the answer.  More importantly, before I reveal the answer I want to share some facts on inflation which you should consider as you plan for your retirement.

inflation impact on retirement

Inflation:  The Silent Killer Of Retirement

In my view, there are three Great Unknowns as we prepare for retirement:

  • Investment Returns
  • Annual Spending Needs (driven, in part, by a 4th Unknown: Health)
  • Inflation Rates

It seems odd to me that we talk a LOT about expected Investment Returns and our Annual Spending Needs.  We study Safe Withdrawal Rates ad nauseam, and we worry if we’ll have enough money to cover our spending needs until we die.  Inflation, however, is not a major topic in the discussion. 

Sure, Safe Withdrawal Rates have a lot to do with Inflation, but it’s not often the primary thing people think about as they work to determine their SWR.  Heck, even I’ve been negligent on the topic.  To date, I’ve written 256 posts (wow!), but today’s is the first post specifically addressing inflation.  Tsk Tsk.

Why Today?

A few weeks ago, I wrote How Much Can You Safely Spend In Retirement, and got some blowback in the comments about my hypothetical example of Jane.  In my example, Jane’s safe spending level increased from $35k at Age 65 (before Social Security kicked in) to $123k at Age 95 (with Social Security increasing with inflation, and her RMD’s allowing a higher withdrawal rate each year). 

The following comment is the reason I wrote today’s post:


Inflation Comment


In response to Rick’s comment, I left a long comment on the impact of inflation and developed the following table to show it’s impact on the Cost Of Living under various inflation rates.  I also decided to write today’s post.

Inflation’s Impact On A $50K Lifestyle

inflation impact on spending

While Rick was critical of Jane “wasting her youth” and having “too much to spend in the later years”, the reality is that her $50k lifestyle will cost $100k+ by the time she’s in her 90’s, so her Safe Withdrawal Rate of $123k doesn’t mean she’s going to have a higher standard of living on an inflation-adjusted basis.  Sure, she may be spending less in her later years, but on an inflation-adjusted basis, she’ll still be likely to spend more actual dollars than in her younger years.  In an environment with higher inflation, her spending could approach $200k (and just wait until you see the answer to the quiz!  It’s coming, I promise…).

By the way, that Tesla that Rick was joking about?  Let’s have a quick look:

How Much Will That Tesla Cost?

tesla cost after inflation

Let’s assume that Tesla costs $65k today.  By the time Jane is 90 years old, that same Tesla would cost $158k at a 3% annual inflation rate, so Rick was a bit short in his estimate of Jane’s ability to buy one (hey, she shouldn’t be driving at Age 90, anyway.  Right, Rick?).


Inflation – The Facts

Inflation is real, and it’s something that each of us needs to consider as we plan for retirement.  As the cost of living increases every year, the reality is that we’ll need to spend more money to maintain the same standard of living.  Seems obvious, but it’s a fact that many of us miss in our retirement planning.

Inflation WILL force you to spend more money every year to maintain the same standard of living. Does your retirement plan address the risk? Click To Tweet

Let’s start with a few facts.

In researching this post, I found this fantastic chart on inflationdata.com which helps put inflation into some longer-term perspective:

What I find of particular interest in this chart is the spike from 1970 – 1989 (hence, today’s quiz, which covers that exact time period). Given that we’ve had 30 years of low inflation, many folks forget the impact of living in a high inflation environment.  If you’ve only been paying attention since 1990, it’s hard to appreciate the reality that 50% of the decades before that had inflation above 5%.  With a long-term average of 3.22%, is it possible that a future “return to the norm” will require inflation levels higher than we’ve experienced in the recent past?

There are some folks today who are warning of potentially devastating inflationary impacts of governments around the world spending more than they receive in tax revenue.  In a recent excellent podcast on the issue titled “Federal Debt:  The Ticking Time Bomb” by Radical Personal Finance, the host points out that only 3 levers are available to, ultimately, manage government debt:

  • Raise Taxes
  • Cut Spending (including, potentially, Social Security)
  • Inflation (as Governments “print money” to solve the problem

While I’m not a doomsday prophet, the podcast makes some excellent (and concerning) points and is well worth your time as you evaluate the situation for yourself.  As you prepare for or live through retirement, it’s important to keep your eyes on the macro-economic impacts which may impact your journey.  There are certainly some storm clouds on the horizon, and they’re worth watching.


Here’s another interesting chart I found from Mark Perry:

Obviously, not everything “inflates” at the same level.  Some things (like electronics) actually go DOWN in price.  Other things (like health care) inflate at a rate higher than average.  It begs the question:  What will you be spending your money on in retirement, and how will those areas be impacted by price increases over time?  In a minute, I’ll address a method I’ve used which builds this variability into your retirement cash flow plan.


The Answer To The Quiz

Ok, it’s time to grade your quiz.  Do you remember what you answered?  Here’s a refresher:

inflations impact on retirement spending

  • You retired on January 1, 1970. 
  • Your annual spending for 1970 was planned at $60,000 per year. 
  • How much money would be required to have the same standard of living in 1990?

To answer the question, I’ve put together the following table which increases your $60k of spending each year by the actual inflation over the same timeframe.  For example, in the first year, with inflation at 5.7%, you’d need $63,432 to have the same $60k standard of living a year earlier: 

The Answer:  $213,379

I’ll admit, I was shocked when I put that table together.  $213k!?  That can’t be right. As you can see by looking at the table above, it most certainly is.  The 70’s and 80’s were a period of high inflation, and this example serves as the best illustration I could come up with on the very real risk that inflation represents in retirement.  Notice how compounding works against you in an inflationary environment.  As year after year of high inflation compounds over a 2 decade period, it’s easy to underestimate the cumulative impact.  Hence, the quiz.

Sure, the inflation you experience won’t line up exactly with the CPI inflation average.  It could be higher (remember that healthcare has gone up faster than overall inflation, and it’s likely a high % of your spending in your 90’s).

The Bottom Line:  To live the same lifestyle that $60k would provide in 1970 would cost you $213k in 1990, a 3.5X multiple of your first year’s spending.  Ouch.  

While you were prepared to spend $60k a year, you're now spending $213k to maintain the same standard of living! Click To Tweet

Did your retirement plan account for that increase?


Inflation – The Solution

Hopefully, my little quiz served as a good example of the direct impact Inflation can have on your retirement.  The strange thing about inflation is that it’s a “Silent Killer”.  You don’t really see it on a daily basis.  You may notice the price of gas when you fill up your tank, but does your retirement plan take a holistic look at the very real risk of inflation over the decades of your retirement?

Don’t let the silence of inflation lull you into ignoring the risk.  As you plan for retirement, it’s critical that you’ve considered the risk and built it into your retirement plans.  It’s important to think beyond a simple “Safe Withdrawal Rate” calculation and ensure you’ve spent some time thinking about the risk in detail and putting some defenses in place.

Here’s how we did it…


The 3 Things Your Retirement Plan Must Include 

As we planned our retirement, there were three main areas where we addressed the risk of inflation. I’ll comment on each of these three areas below, along with some suggestions for your retirement plan.

1. Inflation Assumption By Spending Category

After we tracked our actual spending for a year, we built a retirement spending spreadsheet and entered our estimated post-retirement spending for each category.  I then added a column to be able to play around with various inflation rates for each category, which automatically calculated future spending based on the assumed rate of price increases.  Here’s what it looked like in my base case scenario:

Note that “housing” was only 1% due to the fact that we own our retirement outright (we’re assuming some increase in our annual property tax bill).  If you plan on renting in retirement (e.g., a winter place in Florida), I would suggest a higher rate as your assumption. We also assumed 5% for health care, which may end up being on the low side.  Tricky stuff, this retirement planning…

As a “Stress Test”, I played around with alternative scenarios at higher inflation assumptions.  Don’t scare yourself out of retirement, but recognize various scenarios that could unfold and have contingency plans in mind in the event we see a return to the days of high inflation.


2. Asset Allocation – Keep Some Inflation Hedges

As you develop your asset allocation targets for retirement, keep inflation in mind and ensure you’ve got some asset classes which can act as a hedge against the risk.  According to Investopedia, the 9 Top Assets For Protection Against Inflation are below:

  1. TIPS
  2. Leveraged Loans
  3. Barclays Aggregate Bond Index
  4. Real Estate Income
  5. S&P 500
  6. REIT’s
  7. 60/40 Stock/Bond portfolio
  8. Commodities
  9. Gold

I certainly don’t recommend owning all 9 of these asset classes (simple is better), but make sure you’ve got adequate exposure to some inflation hedges.  In our case, we own TIPS, REITS, Bonds, Stocks and Precious Metals. If you’d like to read more detail, check out my post:  A Simple Guide To Targeted Asset Allocation.


3. Investment Return Assumptions

It’s not enough to simply assume that stocks will earn a rate of return sufficient to keep up with inflation. You also need to recognize that historically stocks have only beaten inflation over a long period of time.  If you’re forced to sell in a bear market, you’ve lost your hedge.  Ben Carlson recently shared some very cool charts in “Averages Are Clean, But Actual Results Are Messy”, such as the one below which shows the 5-year average “Real” returns (after netting out the impact of inflation):

Notice that ugly period in the 70’s and 80’s, when the 5-year average return of stocks did not keep up with inflation (of note, in every 20-year period stocks DID outpace inflation, so the longer you can hold them, the better the hedge).

To avoid selling stocks at the wrong time, we spent a lot of time setting up our Bucket Strategy, which I wrote about in detail in the post:  How To Build A Retirement Paycheck From Your Investments. We’ve filled Bucket 1 with 3 years of cash, Bucket 2 with 5 years of “income & stability”, and reserved Bucket 3 for stocks.  In a worst-case scenario, we could hold off on selling any stocks for a period of 8 years. 

Make sure you’ve built a plan to allow your inflation hedges the time required to do their work.


Conclusion

Inflation is a significant risk to your retirement.  Make sure you’ve taken adequate precautions to build some defenses against this Silent Killer.  Develop a targeted asset allocation which includes the appropriate asset classes to hedge against inflation, and build in strategies to give them the time they require to serve as adequate protection.

The risk of inflation is not too big to keep you from retiring.

It is, however, too big to ignore.

Your Turn:    

Is inflation something you’ve thought about as you’ve planned for your retirement?  What precautions have you taken to ensure protection, in the event that the days of high inflation would return?   Let’s chat in the comments…

63 comments

  1. The one thing you did not mention is that it has been proven that spending tends to naturally decrease with age, even accounting for higher medical care costs. Would this natural decline not offset (for the most part) increases caused by inflation?

    1. Hey Rick, there is a natural tendency to spend less as we age. However, we should all think about various risk, and given that health care will be a “high spend” item for most “older” retirees, the potential of higher inflation in that category could be a major concern, even if other spending declines.

      1. I’m not sure if I agree that spending will decrease with age.
        That might be true for regular folks, but we’re already frugal.
        I don’t think we can cut much from our budget.
        Healthcare cost would offset any saving we get from going out less and other stuff.
        I’ll need to research this topic more. Does spending really decrease when you’re older?

  2. Morning Fritz, I’m first again 🙂

    Yes inflation sucks, but the devil’s advocate of the FIRE movement would just say that it’s built into the 4% rule, which it is.

    I however just consider the 4% a general guide, realizing history could throw us a knuckleball that we’ve never seen. Like a period of unprecedented inflation tat breaks models. The good news is that as inflation goes up, usually (key word) interest rates do too. In the mid-80’s you could get well over 10% on your money in a bank account, and CD’s were higher.

    But let’s hope we don’t get that knuckleball.

    1. Rick snuck in 21 minutes ahead of you! (Sorry, he was in my “pending Approval” folder when you wrote your comment).

      The knuckleball is my favorite pitch in baseball. I hope I never have to try to hit one. I agree interest rates should also increase in that scenario, tho that could be harmful to the bond portion of retiree’s Asset Allocation. Knuckleball, indeed.

  3. Inflation is something that you could spend decades worrying about or many late nights reading up on conspiracy theories and digging holes for your gold.
    One way to think about it is that inflation only impacts on what you spend your money on three things:
    1 the cost of goods and services.
    2 the value of your cash or cash equivalent savings
    3 the value of your paid employment

    For FIREes, your lifestyle inflation is what’s more important. If the cost of travel goes up by 5% in a year but you decide to take 3 instead of 4 holidays you spend less overall – personal inflation is not the same as economic inflation.
    if your FIRE funds are invested in the stock market, all that really matters is that your dividends keep up with how much money you want to spend. You could worry about how your future dividends will grow (keep pace with? grow faster than or slower than inflation?) but worrying isn’t going to help you.

    1. I agree that worry for worry’s sake doesn’t do anyone any good. I do think it’s worth thinking through the various risks we face when deciding on an early retirement. Sure, your wages increase in line with inflation, but once you’re retired you lose the luxury of having an inflation adjusted wage. You can certainly cut back on expenses, but this goes against many folks’ goal of maintaining a targeted standard of living in retirement. If we face high inflation, I suspect most folks will reduce their standard of living as one of their corrective actions. Let’s hope dividends keep up. Plan for the worst, hope for the best. Thanks for stopping by!

  4. Uncanny timing. I was just updating our financial plan. We do take into account inflation, though it was only this past weekend where the light went off about different sources of inflation.

    I just posted about a JP Morgan Retirement Guide and it covered the impact of inflation. See http://road2eudemonia.com/10-things-j-p-just-told-me/

    Number 4 covers the topic of inflation and the impact on retirement. The point is exactly the same of your post – the areas of higher inflationary pressure are healthcare and education. Sure retirees might not have education costs but they will have healthcare costs.

    The second graphic in Number 4 shows the cost of Medicare at 65 and 85 – wow, that is a big change as people get older.

    Great post.

    1. Thanks for sharing your post, good stuff. Wow, a 3X+ multiple on health care costs between 65 and 85, and that doesn’t account for inflation as you’re moving through that 20 year window. I risk, for sure. Thanks for sharing.

  5. Interesting post. To me general inflation is not really relevant. Personal consumption and personal inflation are. Your FIRE lifestyle should be flexible. Cut some spending in down markets, defer large purchases by a year or two so the market recovers, avoid lifestyle inflation, and fight general inflation. I looked back and since I FIREd in 2015, my actual personal inflation as only been 0.8% per year (I had assumed 3% before retiring). It’s about being intentional regarding what you spend your money on (but definitely not depriving yourself!). The one caveat is healthcare that can be difficult (imposible?) to control in the US. But I don’t worry about that as we won’t live in the US past 55.

    1. I agree it’s the personal inflation that matters. You’re fortunate to have the ability/willingness to go international after Age 55, definitely an option to avoid the escalating health care costs in the USA!

  6. Interesting post. In multiple choice quizzes, I always guess in the middle if I don’t know so I went with C. Shocked to see that answer.

    Curious if any explanation for Barclay’s Agg Bond Index as #3 on the list of inflation hedges. Looked it up and one of the few things it doesn’t contain is TIPS. Seems like a curious choice on a list that (while I don’t own all of them) I have heard the reasoning behind.

    1. You weren’t alone. Only 16% of the folks have answered correctly (as I write this comment). Interesting.

      As for Barclays, I can’t give an explanation, I was just citing the study as examples of some of the asset classes folks may want to consider as inflation hedges. Personally, I’d never invest in the Barclays unless I had done a lot of research and fully understood what I was buying.

  7. Fritz – great post. The good thing about including an inflation knob in your plan is you can stress test. I like your use of inflation by spending categories. In our plan we have knobs for base spending, healthcare, and remaining education expenses.

    Just like using average investing returns could overstate the size of your future nest egg using.an average inflation rate could overstate (or as you correctly state could understate) spending. So you have to be agile and review your plans assumptions over time and adjust as necessary. As I entered retirement I have started looking closer at five years of projected cash flow which allows me to make adjustments to the next couple of years of spending patterns, returns, etc.

  8. Great article. I do remember the hyper-inflation of the 70’s and 80’s (and I did answer the question correctly). Your point on asset allocation is a good one as many people saw the erosion of their savings due to the investments used during that time period (my parents). Not as many people invested in the mutual funds or the stock market in those days. Adjusting your personal inflation exposure by category is also a good exercise. While one can reduce the risk by homeownership and discretionary spending flexibility, the one concerning area (based on historical inflation) is the cost of healthcare. Healthcare insurance provides a moderate ‘put’ on the exposure, however with the rates of historical inflation and the fact we are all aging, it could be a large exposure. Any thoughts on mitigating this exposure? Thx

    1. Congrats, you’re one of only 16% who got it right! Being born in 1963, I remember the time period, but it wasn’t impactful on me since I hadn’t really gotten into personal finance yet. As for mitigating the risk of health cost inflation, afraid that’s the million dollar question. Personally, I plan on maintaining my dedication to regular exercise and “controlling what I can control”. As J cites above, international relocation is always an option, though one that I suspect not many would be willing to pursue.

  9. I agree inflation is a risk, which goes along with another big retirement risk-longevity. As far as mitigating inflation risk, we use a TIPs ladder, which also mitigates market and SOR risk to some extent. Additionally, we have a mix of stock and bond funds as well as small positions in REITs and commodities. We sold a rental house when we retired to use the cash to fund the TIPs ladder.

    1. Rob, it sounds like you have a solid plan. As for longevity risk, it’s one of the main reasons we’re planning on delaying our Social Security to Age 70 – it’s one of the only options for defense, and offers inflation-adjusted payments for life. Thanks for stopping by.

      1. Yes we are doing the same Fritz, although my wife, who also had a career, may take it at FRA. I am also considering an inflation-adjusted QLAC and/or laddered QLACs, which, along with SS, also can help a bit with Long Term Care, if needed (hopefully not but must be realistic about the fact that around half of us will). Always enjoy the posts and comments, thanks.

  10. Really high quality post POF. Today many seem to take an inflation rate of 1-3% for granted like it will always be that way but you lay out some compelling considerations. To me it also raises the question of how you stimulate the economy further when you are in the midst of the longest bull market in history? One way is to make holding cash expensive meaning low interest rates and higher inflation making it painful to hold cash that reduces in value every year. Sweden for example has been playing with this lately. Inflation hedges could be a more popular topic if this hits harder in the USA. Thanks again

  11. Fritz

    I find it curious that the folks ine the FIRE movement talk about assumptions on cola increases and what they anticipate needing in the future. But my concern for them is that we will see the market dip by 50% or more in the next few years AND THEN WHAT ?????????

    It might be a sad day when you realize the million or two you have saved is now 500k or 1 million and your 5% becomes 20k or 40k unless you are living in a tent in the woods I am not sure you will have enough to live a comfortable life.

    JJ

  12. Inflation actually has been pretty mild the last 30 years. Even if it rears its head, I don’t feel it will hurt me that badly. As we age, we will spend more time at home and spend less. I’ve seen it with my in-laws and my parents. It gets to where you hardly need much money at all once you hit your 80’s. So, enjoy a bit of your money now, while you can!

  13. Your quiz example indicates an average inflation rate of 6.55% per year. Its happened before and we should not be lulled into complacency with the low inflation rates we have enjoyed over the past 20 years.

  14. I started work in 1977, by the time I retired 34 years later, I was earning about 50 times my starting salary.
    Great article
    Inflation is certainly a worry for me. I am nearly 8 years into retirement, and hope to have another 35 years ahead of me. Despite low inflation over the last few years, I am already noticing that our monthly spend is higher, although we are not doing anything different. It is well within our estimated window, but still….
    I went for the belts and braces version. I expect our guaranteed income to see us through on its own, but if not, then we have some tax-free savings, which will hopefully have grown well if inflation rears its ugly head. And finally, our back stop is some pension pots (which have very efficient inheritance tax status, hence why they are last to go…)
    I hope I’ve done the sums well!

    1. Erith, thanks for sharing the reality of seeing your monthly spend go up in retirement without doing anything differently. Exactly what rising inflation will look like, and our options to deal with it our limited. I hope we never have to face above average inflation during my retirement, but it’s a good exercise to think about what defenses we can put in place “just in case”. Thanks for stopping by my blog, always honored by your presence.

      1. I suspect, because we eat / use many imported things, we are suffering a bit because the £ has dropped 30% over the last 2 years, against both the € and the $. Bless Brexit….

  15. we’ll be staying nimble and aware. i do believe we have a more in-tune federal reserve these days so i have high hopes for anything they may be able to do. failing that we’ll be investing in more than the sp500. i’ve been looking and looking at the nasdaq or only the qqq portion and it beats the tar out of the s+p over most long periods. we’ll also use a very similar bucket system to yours and build in a margin of safety for withdrawals. mostly we’ll not worry so much about like the rest of the stuff in our lives.

    1. I’m afraid you have more confidence in our Federal Reserve than I do, my friend. Wink. Fortunately, I tend to not worry too much about these things, just make sure I’ve considered the risks in my retirement plan and build as many defenses as possible. Sounds like we’re similar in that regard.

  16. Great post and one that, perhaps, many may ignore. I doubly the insance inflation of the past will haunt us, but if you’ve not calculated this into your FIRE plan, you should. I looked close and hard at this and on my 100 acre “retirement ranch” I have aimed toward self-provisioning. Early invested into a cow farm (for meat and milk), wheat supplier, alfalfa ag (to feed the other critters) and am 5 miles away from a plenty stocked fish lake. My only concern is healthcare. If I was an urban FIRE person I’d be a lil worried.

  17. The quiz was interesting. I ended up getting it right due to the “magic number” of 72. I don’t recall if you covered that in a previous post but I first learned about it in the 70’s in a Boy Scouts merit badge…. The magic number makes it real easy to figure out how long it takes for something to double. Just divide 72 by the interest rate or rate of inflation or …. and the result is the number of year it takes to double. I do remember 7+% inflation so 72/7 ~10 year and you had a 20 year span so potentially a 4X multiple. Option 3 was a double+ while option 4 was about 3X. so the answer was $213k.

    In our planning I have factored in inflation. I do it two ways. One way I project based on (expected return – inflation) and so can see based on the start base (currently set at the year 2014). That is easier to put my brain around as it is hard to think about the prices when something is 3 or 4X what you are used to. I also calculate using inflation adjusted costs and see some whopping big numbers. They scare me so I go back and look at the 2014 numbers until my heart slows down.

    I like your approach to breaking out inflation by sectors. That makes a lot of sense (even with the cracked crystal ball that is anyone’s prediction of the future). If your spending is also broken up by sector you can more easily plan for contingencies.

    1. Ah, a brilliant “back of the envelope mind”. Well done, you get an A. Go to the head of the class!

      Good point about doing your planning based on real returns, a great way to keep the numbers in line with the mental framework of today. Keeping one’s heart rate down is always a good strategy. Well done.

      1. I was actually thinking the same thing about projections as I read this post.
        When trying to get an idea of future retirement expenses (7-10 years out for me), I have been using today’s real dollars and inflation-adjusted return assumptions to keep things simple.

        I find that a lot of people think they need to inflation-adjust retirement spending AND return assumptions. This has to be overly conservative, not that it’s a bad thing! But it can also be discouraging, if retirement is a long way out.

        I do love the bucket approach, Fritz. I figure I’ll be re-reading a lot of your posts in 5 years as retirement gets closer!

        1. I hope you do “re-read” my posts as you enter your Red Zone. I’ve tried to organize my thinking along the times of “Retirement – X years” for exactly that purpose. Hopefully, my content remains relevant for folks who approach retirement years after I did, and my words continue to help folks on their journey years after “my present has become the past” (strangely, it would also be when “my past” becomes “your present”. Never realized that before…)

  18. Thanks for pointing me out and using me as an example, I think this is the 2nd time you pointed me out, so I do not know if I am the teachers pet or the bad kid in the back of the class that the teacher is making an example out of, I will side with the latter.

    My Grandparents retired in 1973 and would not have been considered wealthy by any means but when my Grandma passed in 2015 she still had a sizable retirement account. I am not sure how they did it, but they did. They only owned a very small grocery store in Velva ND, population 2000. Yet they were snow birds and enjoyed life. So the inflation factor did not destroy them.

    I think not having to buy a home in the 80’s was a good start, if you have to buy a home and interest rates are 17% you are in big trouble but if you have your house paid off or in a low rate mortgage and your cash is earning 10% you are doing pretty well.

    As for the national debt, how about this as a 4th option? Every country just wipes their books clean and they all start anew. The European countries with huge debt and already high taxes cannot tax their way out of it and neither can we, 22 trillion is a lot of taxes, I doubt any politician is truly concerned with the debt.

    And of course in last weeks post the lady would have bought the Tesla on a 10 year contract, and not have paid cash, I am assuming she did not follow the FIRE movement. hahahaha

    Thanks for the great post as always

    1. Wow, didn’t realize I’d “jumped” you twice! Apologies, just like to use reader interaction as fodder for future posts. Keeps it real. Given that you voiced legitimate concerns, I always figure there are a lot of other readers who thought the same thing, but kept it to themselves. Keep vocal, you’re helping me know what’s important!

      (BTW, I love your 4th option, but I don’t see that happening. Last time that happened was in the Old Testament, I believe, when all debts were forgiven every X number of years. Makes me wonder what the fallout of that approach would be, suspect there’d be a lot of losers. Hmmm…perhaps a future post? Haha).

      1. No problem, I still read your post!!!!

        Herman on the other hand might be going elsewhere. There is a difference between putting thoughts out there for people to ponder and preaching. I think you are thought provoking.

        Keep giving us things to think about.

  19. Thank you for including the link to the podcast “Federal Debt, the ticking time bomb”. An excellent, well researched, unbiased view of how our current politicians are failing our country by not acknowledging that we need to get our country’s spending under control. Listening to it I couldn’t help but think how my in-laws are critical of younger millennials, some of whom have an entitlement mentality, when my in-laws wouldn’t think of trimming their Social Security and Medicare benefits which on average, they get 3-4 times the benefit of what they paid in. We, all Americans of all ages and income brackets need to stop thinking about what the government can do for us and instead be more responsible for ourselves so we can have a smaller less expensive government.

    1. Thanks for listening to the podcast link. I agree that Joshua did an excellent job of laying out the situation. The timing couldn’t have been better, I was already done with my draft when I heard it, felt I couldn’t publish without including that link.

  20. My mother kept family books for 55 years. Reading through her entries for 1965, I was shocked at how little it took to run a house of seven people at an upper middle class level. The number here is shockingly low. Big wake up call.
    We have most noticed real estate. Moving twice in the last ten years of our retirement, we are getting less and less house for the same amount. We want to move one more time, but that might be financially silly. We really fear for our friends who have chosen to rent (or just entered a mortgage).
    The other place we notice is in our own children’s salaries. In our line of work retirement plans, we are promised one half of the final three years’ salary. We retired twenty-three years ago. Our son started in his career in the same career as my husband shortly after we retired. If he chose to retire today, he would be receiving almost three times what we currently receive! That was a HUGE wake up call.
    And then there is the number tossed about to put our grands through college ($400,000 per child for public college in 15 years. We have six grandchildren.)
    We have been in cash (and house) for too many years. It is time to get that moving. Thank you for some ideas. i guess I should get ahold of a financial advisor.

    1. JanBo, I agree looking back at spending levels from decades ago is a real wake-up call to the power of compounding inflation. Thanks for sharing a real life example. I agree “being in cash” is a risky position, you need some growth to build your defense. I hope your financial advisor reads this post! Smiles.

  21. What are your qualifications to make such predictions? What financial training/education have you had? This is a problem when people like you write financial dossiers. You make absolutely no sense.
    Here’s the reality: if a person has planned for only $50K in retirement, as they age and as the prices of everything go up, their standard of living goes down. People make cuts and adjust. So does the government. As their income technically goes down in value, they qualify for more and more FREE Federal benefits, such as health care, food stamps, heating assistance (to name a few) and the biggest of all, free nursing care. In other words, technically their quality of life goes up as their income goes down. No one, who calculated $50K for retirement will scrounge together $213K in the 20 or 30 years they are retired.
    You’re calculations are pompous, as is your website.
    I wish you would cease and desist. Who died and appointed you king?

    1. You’re right. I’m just a pompous idiot who knows nothing. Thanks for bringing me back to reality.

      (You, obviously, did not listen to the podcast). May be worth your time to realize the fallacy of your argument about “free stuff”. I don’t think I’d rely on that as a well thought out retirement plan, but that’s just me (and we all know, I’m just a pompous idiot who knows nothing. You’re obviously much better off by never reading anything I write again. I’ll miss you).

    2. Herman, perhaps the Retirement Manifesto isn’t for you. Many of us find it informative food for thought. I never got the impression Fritz is posing as an expert. He clearly states in his bio that he’s just a retiree that wants to impart his experiences with the rest of us interested current and future retirees.

  22. Hey Fritz, Don’t listen to the idiots. I don’t agree with everything all the time either, but enjoy the discussion. Everybody’s situation is a little different.

  23. A 30 year fixed mortgage is the best hedge against inflation while having rental income which can be increased with inflation. Also the 4% (or the new 3% swr) takes into accoun, “normal” periods of inflation. What is difficult to mange are periods of hyperinflation.

  24. When I think about what “basics” cost when I was growing up (late 50s & early 60s), then compare those prices with what we pay today, the effects of inflation really hit home. For example, I remember going to the grocery store to get a loaf of bread for my mom: 10 cents. Gas was around 28 cents a gallon, a candy bar (which I’d call a “necessity”!) ran all of 3 cents. When new houses were being built in my hometown, they were $16,000–and folks asked “Who’d be crazy enough to pay THAT much for a house??”

    On the opposite of the spectrum, when my father was planning his retirement in the early 80s, I remember him stating with the utmost confidence “interest rates on CDs will NEVER go below 6%.”

    It’ll be “interesting” to see what unfolds over the next 20 years.

    1. Ann, I agree that “looking backward” at the impact of compounding inflation is a good way to realize the potential impact going forward. I just wish we still had those high interest rate CD’s (tho, in fairness, even when they were approaching 10%, I believe their “real returns” were no better than what we have available today, given the high inflation they were dealing with at the time). Thanks for stopping by!

  25. Inflation plays a significant role in investment returns and retirement planning. In the short-term, I’m keeping up with inflation by investing in 3-month t-bills that pay about 2.5%. Although, once I move to 90%+ stocks, the stocks will grow and exceed long-term inflation.

  26. I guessed correctly! I was a child and teen in the 1970s, and I remember much more “inflation talk” in the air than there is now. I remember hearing the adults talk about how you couldn’t get ahead because inflation ate up the recent raise.

  27. I just wanted to say that I’m relatively young (31) and have started to think seriously about retirement. This blog is a great helpful to me. I understand the basics of inflation, but the chart above about inflation by category made me wonder why healthcare would suffer from inflation more than entertainment items or shopping. I understand that housing is more stable, but not how those other items experience inflation differently?

  28. Dear Retirement Gift,
    I’m no financial expert and don’t pretend to understand everything there is to know about inflation but my best guesstimate would be the aging of the baby boomers is driving up the costs for medicines and increasing the need for healthcare workers. Also there are amazing technological advances in medicines and medical treatments that are being implemented that are driving the overall costs higher as well.

  29. Hey Fritz. I love your work! However, don’t agree on this one. Yes, inflation exists. This is not debatable. It has certainly gotten lower over the last several years, but no one can argue that we do not see it in many of the things that we buy. And it is pronounced in college costs and medicine. However, where I disagree with you is that in my experience many retirees consume significantly less in the latter years of retirement. And in many cases it is a lot less. I have been an advisor for 25 years and work with, generally speaking, middle class people throughout America. I have worked with thousands of people – this is not an exaggeration – and many of them are in retirement. What I have observed as I work with my retired clients is that their energy and enthusiasm for spending goes down as they move in to their mid to late 70’s. They simply don’t do as much as they did. For some, actually most, this is across the board. They eat less, drive less, buy less clothes, take on less projects, travel less, etc… They still do things of course and have costs, but they are doing a lot less. I hate it when people use anecdotes to try and prove a point, but I will anyway! My Father is now 87 and still lives in his home by himself. He can get around and take care of himself. Still drives during the day. But he has no interest in spending money on much of anything. All in, he spends about 27 to 28K a year. This is everything. When he was more active with my Mother in their 60’s, they would spend maybe $65 to $70K year. In fact, before my Mother passed away just a couple of years ago, they were together spending just a little over $30K a year. They were doing some travelling but just did not buy much any more. But what about healthcare?? Yes, healthcare is expensive. But be careful of averages. Not all retirees spend hundreds of thousands of dollars on healthcare. Medicare covers much of their expenses and many do have supplements. And it goes without saying that there are definitely people in their 80’s that spend more than others and those that have long term care events which are expensive. But I think general inflation is grossly overhyped as a long term cost to a retiree. In fact, I think the financial services industry uses the fear of inflation as a ploy to sell unnecessary and costly products to consumers. While I disagree on this one, keep up the great work. I always enjoy your ideas!

    1. Mark, the respect is mutual, and I appreciate your perspective from front line reality with “thousands” of people. I agree that spending certainly goes down as folks move from the “Go Go” to “Slow Go” years, especially (as in your Dad’s case) after the loss of a spouse. I do wonder how the Baby Boomers will fare, however, given the increasing longevity, strong focus on fitness (expanding those “Go Go” years), and higher probability of increased inflation rates (taxes are, in my view, also likely to increase as the federal deficit becomes more problematic due to an aging population).

      I appreciate your disagreement, and sincerely hope you’re correct. However, as you’ve likely learned, I tend to plan for the worst and hope for the best, and continue to think it’s wise to think about the risk of inflation as folks prepare for retirement and build in appropriate defenses. I do agree that it’s worth being skeptical, and certainly to avoid “unnecessary and costly products” from the financial services industry.

      Thanks for stopping by, and providing your insightful perspective. Much appreciated.

  30. Great article and appreciate the commentary. I would appreciate a corollary between inflation rates and the federal tax rate percentages at various income levels. As an example, $50,000 in 1980 would be taxed at x%. In 1990, 2000, 2010, 2018 that same 50% was taxed at x -y% because the federal government moved the income thresholds up. I understand the tax rate % is subject to Washington’s edicts but I would think the income bracket thresholds would have been inflated as well. Since we are all living on post -tax income and not all of it is derived from non-taxable sources, I’d appreciate the research.

    1. Interesting question, Bob. Afraid I’m running out of time to pull something like that together (we’re leaving in two weeks for The Great American Road Trip, and I’ll be taking a sabbatical for the summer – watch for a post shortly explaining my rationale). I did find this site which charts tax rates, would be a lot of work to move from marginal to effective tax rates over various years at various income levels. Perhaps something you can work, I’d be happy to share a guest post from you if you find anything interesting?

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