New Visitors Privacy Policy Sponsorship Contact Us Media
Baby Boomers Family Green Home and Auto In Critical Condition Just Starting Out Lifestyle Money
- advertisement -
Bankrate.com
News & Advice Compare Rates Calculators
Rate Alerts  |  Glossary  |  Help
Mortgage Home
Equity
Auto CDs &
Investments
Retirement Checking &
Savings
Credit
Cards
Debt
Management
College
Finance
Taxes Personal
Finance

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
Page | 1 | 2 | 3 | 4 |
 

"Originally the motivation for introducing the CPI-E was precisely so that Social Security might be linked to this index," says Milevsky. "At this point though, I don't think the U.S. can afford to link to yet a higher CPI-E."

- advertisement -

Milevsky calculates that during the period from 1982 through 2006, CPI-E averaged 3.3 percent, versus 2.96 percent for CPI-W, or one-third of a percentage point higher annually.

This is true even though seniors spend less on just about every component of the index except for housing and medical care. In fact, they spend twice as much on medical care as younger workers.

Except for those who've been in a coma obliviously racking up bills, everyone is aware that medical costs have risen at a much higher rate than most other goods and services. So, not surprisingly, the inflation rate that seniors experience is higher than that of the population at large.

In a separate paper published in December, titled "Should Retirees Insure Against Inflation or Just Worry About It?," Milevsky and co-author Huaxiong Huang make the case that CPI-linked investments such as Treasury Inflation Protected Securities, or TIPS, and I-bonds are not perfect ways for retirees to hedge against "retirement ruin" -- a scenario in which a retiree's money runs out before his or her life does.

Their paper discusses how much retirees might allocate to an imperfect hedge, such as TIPS and I-bonds, versus an equity fund, with varying assumptions about the volatility of the investments and the probability for ruin at different allocation levels. It's not easy to sum up in a few lines, so I won't. But here's the line that struck me: "Obviously, as the wealth to liability ratio increases, the entire vector of ruin probabilities declines and reaches zero at approximately 50-to-1."

Translation: You won't have to worry about how you allocate your assets among imperfect inflation hedges and stock funds if your assets are 50 times higher than your current level of consumption.

So if you need $75,000 a year to live comfortably, in addition to your Social Security payout, a nest egg of $3.75 million will ensure a worry-free retirement during which you need not pay too close attention to your finances.

Immediate annuities with COLAs
Let's face it, most of us won't be able to save 50 times our annual salary, or even 25 times for that matter. So we can buy annuities or some other financial products designed to last for the duration of our lives -- though we must do so with utmost care.

For instance, would it make sense to purchase an immediate annuity with a built-in COLA increase of 3 percent annually?

Next: "But this peace of mind doesn't come cheap."
Page | 1 | 2 | 3 | 4 |

Compare Rates
NATIONAL OVERNIGHT AVERAGES
IRA MMA 0.51%
1 yr IRA CD 0.79%
5 yr IRA CD 1.83%
Mortgage calculator
See your FICO Score Range -- Free
How much money can you save in your 401(k) plan?
Which is better -- a rebate or special dealer financing?
VIEW MORE CALCULATORS
FINANCIAL LITERACY
Rev up your portfolio
with these tips and tricks.
- advertisement -
- advertisement -

About Bankrate | Privacy Policy/Your California Privacy Rights | Online Media Kit | Partnerships | Investor Relations | Press Room | Contact Us | Sitemap
NYSE: RATE | RSS Feeds |

* Mortgage rate may include points. See rate tables for details. Click here.
* To see the definition of overnight averages click here.

Bankrate.com ®, Copyright © 2014 Bankrate, Inc., All Rights Reserved, Terms of Use.