7 Ways to Stay Ahead of Inflation in Retirement

There has been inflation every year since Obama took office, yet, the COLA has been minupliated so it shows no inflation so Seniors don't get the Cost of Living Adjustment. The figures take out gas, food prices, and other things you absolutely need. I for one am disabled and cannot get a job to supplement this income. So, we are all behind and won't catch up anytime soon, or ever.

Donna of NY 1:06AM October 18, 2011

Here's something the actuaries may evaluate. Intelligent rather than rhetorical readers should appreciate this.

Assume the following for illustration:

You have $1,000. (For different amounts, adjust proportionately.)

Inflation is 5% level going forward.

Pick a period of time - let's say, 5 years.

(In each of the above, you can use a different assumption, but the gist below will be unchanged.)

Also say you can earn exactly equal to the inflation rate on your investments. (No one can do that in the current economy, but let's generously assume that our "smart" Fed and Treasury can reverse our current course to achieve this.)

In five years $1,000 grows to $1,276 at 5% interest. Once again, though the current economy makes it unlikely you can actually earn 5% now, our assumption is that you can earn equal to the rate of inflation which for our assumption is 5%. True, inflation is greater than that currently, but let's continue while keeping that in mind.

So what is worth $1,000 today is worth $1,276 5 years from now in our example. $1,000 today buys $1,000 of goods. But at the assumed inflation rate, the same goods would cost $1,276 in 5 years. So you can buy exactly the same amount of goods, right? By earning investment returns equal to the inflation rate, you break even, right?

No. You are taxed on the gain of $276. Unless you are exempt from income taxes, you will be in the hole on this deal.

This is the "silent tax" of inflation.

Now believe it or not, this is the optimistic scenario, because it assumes you are 100% invested. You need to invest every penny in your existence to achieve this outcome. If you want to own such an extravagance as, oh, a CAR which doesn't go up 5% per year - the outcome is even worse.

And what if some of your investments fail - say, a pension provider defaults, like Enron, or a stock disintegrates like GM? Does life make an exception for you, and say, "I feel your pain. You get to have 0% inflation." Not!

The undeniable fact is that if you redo the above calculation at 0% inflation, regardless of the time period (and regardless of the investment return as long as it's 0.0000% or higher), you don't lose a thing. Nada.

And what if our wise Fed overlords who "target 2 to 3 percent inflation" miss, and we get 10% or 20% or 50% or 4000% ? Don't laugh. History - contemporary history, in fact - shows this has actually happened many times, even in modern industrial nations such as Germany (check their history).

I understand the earlier poster's frustration with dishonest discourse; a manipulative responder would tear apart the above by attacking nongermane details and such trash ploys. Thus I address this to actuaries. Does this pass muster? Is the analysis above, in essence, valid?

Skeptic of CA 4:22PM June 16, 2011

Indeed, someone is wasted.

How to win an argument when you are just wrong, and are countered on every front:

Use the fallacy of authority (Nobel)

Fallacy of non-sequitur (Clinton surplus means inflation is necessary??)

Fallacy of negative proof (Inflation is not proven to be theft; ergo, ipso facto, inflation is not theft?!!)

Fallacy of lying (fan of the [real estate] crowd - read the comments - every single one. You're just wrong, and evading the point with classic distraction)

And straw men and other fallacies litter the landscape. Special mention of appeal to fear.

Nearly every meaningful Keynesian economist is so smugly convinced that they are the only ones that know anything that they are essentially *incapable of honest debate*. This economy is in serious, serious trouble, hyperinflation is possibly the only way out from unsustainable debt, and smug rationalizations and fallacious distractions are all you hear. Hmmmph. AND INFLATION. It is the Keynesian mantra. "But we'll only rape you a small amount. You won't even notice it."

Go ahead and grab the last word. I think anyone who reads the comment thread will see the real truth.

As you ponder that, get your ad hominem skills out for this one, because you will hate its message -

http://www.youtube.com/watch?v=XV8xLX7dy64

http://www.google.com/search?hl=en&source=hp&biw=1126&bih=727&q=inflation+is+theft&aq=f&aqi=&aql=&oq=

Another Actuary of WA 8:31PM June 13, 2011

I remain "willing, however, to tolerate a measure of mild inflation along the lines I described already, but only, as I made clear then, as a last resort to repair the damage done by Cheney et al." For this statement to be pilloried by a fan of the crowd who triggered the huge burst of real-estate inflation which almost drove us off the cliff, would be funny were it not tragic.

All this invective with no argument, just naked assertions like "theft" to characterize what I (and more importantly Nobel-prize-laureate Krugman) am advocating, and "erroneously pontificate success" to describe mention of the undoubted fact that Clinton left a surplus which Cheney et al squandered, convinces me that further response is wasted

Brian A Jones of NY 4:44PM June 13, 2011