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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.
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 |
|
| 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 ResearchMag.com
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.
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