Real Inflation and Your Retirement

The Bureau of Labor Statistics (BLS) has been telling us for a long time that the rate of inflation is around 2 to 3 percent each year - or even lower. For example, in August 2007 it reported a rate of only 1.7%. Have you ever said to yourself: Hmm, that doesn't sound right. Indeed, it does sound like something isn't quite right there.

There has been no better example of high inflation than the year 2008 where fuel prices have skyrocketed and subsequently drove other prices up. You probably noticed that many common items on your grocery list suddenly shot up by 200 percent or more. Yet the BLS continues their low end statistics and unfortunately, these statistics are the most widely publicized and accepted. Here's a hard truth to swallow: The BLS keeps the statistics on the low end artificially.

Here is the problem with the BLS statistics. It relies heavily on the Consumer Price Index (CPI) which excludes items like food and energy. The reason given for this exclusion is that such items encounter volatile price movements and fluctuations. This type of exclusion has been practiced by the BLS since the Carter administration.

Whether this type of exclusion is right or wrong really takes a back seat to the real issue here. The real issue is that we can't simply 'exclude' food and energy from our lives. The reality is that we have to plan for these. We must have meals, we must have heat in the winter, and if we live in a hot climate, we must have cooling in the summer. Since we are mobile seniors we must also get around. Even if we cut back our driving and carpooling, we still have things to do, places to go, and events to attend. The excluded items are part of our budgets.

The point of all this is that financial planners often go with a BLS like inflation figure and like them, we are conditioned to think inflation is not as bad as it seems. The real inflation rate is understated by as much as 7% when you add in these conveniently excluded items and that's the reality for today's seniors. How many seniors have planned this into their retirement? I have not and that's why I plan to take my home based businesses long past my retirement. What about you?