Inflation is a reality in all economies, and generally occurs for one of two reasons, know as “demand-push” or “cost-pull.” Businesses and companies that want to retain their employees have to insulate them to some degree against the rising and falling of the value of a dollar. This means that few people will generally feel the full effects of the rising costs of living throughout the course of their working lifetime. The people that do generally feel and understand it’s full effect are elderly or people living on a fixed financial base of some kind. Here is a brief overview of the two types of inflation and why you should plan for it in retirement.
When the cost of providing goods or services goes up, businesses pass these increases on to the consumer. One example of this is the minimum wage. When businesses have to pay their employees $8 an hour, they charge a corresponding amount for their goods or services to cover the cost of wages. If the minimum wage rises to $10, however, then they raise the price of their goods and services to adjust for the increase they now have to pay in wages. This creates an increase almost across the board in goods and services. Thus a person making a $10 minimum wage is no better off than when they were making $8 an hour, but they are also not worse off, since they did at least receive an increase in pay to adjust for the increase in the cost of goods and services. The people this affects negatively, however, are people living on a fixed income because their income generally does not adjust accordingly to the rise in prices.
2. Demand – Pull
When the demand for something rises, so does the cost. When there is a shortage of food, gas, water, housing or any other good or service, it also creates an increase in cost. Whenever there is a surplus of a good or service, it drives prices down. This is why retirees living in heavily populated areas or areas that grow in population often have to move to a less populous area where there is less demand. Businesses in areas where shortages create higher prices generally have to adjust the salaries of their employees accordingly in order to keep them, so those still in the work force are not generally as affected by this type of inflation as those who are unemployed or retired.
Regardless of when it occurs or how long it lasts, the expanding and contracting of the value of the dollar is an important thing for those planning for retirement to consider. It’s not a question of if it will happen, but when and for how long. While you may be able to live perfectly comfortably on $1,500 a month now, that doesn’t mean you will still be able to do so in 10 years -or at least not while living in the area where you are right now.
The good news is that currency values rise and fall around the globe, so there are almost always inexpensive places to live. The problem, of course, is how settled where you are now and how badly you want to stay there. If you like where you live and plan on staying there upon retiring, then it’s important to develop a good, solid financial plan for dealing with the inflating and deflating of the dollar over the course of the remainder of your life after retirement. It is certainly possible to live on a fixed financial base, but it also takes careful planning and a great deal of insight into the realities of the world of currency and finance.
Eric and Jennifer Lahaie
JEHM Wealth & Retirement
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