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Columns: Boomer Bucks
Barbara Mlotek Whelehan   Expert: Barbara Mlotek Whelehan
Boomer Bucks
It seems we're always considering the wrong number when gauging the inflation rate.
Boomer Bucks

Inflation under suspicion
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If inflation is a concern for wage earners, it should be a huge source of anxiety for retirees, because retirees generally don't earn wages that keep up with it. They rely on Social Security, savings and -- if they're lucky -- pensions. Two out of three of these income sources frequently don't offer cost-of-living adjustments.

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The 'quiet' risk
Inflation is tough to plan for. As Certified Financial Planner Bill Losey notes in his book, "Retire in a Weekend," even at a relatively benign rate of 3 percent, "you'd need to double your income in approximately 20 years just to maintain the standard of living you have today."

Put another way, if you require $75,000 a year to live comfortably today, you'll need about $150,000 annually in 20 years just to break even, assuming a 3 percent inflation rate. Have you figured out how you're going to get your portfolio to grow by leaps and bounds as you draw down assets? You might have to hire a magician.

The chart below shows the steady erosion of the value of $1,000 at different inflation rates after one, 10, 20, 25 and 30 years.

Value of $1,000 at varying inflation rates
Year 2% 3% 4%
1 $980 $971 $962
10 $820 $744 $676
20 $673 $554 $456
25 $610 $478 $375
30 $552 $412 $308

COLA not right either
The good thing is that, at least for now, Social Security has a cost-of-living adjustment, known as COLA, each year so that the incomes of seniors don't totally stagnate. The bad news is that this COLA is based on the CPI-W, an index based on the spending patterns of wage earners and clerical workers. That represents about 32 percent of the U.S. population -- but not the senior population. Few people know there's actually a separate index for seniors called the CPI-E (elderly) that came out in early 1982.

In an article he wrote for last year, Moshe Milevsky, who holds a doctorate in business finance, explained that seniors spend differently than people who work. They spend less on clothing and transportation and more on medical care and housing. So the weightings of these goods and services are different in the CPI-E than in the CPI-W, on which Social Security COLA increases are based.

Next: "A nest egg of $3.75 million will ensure a worry-free retirement ..."
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