Inflation is a quiet thief, as in the night.
When a person turns on income to retire, most often the amount that will be paid for life is locked in from that moment on. As inflation increases, income value, in effect goes down, down, down.
This kind of risk is hard to combat. For example, think of the tax brackets that determine what you pay on your income. As inflation goes up, wages do also. So the IRS automatically gets more income tax from everyone, including those using retirement income. This increase has become so common, that everyone just accepts it — or in other words, everyone just lays down and takes it on the chin.
Inflation is tracked by the government through the CPI or Consumer Price Index. A basket of goods is selected and compared against prices each year to determine if inflation exists or not. So a 2 percent CPI means all the goods placed in the basket went up on average 2 percent. The assumption to be made from this is that all prices went up 2 percent or more.
But, what if I track my own basket of goods and use 30 items instead of 8? And what if I don’t change the goods in my basket like the government does year after year, so I get a more accurate picture of these increases over time? It is isn’t hard to track the cost of one gallon of milk, or tuition at the college my child goes to. It’s not hard to track the membership fees I pay to my recreation center, or the cost of my favorite tennis shoes. Once you do your own tracking, which I have done many times, you will realize like I did that the CPI is very subjective and not very accurate. Your own tracking will inspire you to learn what you can do to keep up with inflation, especially when it comes to retirement income, which, as I mentioned at the beginning of this post is sort of “set” at the point in which you turn it on.
Here are a list of things you can do to combat inflation as it relates to retirement income:
- Start a small business to make more money and pay for increasing costs. You may scoff at this idea, but many of my clients have been able to stay on top of rising costs during retirement by operating a small business out of their home based on an activity they enjoy doing. They make a little extra money and enjoy some real tax savings as well. That’s because small businesses create many more deductions on Schedule C than retirement income. Note: be sure you are running your business as a viable venture and not as a hobby or the IRS will not allow such deductions. Learn more by reading MONEY: What Financial “Experts” Will Never Tell You (amazon.com).
- Arrange your retirement money to be “indexed” to market increases.
- Own real estate such as a rental duplex or small apartment complex (even a basement apartment); the rent you collect can increase with inflation, thus helping you keep up with rising costs.
- Consider moving to a more rural area; inflation is worse in larger metropolitan areas. The best way to do this is through Internet searches for communities that require less money to live than your own. I did this last year and found that an income of $100,000 living in San Francisco, California is equal to $43,000 living in Cedar City, Utah. And what would that $43,000 living in rural Utah be worth in an even more rural setting, such as Costa Rica? Having traveled to Costa Rica and discussing this with several people from the United States who live there, my estimate would be about $15,000 a year, as compared to $100,000 living in California. It does make a big difference where you live.
In retirement it is important that you don’t ignore the elephant in the room, i.e., inflation. It is a problem and you need to keep your eyes open to the real costs for you and find solutions that can counter increasing living costs as much as you can. Unfortunately, inflation is here to stay. Be sure you study it and plan around it, or inflation will silently decrease your purchasing power in your retirement years.