Retirement Shock Number Three: Inflation

The rate of inflation can have a big impact on your standard of living in retirement.

The past few years have been kind to people living on a fixed income. In 2003, the consumer price index went up 1.9%. The annual increase over the past 10 years has been about 2.5%. But, says the Department of Labor, the average annual inflation rate over the past fifty years has been 4%.

So what does this have to do with your retirement?

It could have a lot to do with it. Interest rates are now very low. The economy is rising again and taking prices along with it. The Federal Reserve is starting to raise interest rates to reduce the inflation risk but the consumer price index in May showed a 3.1% rise from one year earlier. A reasonable person can expect inflation to revert to its historical average of 4%, or even higher.

That doesn’t sound like much. The Wall Street Journal says an inflation rate of 4% means that goods and services costing $10,000 today will cost you about $22,000 in 20 years.

Keep in mind that the consumer price index is not always an accurate barometer of how much prices are increasing. Ask any federal employee who retired in the past five years about one of his major concerns and you are likely to hear about the rise in health insurance rates. Annual double digit increases are common and increases of 10-15% each year in your health insurance costs will quickly make a big difference in your ability to live comfortably in retirement. See, for example, “Health Insurance Costs are a Problem in Government and Private Sector”

Another big factor that the inflation rate does not adequately describe is property taxes. Many, perhaps most, federal employees live in metropolitan areas in or close to large cities. Most own their own homes. If you choose to live there after retirement, you can probably expect a big increase in property taxes.

For example, using statistics from a recent issue of the Wall Street Journal, between 2000 and 2004, property taxes in Alexandria, VA rose 53.1%. Want to move further south to avoid big tax increases? Property taxes in Roswell, Georgia went up 36.7% in the same period (although property taxes in Roswell are still about half of the amount you will pay in Alexandria, VA). How about Miami–that is just about as far south as you can go and remain in the United States. Property taxes near Miami went up 46.5% in the past four years.

On the other hand, taxes in Littleton, Colorado went down 1.6% and residents there pay an average of $1850 instead of the $4549 you will pay in Alexandria.

Want to move to Las Vegas? The tax assessor there is asking the state legislature to pass a law to limit annual tax increases to prevent tax bills going up 20-50% in one year because of increased property values.

You may want to consider where you will be living when you retire. Choosing to live in a large city or fast growing recreation area can quickly eat up your retirement income.

Fortune magazine recently ran an article with suggestions for retirees on good places to retire because of pleasant living conditions and lower cost of living. Their suggestions: Beaufort, South Carolina; Sarasota, Florida; Flagstaff, Arizona; and Grants Pass, Oregon.

Note that none of these retirement locales are located near Broadway, the Kennedy Center or Fisherman’s Wharf. All are in relatively small areas of population and none are at the top of nationwide lists on the fastest growing areas of the country.

In short, plan for your retirement, don’t just take the stop to leave your government job without thought and consideration. Make sure your retirement calculations give consideration to the rate of inflation. And think about where and how you are going to live in order to have a comfortable standard of living.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47