Retirement planning for inflation - Don't worry about inflation, be happy in retirement! Many people worry about how inflation will affect their retirement expenses. It may not affect retirement as much as you might think.
This week on Friends Talk Financial Planning, John and Bridget discuss the challenges and concerns surrounding inflation in retirement planning. They offer practical insights on how to manage inflation so you don't need to worry in retirement. They will discuss 5 big reasons why you don't need to worry about inflation in retirement planning:
1. Housing - a fixed mortgage is not tied to inflation
2: Flexibility in Education Costs
3: Flexibility in Food Costs
4: Flexibility in Travel
5: Social Security / Pensions are Indexed for inflation
Owning a home, especially with a fixed mortgage, is one of the best ways to protect against inflation, as housing costs make up a significant portion of the Consumer Price Index (CPI). Additionally, education costs, while a big factor in inflation, typically don't affect retirees in the same way.
Unlike younger individuals with dependents, retirees often have more flexibility to adjust their spending habits, whether it's choosing cheaper food options or traveling last-minute for deals. As people age, their lifestyle expenses often decrease, and they can take advantage of lower-cost opportunities, like discounted movie tickets during the afternoon hours or off-season travel.
For many retirees, inflation may not be as impactful because income sources like Social Security and pensions are often indexed to inflation, ensuring a steady stream of income that rises with prices. For some retirees, these income sources may already cover a large portion of their spending, effectively neutralizing the effects of inflation.
With strategic retirement planning you don't need to worry about inflation and can have a happy, stress-free retirement!
Resources:
- Alliance of Comprehensive Planners: https://www.acplanners.org
- John's firm website: https://www.trinfin.com
- Find us on Facebook: www.facebook.com/friendstalkfinancialplanning
-Link to Pew Research Consumer Price Index article: https://www.pewresearch.org/short-reads/2022/01/24/as-inflation-soars-a-look-at-whats-inside-the-consumer-price-index/
TRANSCRIPT:
Bridget: Hey John. I don't like inflation, and I'm thinking about retiring. What do I do? Hi, I'm Bridget Sullivan Mermel, and I have a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Before we dig into Bridget's distaste for inflation, I want to remind everybody to hit the subscribe button. That helps other people find this content on YouTube. And let's talk about inflation. I love how you say that, Bridget. Usually when we talk with folks it's more nuanced, but at the end of the day it's exactly what you said. It's like a five-year-old who doesn’t want to eat their broccoli. I hate this. What do we do about this thing?
Bridget: We've had our show for four years now, coming up on five, and every time we’ve talked about inflation, even before there was big inflation, I said, “I don't like inflation.” And you said, “Just deal with it.” “But I don't like it.” But anyway, now it's kind of part of life. Because I understand people's emotions around inflation, I still got to be a planner and try to figure out how to help people when they’re retiring. It just throws a wrench into their plans.
John: Well, we just did a recent episode on how to think about budgeting for retirement. Geez, how do I plan for what I'm going to spend? And that's a whole separate topic. We'll put a link to that episode in the show notes. Go check it out. But then this whole retirement thing is scary. You go, “Geez, how do I factor in inflation over the next 30 years? How do I think about that?” I think we have similar views on this, but what do you say to folks or how do you talk about that when that topic comes up?
Bridget: I tell them not to worry about inflation.
John: I hate it, and don't worry about it.
Bridget: I hate inflation, but I tell them not to worry about it, because there's plenty of things I hate, but I try not to worry about. Let's talk about why. Then I try to explain why. And like I said, I don't know if I get anywhere with that, but this is why. First of all, what are the components of inflation? We've got a Pew Research poll out about the components? All right, number one, housing. We encourage people to own a house.
A lot of people in retirement have even paid off their house, which we're 50/50 on. But the biggest component of inflation is not getting inflated for you. You don't have to worry about your housing costs, for the most part. So if you own your house, you don't have to worry about that part. If rent goes up, that's fine. You don't have to worry about that. It's a great inflation hedge.
John: I really appreciate that point. And I think sometimes we gloss over that. But housing is something like a third of the CPI, the Consumer Price Index computation. In other words, a third of inflation goes to housing. If you don't have a mortgage, that's not a cost for you. If you have a mortgage, your mortgage is fixed. If you listen to our advice on things, you got a fixed mortgage.
If you're paying $2,000 a month for your mortgage today, what are you paying in five years, what are you paying in 10 years, what are you paying in 20 years? That same amount. It doesn't change. Property taxes can be a big thing for folks. But that core factor, most of that third of the Consumer Price Index doesn't really apply. That's so huge. And it's easy to overlook how powerful owning your home is. And like I said, even if you have a mortgage on it, it's almost more powerful. That's really critical.
Bridget: Another big part of CPI, I think it's at least 6%, is education costs. So that probably starts from daycare and ends up at college. What's the cost of all that stuff? Guess what you don't have? Or maybe you do have, but you totally have control over it when you're retired is education costs. Maybe you are taking some classes, but you can decide which classes to take. It's not like you've got to go to college and pay this, so suck it up. You can take whatever classes you want.
John: Yeah. I mean, look at my situation. I have two middle school kids, so education costs are a big factor in my inflationary thinking. It will be a little bit different in 20 years when they're hopefully off the payroll and hopefully out of college in 20 years. That’s a very different calculation.
Bridget: Then let's get into food. Food costs have gone up, and we feel like maybe the grocery stores are milking it. Pretty funny, huh? 😊
John: I was not expecting a milk joke.
Bridget: Well, you live in Wisconsin. So anyway, if it really bothers you, you can shop at different places. You have a lot of control over this.
John: Yeah. And I'll go back to being at a younger stage in life with kids. We've got certain things that our kids eat or don't eat. We've got to put different levels of food on the table. And as I picture in retirement, I'll use the phrase, hey, if the price of beef goes up, I can buy chicken. I've got some flexibility. Certainly, younger folks have flexibility, but not to the same level as those in retirement.
Bridget: Right. And I'm actually eating a lot less now.
John: Yeah. Eating less as you get older, just in general.
Bridget: Yeah.
John: That flexibility to me is a really big thing and it comes into things like food. There're just different necessities for things. But then I think of things like travel. And when I do travel planning, when you do travel planning, how does it work around our work schedules and for me, around the kids’ school schedules. And we're going on vacation on October 27th, because that's when the kids have off school. When you're retired, you don't have that. And you can go whenever you want. We've got folks who make last minute decisions. Hey, we're going to go on vacation next week. Where are we going?
I don't know. We're going to see what the best deal is. Cruises for 25% of the cost and different things. And your travel costs can go way down if you choose to be flexible like that. You and I can't do that right now but give us 10 or 20 years and we'll be able to do those things if we want to and really control some of that inflation. And there are other similar things. For example, I've got limited times if I want to go see a movie, whereas hey, the Tuesday afternoon $5 special. Wonderful. I can't do that. You can't do that right now, but in 15, 20 years we can do those sorts of things. So it’s easy to overlook that impact.
Bridget: So according to Bert, there is something to be concerned about and that's not inflation, but what I would call lifestyle creep. So that his contention was that prices going up don't matter as much as my cell phone. Oh, I just got this 10 years ago. My Internet, oh, I just got that 20 years ago. My, this, that and the other thing. Oh, now I get my groceries delivered. All of these conveniences that are must haves that I'm spending more on. So it's not about inflation, it's about spending more on other things that you want and value. I value my cell phone. I value those and that's within my control.
John: Right. I forget about that, so I'm glad you brought that up, because 30 years ago, 40 years ago, nobody had a cell phone bill. And that's not an insignificant dollar. Nobody had a streaming bill. Maybe you had cable back then, but there was a time when cable TV was nothing. All these different things may be useful and necessary (I'm not going to go without those) but at the same time, that's more of an impact than pure CPI inflation.
Talking about the legal CPI inflation definition, one of the other factors that mitigates the effects of inflation on our retired clients is that Social Security is tied to the consumer price index. So Social Security, to the extent it's part of your retirement, is protected. And of course, for some folks it can be a really big part of retirement depending on the benefits you get. I mean we've got folks for whom half of their retirement income is indexed for inflation. So inflation is a non-factor.
Bridget: Right.
John: For a lot of folks here in Wisconsin who have the state pension plan, if you worked as a teacher or state employee, that's not tied with inflation, but it is indexed. It goes up over time. It's actually done better than inflation in the last 20 years. So for our folks who say, hey, I've got Social Security coming, it’s indexed with inflation. If I'm a teacher, I got my state pension, that's indexed, let's call it for inflation even though it's not purely that. Golly, I might have three quarters of my spending in retirement indexed for inflation.
And for some of our clients, all their retirement spending is indexed to inflation, so inflation is literally not a factor, even if we don’t count all the things that you and I were just talking about. So there's some of those things that are easy to forget. For a couple with both people who had working careers earning money and paying into the Social Security system, it's not uncommon for them to have $40,000 or $50,000 or $60,000 of income from Social Security. That's a pretty big chunk of dough coming in every year indexed to inflation.
Suddenly those rising prices of pure CPI, aren't quite as big of a deal. To me, it's one of those things that yes, it's a legitimate concern. Prices go up over time. We certainly have seen this the last couple of years. But it’s not as much of a concern for a retired person as you might think, based on housing and some of the other costs. And it's offset in some cases by income indexed to inflation. We haven't even talked about higher interest rates on CDs and things like that. But you got Social Security and maybe your pensions indexed to inflation. It's important, it's legitimate, but it's not quite as scary, as it might be made out to be, the sort of financial boogeyman in retirement.
Bridget: I think the underlying feeling associated with it: this is change that's imposed on me and I don't like it.
John: Yeah.
Bridget: So what? All right, I'm off the cliff now. My reptile brain has taken a break.
John: Right. If you don't remember anything about this episode, just remember I hate it, and don't worry about it.
Bridget: All, right.
John: That’s a great place to wrap up here. Again, I'm John Scherer. I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. John and I are both proud members of the Alliance of Comprehensive Planners, which is a group of fee-only financial planners that focus on tax-focused, comprehensive planning. It's all over the country. IJohn and I are both taking clients now, but if you're interested in finding somebody who’s in your local area, you can check out acplanners.org.
John: And don't forget, hit that subscribe button.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.