| Sargent & Lundy Savings Investment Plan |
| INFLATION AND YOUR RETIREMENT BUDGET |
| The following excerpts are from an
article in the May 1998 "Retire with Money".
The opinions of the author, Jeanhee Kim, may or may not
reflect those of the SIP Committee. When you plan for future expenses, whether you're working or already retired, the most elusive number to budget for is inflation. Readers of this newsletter vividly remember the 1970s, when mortgage rates rose above 20% and the price of gasoline climbed daily. Back then, inflation reached levels high enough to double the cost of living every six years. Over the past five years, however, the U.S. inflation rate has been 3% or less annually; at that pace, prices need more than 20 years to double. Considering the unpredictability of inflation, how can you possible forecast the income you'll need for the coming decades? Meeting this challenge begins with choosing a reliable inflation yardstick. The most widely used gauge is the Department of Labor's consumer price index - and practically no one is happy with it. It tracks monthly prices of more than 400 goods and services but ignores certain federal, state and local taxes. And because its roster of 400 items is updated only once a decade, the CPI can lag in tracking popular new products such as cellular phones. The index also melds differing rates of inflation for various groups of items - such as food, housing and medical care - by giving each a different weight according to the proportion of disposable income that the average consumer allots to it. For instance, housing expenditures account for 41% of the average American's budget and also of the CPI. But retirees who've paid off their mortgages generally spend less than that. Moreover, two of the three fastest-rising items in the CPI since 1980 have been college and grade school tuition, which are seldom relevant to retirees. On the other hand, in 1997 health-care prices - on which retirees spend a higher share of their income than the average consumer does - grew 50% faster than the CPI did. Unfortunately, trying to assign individual rates of inflation to various segments of your budget is a daunting and inevitably inaccurate exercise. So what should a conscientious retirement planner do? Planning experts we consulted were unanimous in recommending history as the most reasonable guide: If you're looking ahead 25 years, use the past quarter-century's average annual CPI inflation rate - 5.6%. That may seem unduly pessimistic at a time when inflation is a scant 1.7%. But nobody anticipated runaway inflation in the 1970s, and inflation forecasts are no wiser today. Thus planners recommend possibly overestimating to prevent a shortfall. "Lots of people are earning 12% on their investments now, with less than 2% inflation - but they could need that excess to balance out what may happen in the future," says certified financial planner James Budros in Columbus, Ohio. |
This page updated on 4/1/98