Inflation Deflates Retirement Plans

According to an article by Laura Rowley on Yahoo:

“Consumer prices fell half a percent in September, the Labor Department reported Wednesday. But leaving out food, and the significant drop in energy costs, the so-called “core rate” of inflation rose 0.2 percent.

That’s the third consecutive monthly rise for core inflation, which is running at its fastest rate in 10 years. Costs for housing, medical care, and clothing all showed a significant jump.”

Inflation is a major factor when considered for retirement. And the market isnt super-safe or super-reliable anymore as it once was. In fact, compared to some of the more active and growing stock markets in the world, the Unites States stock market has performed average over the past few years. This average performance means, unfortunately, that inflation is a more powerful force influencing our portfolios than we may like.

Often people put inflation near 2% but in real terms for me it seems much higher. Almost all of my bills are increasing and the only reason I am able to reduce my monthly expenses is by getting bills paid off. This is a great feeling of satisfaction but it truly feels like I lose about 5% of that gain every month to inflation which would put it much higher than the stated 2% when you compare my total expenses at approximately 5000 per month. At that rate, assuming that I am not able to reduce my expenses further by paying off more bills, in just over 14 years I will find that I no longer have any savings at all.

This seems most dubious for those in retirement situations. There will not be any amazing windfall or lottery ticket that is going to double their retirement nest egg, and therefore their monthly check. Instead, they have to somehow just live on the money that they have and just try to survive. All the while, the price of goods like milk, eggs, fuel, etc. just continues to grow. Social Security does have a cost of living adjustment and although that has been good lately, I confess that I really don’t factor in social security when it comes to retirement. It just doesn’t make sense, in my opinion, for anyone under 30 to count on it.

Inflation is increasing the costs of goods and therefore removing the buying power of the portfolio that you’ve grown for 20, 30, or perhaps even 40 years. But, what does that mean for other aspects of retirement. Inflation is not just the cost of perishables, but it is also the cost of services. Utilities, healthcare, and other items of this nature will all increase in price. But in addition, there will be increases in the costs of large purchases. Homes, appliances, and cars are all items that will grow more expensive over time since the salaries of the people who are working will increase.

Interest rates will be hit next. If you are diversified and have strongly monitored your asset allocation, it is likely that you have a portion of your money in cash, money market funds, cds, or perhaps something more exotic like a T-Bill or municipal bond. Regardless of where you are putting this money instead of the stock market, it is likely that an increase in inflation will bump up the rates on some of these investments, but what to do if the interest doesnt make enough when compared with inflation? Or what if the stock market doesn’t rebound once interest rates are raised.

In a world of cause and effect, the devil you might already know (inflation) may be better than the one you don’t (high-interest rates) since this new one may not make you much money at all. Worst of all is the fact that there is no panacea for this situation. Homework, watching the market, and being shrewdly allocated with a large portfolio, however, seems to be the best shelter for weathering the buffeting waves of inflation and the occasional gusts of high-interest.

Source: http://finance.yahoo.com/columnist/article/moneyhappy/11094