The 'Couv'

The 'Couv'

Tuesday, June 22, 2021

Inflationary Period is Bad News for Retirees

Inflation is the enemy of all retirees. Generally retirees are on a fixed income that may have a COLA factor but in high inflationary periods the COLA rarely keeps up with real world prices. The numbers for inflation in April and May were atrocious hitting levels not seen it more than a decade. The real concern isn't a few months of inflation at high levels but rather a potential long term trend. I am seeing too many analysts suggest that our current pattern looks a lot like the patten in the 70s and that was not good, not good at all. There are some key differences in the 1970s and today however. Monetary policy has changed enough that the fed does have some stronger capability to stave off hyper-inflation. But the key approach still lies with manipulating the availability of money and that is done primarily with interest rates. 

We have been in a ultra-low interest environment for a fair bit of time, and I believe it may be time to let rates creep a bit before things get into another bubble. Prior to 2015, the average mortgage rate over a fifty year period was about 6%. We have been well under that for a very long while and having rates on home mortgages creep a bit into the upper 4s and very low 5s would be healthy at this point.

Government spending in the crazy excess we see now is a propellent for inflation and I see no signs of a federal government crackdown on fiscal policy. Retirees are wise to be certain they do not commit too much of their income into living arrangements. Now more than ever, following the old school guidelines about income and "rent" or mortgage is a good idea. Build in a cushion so that if inflation does get out of hand you will be able to maintain your mortgage or rent and still provide basic living expenses.

Anyone over 50 should be seriously looking at long term savings and safer investments that preserve principal rather than aggressive investments that have a higher probability of volatile swings. Let's hope the government gets a handle on the fiscal spending and staves off hyper-inflation. I remember the late 70s and early 80s and it was not pleasant when trying to borrow money for a car or a house.

Retirees are well advised to not overbuy in retirement and in practice it may be wise to underbuy a little instead.

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