REVEALED: Government Faked The Truth About Inflation
Dear Rich Lifer,
Every Friday, Rob buys a six pack of beer for $10.
Rob sets aside $520 in his savings to buy his weekly suds for the year.
This routine makes Rob happy.
Now, let’s assume the cost of Rob’s six pack increases by 3% annually. Every year, Rob’s $520 buys him 3% less beer.
In thirty years, when Rob turns seventy, that same six pack of beer that cost just $10, will cost Rob $24.27 — a $1,262 annual expense.
If Rob wants to maintain his current beer consumption, he’ll need to increase his $520 in savings by nearly 143% over the next 30 years.
Even if Rob manages to increase his savings to $1,262 by 2051, he will have to sell $1,262 worth of investments to pay for the beer.
This will trigger a $750 taxable gain, and at 25% federal and state tax, Rob will pay roughly $188 in taxes.
All said and done, Rob is left with $1,074 in beer money, which only buys 44 six packs of beer in 2051 versus his usual 52 in 2021.
This makes Rob sad. But, such is the nature of inflation.
In case you’re wondering, Rob is you.
Whether you realize it or not, every year the stuff you buy costs more than it did the year before.
While inflation may appear stagnant due to the Bureau of Labor Statistics’ fuzzy math around the Consumer Price Index, the truth is the cost of consumer goods is going up.
And for retirees, this means you’ll need probably twice as much income later in retirement to buy the same goods and services you bought at the beginning of retirement.
To make matters worse, people are retiring earlier and living longer. Since 1950, the average retirement age has decreased by five years and the average life expectancy has increased by more than a decade.
Depending how you feel about another 15 years in retirement is besides the point. You still have to come up with 15 more years of retirement income which is constantly being eroded by inflation.
So, what’s a retiree to do?
Two Strategies to Boost Purchasing Power
For most retirees, there are two proven ways to lengthen their retirement dollar. The first is simply delaying Social Security benefits.
You may be thinking, doesn’t Social Security have a built-in annual cost of living adjustment which keeps pace with inflation?
Yes it does, but somewhere along the way politicians and the Bureau of Labor Statistics got this idea that inflation was overstated.
For years, the Bureau of Labor Statistics calculated the Consumer Price Index in a straightforward manner. They looked at a basket of goods, and determined how much it would cost. The next year they would price out that same basket of goods and the Consumer Price Index would go up or down based on the new price.
In the ‘90s, some politicians argued inflation was too high. The thinking was that if prices increased, people would substitute less expensive alternatives, therefore the basket of goods should be adjusted each year accordingly.
For example, if steak becomes too expensive, consumers will substitute ground beef. By removing steak from the basket and replacing it with cheaper ground meat, inflation is controlled.
The Clinton administration didn’t completely buy into this variable basket, but they took a different approach that achieved the same results.
Basically the Bureau of Labor Statistics started weighting different items in the basket of goods. Items increasing in price were given less weight than items decreasing in price.
On top of that, the Bureau of Labor Statistics made another change called “hedonics,” which goes beyond the price of an item and considers its value.
For example, if the price of a new car increases by 5 percent, but new features on the car like lane assist and back-up cameras increase the value to the consumer by 15 percent, the Bureau of Labor Statistics would say the price of the car decreased by 10 percent… even though you’re paying more money for the car…
You can see why your Social Security check’s cost of living increase doesn’t necessarily help you keep pace with inflation since it’s based on this obfuscous math.
So, the best way to beat the system is to build your own inflation adjustment into your Social Security benefits. How do you do that?
By delaying Social Security you can add as much as a third to your annual benefit (eight percent per year for those born after 1943 to a maximum age of 70). The annual cost of living adjustment will still be underrated, but it will be based on a larger benefit amount.
Rethinking Risk to Increase Purchasing Power
The second way retirees can boost purchasing power is by rethinking how they view risk.
Most retirees have been told it’s risky to keep their nest egg invested in stocks later in retirement. Instead they should be rebalancing their portfolio to manage the risk by putting more eggs into less volatile investments like Certificates of Deposit and government-issued bonds.
The problem with this advice is twofold…
First, the terms risk and volatility are often used interchangeably and they shouldn’t be. These are two words that mean very different things.
For instance, just because the S&P 500 may experience wild swings up and down some years, doesn’t mean it hasn’t consistently returned 10% over the last 50 years.
Second, due to this misinterpretation, people often underestimate the risk of so-called “safe” investments.
If you were trying to hedge against inflation, what’s the riskier investment: a 10% return over 30 years with wild swings in between or a guaranteed 3% return from a 30-year Treasury bond that has very little volatility?
Before you answer, remember Rob’s beer money example. Between inflation and taxes, what most retirees consider to be a safe investment is actually the riskier choice.
Bonds create a lot of portfolio risk in the form of a negative real return. You’re essentially locking in a guaranteed loss.
Few investors realize this, and think they are protecting their wealth by not exposing it to the ebbs and flows of the stock market. When in fact, the only way to avoid investment risk is to buy publicly traded stock, which offers small investors a low-risk and high return opportunity.
These two strategies are the cornerstones of beating inflation.
There are several other tips and tricks you can try that will lengthen your dollar. Growing your own food and living somewhere with easy access to public transit will help insulate your money against rising food and transportation costs. Investing in real estate is another proven strategy since your ability to generate rental income from a property increases at a rate that compensates for inflation.
Also, any debt you take on to purchase a rental property decreases. If you are paying $800 a month in a fixed-rate mortgage, those payments won’t increase, even as the worth of the payments decreases with inflation.
Inflation can ruin retirement for many seniors. However if you’re willing to develop a plan that addresses the points covered here today, you will successfully soften inflation’s blow and reap the rewards of a care-free retirement!
To a richer life,
The Rich Life Roadmap Team