As a financial adviser, one thing that is a constant is the need for continuing education and training. A typical financial adviser may be registered with the Financial Industry Regulatory Authority (FINRA), hold an insurance license and maintain a variety of professional accreditation's (CFP, AIF, ChFC).
All of these various professional standards involve their own form of continuing education requirements, often with no crossover. So learning is a continual process in my world.
One of the persistent themes of most continuing education is the topic of inflation, particularly inflation as it pertains to retirement planning.
At the same time, however, I actually work in the real world, with real clients, living real retirements. After doing this work for 25 years, I’ve actually formed some inflation observations of my own, and these observations don’t always concur with the information in the financial planning training materials.
In its base form, inflation is an abstract concept. We get taught in high school economics class that inflation causes prices in general to go up over time. But is this actually true?
Well in some ways, yes, but in others, no, and when it comes to retirees the answer becomes even more opaque.
First, the yes. Of course, prices in many basic products tend to rise over time. I was born in 1970, and I’ve often seen the birthday curiosity cards that say a loaf of bread used to cost 70 cents and a gallon of gas 40 cents.
I’ve heard the stories from my parents and clients that their first house bought in the '70s cost $30,000, and first brand new car $3,500. And who in 1970 even heard of paying for water in a bottle at all, let along $1 to $3? And no one would have even considered a $5 cup of coffee “back in the day.” So, of course, prices do tend to inflate over time.
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On the no side of the ledger, however, price changes also depend on the product and on the time period. Some products actually get cheaper and better over time. The examples that come to mind are computers, TVs, plane tickets and even some produce such as apples and blueberries.
Human beings have an incredible ability to innovate, and this innovation can also lead to efficiency and cost reductions. So, in the aggregate, does life really get more expensive over time?
In my experience, retirees experience inflation in unique ways. With children grown and out of the house, retirees tend to consume less in general. So, in this regard, does it really matter if bread costs $1 more than it did 10 years ago if the household only consumes two loaves a month?
This same logic can apply to gas as well. Gas prices may have gone up 30% since 2009, but if you are not driving to work anymore and only using 20 gallons of gas a month, the aggregate hit to cash flow is around $15 a month. So, in two huge inflationary categories, food and energy, reduced usage can often comfortably offset price changes.
In addition, in my experience retirees are less likely to purchase new homes, and their cars tend to last longer. This helps them dodge the inflation bullet in these two huge expense categories as well.
Where my retirees do experience inflation, perhaps even more so than still-working families, is in the areas of travel and leisure and health care. Travel and leisure, however, are discretionary and can vary considerably from family to family, and with Medicare and the proper supplement policy, inflation related to healthcare tends to cap out for retired folk.
To me, the discussion of inflation in a theoretical sense, at say a constant 2% to 3% a year, will rarely end up being accurate as to what is actually experienced by retirees during a 20- to 30-year retirement.
This is an important real-world observation that can have a significant impact on general retirement planning and feelings of retirement stability over time.