On January 12th, the U.S. Bureau of Labor Statistics reported
that the Consumer Price Index increased 6.5% over the past 12 months.
Shockingly, media outlets ran with absurd headlines like these: “Annual
Inflation Slowed to 6.5%” and “December CPI Report Shows Cooling Inflation” and
even this one: “December’s ‘very favorable’ inflation read could signal the
‘final phase of the bear market’ and stave off a recession.”
Ok, maybe it’s technically true that inflation declined 0.1% in
December, but an annual inflation of more than 6% is still very high. Maybe this will hit home more: that 10% return
on your portfolio is not 10% after 6.5% inflation. Not even close.
Maybe you don’t worry about some of the underlying data in the most
recent inflation numbers. Maybe it doesn’t bother you that over the past 12
months:
·
Food
is up over 10%;
·
Fuel
oil is up over 40%; and
·
Transportation
services are up over 14%.
Well, you should remember this: Inflation can do a number on retirees’
incomes. Most people don’t think about that, but with longer lifespans, we run
a real risk of seeing our retirement savings eaten away. Curbing its impact
takes planning.
Inflation Lessons from a
Paper Route
There’s a story about a young man who learned about inflation from his newspaper route when he was 10 years
old, delivering the Patriot Ledger in Massachusetts. He had a Schwinn Stingray
bike, with baseball cards in the spokes. Because he delivered every day without
fail, the kickstand wore out. So his pedal constantly hit the stand. You heard him coming halfway up the block.
On Fridays, he collected the week’s newspaper payment from the customers
on his route. The weekly delivery cost was 90 cents, and several of his customers
gave him a dollar, which meant a 10-cent tip.
This was the 1970s, an era of rapid inflation. The newspaper then announced
an increase in the delivery cost to $1, and he didn’t think much of it.
The next Friday, he arrived at his first stop, the home of a friendly
elderly woman. Her expression was pained as he approached the door. She said she knew about the price increase,
but she could not give him anything more than the $1. She realized that there
would be no tip for him. She informed him that the ever-increasing cost of everything was crushing her. She could not
keep up with the inflation.
At several stops that Friday afternoon, he heard the same sad tale. He discussed the situation with his mom that night, telling her he never wanted to
be in that position when he was older. She gave him the motherly advice of “study
hard, so you can make a good living.”
What You Can Do About
Inflation
It’s actually quite simple: one must address the inflation issue early –
when still a pre-retiree. Planning ahead and understanding the risks is
paramount.
This issue is a big concern for today’s retirees. They will likely
experience a longer retirement than any other generation ever. They need to
guard against the insidious damage done by regularly increasing costs over the
decades.
On behalf of your 85-year-old self, plan ahead to create a lifestyle-sustaining income. Your financial professional can help.
