Inflation – A retiree’s enemy

Definition of inflation – “an increase in the price you pay for goods or services or a decline in the purchasing power of your money”.

The key statement in the definition is the “a decline in the purchasing power of your money”.

When people are saving for retirement, they usually invest in stocks which increase in value with the economy and therefore are not hurt by inflating prices. However, these assets are not as secure as fixed assets such as CD’s so most retirees investments are in the safer non-inflating investments.

When the investments are in fixed dollar investments, inflating prices decrease the purchasing power of these funds over time.

For this reason, one must save additional amounts before retirement to compensate for future loss of purchasing power of retirement savings during retirement.

On the bright side, if you own your house, its value will grow with the inflating economy and the value of the housing market in your area.

Who Measures Inflation Rate?

In the United States, this is measured as a percentage of the change of the consumer price index (CPI) which is published by the Department of Labor – Bureau of Labor Statistics (BLS) (http://www.bls.gov/CPI/) on a monthly basis.

The news release about the monthly change in the Consumer Price Index can be read at http://www.bls.gov/news.release/pdf/cpi.pdf. This news release also gives the overall inflation rate for the month and breaks it down into its components as shown in this example:

Report for May 2008								Compound annual rate 3-mos. Ended	Un-adjusted 12-mos. Ended

	Changes from the preceding month
Expenditure
Category	Nov.	Dec.	Jan.	Feb.	Mar.	Apr.	May
	2007	2007	2008	2008	2008	2008	2008	May-08	May-08
All items..........	0.9	0.4	0.4	0	0.3	0.2	0.6	4.9	4.2
Food and beverages	0.4	0.1	0.7	0.4	0.2	0.9	0.3	5.9	5
Housing...........	0.4	0.3	0.2	0.2	0.4	0.3	0.5	4.9	3.3
Apparel...........	0.6	0.1	0.4	-0.3	-1.3	0.5	-0.3	-4.3	-0.6
Transportation....	3.5	1	0.5	-0.7	0.7	-0.7	2	8.7	8.1
Medical care......	0.4	0.3	0.5	0.1	0.1	0.2	0.2	1.8	4.1
Recreation........	0.2	0	0.2	0.1	0.3	-0.1	0.1	1	1.2
Education and
communication..	0	0.3	0.4	0.1	0.3	0.4	0.4	4.2	3
Other goods and
services.......	0.2	0.3	0.4	0.2	0.4	0.5	0.4	5.3	3.6
Special indexes:
Energy............	6.9	1.7	0.7	-0.5	1.9	0	4.4	28.2	17.4
Food..............	0.4	0.1	0.7	0.4	0.2	0.9	0.3	6.2	5.1
All items less
food and energy	0.2	0.2	0.3	0	0.2	0.1	0.2	1.8	2.3

The following table shows the inflation rate in the United States by year since 1940:

Average Inflation Rate - United States by Year
Year	0	1	2	3	4	5	6	7	8	9
1940	0.7	5	10.9	6.1	1.7	2.3	8.3	14.4	8.1	-1.2
1950	1.3	7.9	1.9	0.8	0.7	-0.4	1.5	3.3	2.8	0.7
1960	1.7	1	1	1.3	1.3	1.6	2.9	3.1	4.2	5.5
1970	5.7	4.4	3.2	6.2	11	9.1	5.8	6.5	7.6	11.3
1980	13.5	10.3	6.2	3.2	4.3	3.6	1.9	3.6	4.1	4.8
1990	5.4	4.2	3	3	2.6	2.8	3	2.3	1.6	2.2
2000	3.4	2.8	1.6	2.3	2.7	3.4	3.2	2.8

Note: This information is extracted from the history of inflation in the United States since 1913 located at ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

Except for the high rates in the late 1970’s and early 1980’s, it has been fairly steady.

What inflation rate should you use for your retirement calculation?

This is where the crystal ball and research will give you an answer.

The United States Congressional Budget Office (CBO) projects a 2.2% rate through 2018. This may change with the high costs of energy in the middle of 2008.

To read the most current forecasts by the CBO, go to the CBO Home Page (http://www.cbo.gov/) and look for the “Frequently Requested” section.

Congressional Budget Office Home Page

The current economic projections will be in that section as shown in this picture.

Congressional Budget Current Articles

When you read the reports from the Congressional Budget Office, you will not see a table labeled "inflation". Instead, it will say "Consumer Price Index (Percentage Change)".

Congressional Budget Office Inflation Rate

In a column titled "Medicare Threatens a Comfy Retirement", Scott Burns, the nationally syndicated financial columnist, noted that Medicare premiums between 2000 and 2008 inflated seven percent faster than the general inflation rate.

Since a growing part of a retiree's budget is health care as she/he ages, raise your inflation rate a little above the general inflation rate to compensate for this rising health care cost.

Using the above information, develop your own estimate for the average inflation rate during your retirement.

A great feature about the best retirement calculators – you can try various scenarios of rates to see how they will impact your retirement plans.

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