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How retirees manage inflation

How retirees manage inflation

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This article was posted July 1, 2021.

One surprising finding by researchers is that retirees seem to innately keep their spending increases below the rate of inflation. This is especially true for those in the Top 20% of the wealth/income pyramid.

The Myth of Steady Retirement Spending, and Why Reality May Cost Less

Spending in Retirement: Determining the Consumption Gap

Over the past 27 years that I've been early retired, I can identify three things I did that really kept inflation at bay.

1) Rent vs. Buy

It's very hard for home ownership to compete with the stock market as an investment. I didn't buy a home until age 57 when the tail end of the 2008 real estate bust allowed me to purchase my Portland area home for 70% off it's 2008 value in 2012.

Throughout my engineering career and early retirement, I've done a "rent vs.buy" calculation to inform my real estate decisions.

The 5% Rule -- A new way to look at the rent vs. buy decision

NY Times: Renting Is Cheaper Than Buying, Almost Everywhere

Having grown up in a Connecticut home with a lawn that had to be moved and long driveway that had to be cleared of snow, I had little appetite to accept the burdens and hassles of owning a home. I'd rather play golf on the weekends than spend my time doing landscaping or home repairs. My preference was a large apartment complex with a pool and tennis courts, on-site professional management, and a dedicated maintenance staff.

During the 20 years I lived in Houston, you could rent that for $400 to $600/month as developers built those types of apartment complexes for as far as the eye could see, keeping rents low through fierce competition.

Interesting story. When I first moved to Houston in 1981, I leased a 1-bedroom apartment in a 400-unit 3-story complex about a mile from the Galleria shopping center. Landlord was in the process of turning half the complex into condos. The one-bedroom unit I leased for $400/month sold for $45,000 with a 15% mortgage at the time. The monthly mortgage, property tax and HOA fee was more than the $400/month rent, but if you were a high-salaried worker, you'd get some of it back in itemized deductions.

If you put the 20%, $9,000 down payment into an S&P500 index fund in Jan 1981, you'd have $690,000 as of Jan 2021 with dividends reinvested. What's the value of the condo today? Zillow tells me it's a bit less than $100,000.

How did a renter fare? The $400/month 1981 rent, dropped to less than $200/month by 1986 when the price of oil collapsed to $8/barrel and everyone left town. Rents returned to 1981 levels by about 1992. You can rent a one-bedroom there today, 40 years later, for $850 month, which is less than the dividend you're collecting on the $690,000 value of the S&P500 mutual fund. Houston was a very good place to be a renter.

2) Reducing spending during stock market declines? -- not when travel bargains abound

Conventional wisdom advises retirees to reduce spending during stock market declines to improve portfolio survivability. That may make sense if your annual budget contains a lot of fluff like expensive travel or a new car every 2 or 3 years. But if you've retired closer to the bone, it's a lot harder to reduce ongoing expenses like like health insurance premiums or property taxes. You'd need to make up the slack with "fluff" to cut elsewhere.

When the economy crashed (along with the stock market) in 2008 during George W. Bush's last year in office, I noticed airline fares and cruises started to get really cheap. I started traveling extensively as a result to take advantage of the bargains (2 or 3 two to three-week cruises a year.) I've now seen all seven continents (even Antarctica.)

When the economy recovered, and travel prices returned to normal levels, I noticed I had less interest in taking a cruise. Better to do that when prices are cheap.

3) Don't look the Obamacare "gift horse" in the mouth.

As Americans, we pay double the cost of other large industrialized countries for an inferior health care system that kills us an average of 3 years sooner.

It's not uncommon to see financial advisors warn of the high cost of health insurance for retirees. But most of them omit the fact that with a little planning, even people with multi-million dollar retirement accounts can get virtually free health insurance through Obamacare.

Obamacare Repeal? My amazing story of drastically lower premiums.

I'd budgeted $20,000/year for health insurance premiums from age 60 to age 65. The last few years on was on Obamacare, I had a premium of $1.43/month -- less than $20/year. That's almost $100,000 worth of "inflation" that never left my bank account.

Sure, I had the same kind of crap, for-profit health insurance plan as everyone else, but I was paying a premium a lot closer to its value.

Most retirees will see better, more comprehensive health insurance coverage once they qualify for Medicare at age 65.

What I'm doing for Medicare insurance at age 65

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Copyright © 2021 John P. Greaney, All rights reserved.

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