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MONEY MANAGEMENT


What You Don't Know Won't Hurt You -- Will It?

11/22/00 02:56:22 PM PST
by Bruce R. Faber

If you want your finances to survive inflation, you'd better find out what you don't know.

Are you one of those people who believes the adage, "What you don't know won't hurt you"? You roll your eyes, and your attitude is basically: "Yeah. Whatever." Well, here's a newsflash. When it comes to inflation, what you don't know will not only hurt you, financially, it can kill you.

If that's true -- and it is -- you may find yourself asking, "Why isn't this information being broadcast continuously from every radio, TV, and computer?" Now that is an excellent question! When inflation gets too rampant, it becomes impossible to hide the resulting damage. In the early 1980s, when inflation reached toward 20%, it became obvious to people, even those who otherwise lived their lives oblivious to such matters, that their money was not worth nearly as much when they spent it as it was when they earned it.

Soaring inflation causes everyone to panic. People begin to rebel against the usurious charges by banks and other lending institutions. This puts those who profit from inflation in a bad light. Which means that in order for inflation to survive, it must be kept low, out of sight of those who serve inflation's cruel and cunning masters.

INFLATION AND FIXED INCOMES

So low inflation is good, right? Well, let's take a look and you decide. Of late, the inflation rate has been kept relatively low -- in fact, pretty close to 4% for the past few years. Of course, that's provided you buy the numbers the government feeds us, and if you believe those numbers have not been manipulated. For now, we will go with the published figures. We will even go out on a limb and propose that this low-inflation miracle will continue for the next 100 years or so. At least until all of us have long since gained employment in Pushing Up Daisies, Inc.

For the purpose of this illustration, let's take another leap of faith. Say you are one of the very few who have gone through life looking forward to your golden years and having put together a nice retirement savings account. There is enough money in your various accounts for you to withdraw $2,000 every week, $8,600 a month, or well over $100,000 a year for the rest of your life. You are set to live the rest of your life in moderate luxury. Or are you?

With doctors swapping body parts faster than Dr. Frankenstein in hyperdrive, let's estimate that life expectancies into the 90s will be commonplace. So even with retirement age bumped up to 70, you should have 20 years or more on average to enjoy the good life. And inflation has been low since Federal Reserve chairman Alan Greenspan found the magic key way back when. Seems like inflation has been down around 4% forever, and there appears to be no good reason it should get any worse.

IT LOOKED GOOD ON PAPER

With that as our premise, let's see how you would fare for the next 20 years on a fixed $2,000 a week income, with only 4% inflation. Just for the sake of discussion, let's say that in the year we retire, it will cost $100 to fill up the family car, and that fillup will take us 600 miles. Using the 4% inflation figure, the following year, that same $100 will take us only 576 miles. In the third year of 4% inflation, we will only be able to go 553 miles for our $100.

That drops to 489 miles five years into our retirement, 399 after 10 years, 325 after 15 years, and by the 20th golden year of retirement, we are down to 265 miles for our $100. But hey, by the time we're 90 we don't feel like going anywhere anyway, so no big deal. This is based only on 4% inflation and does not take into account dwindling supplies, increasing demands, OPEC-induced oil shortages, wars, and other such insignificant problems.

Maybe we can cut out some of our driving, but we really must have a place to hang our hat. Here's where owning your own home has a huge advantage. Except for taxes and insurance, house payments for home owners will remain relatively flat. However, if you rent ... let's take another look.

It depends on where you live, of course, but on average, housing eats up somewhere between about 17% (Oklahoma City, OK) and 45% (New York, NY) of our income. On the day you retired -- keeping toward the conservative end of things for this example -- your rent took 23% of your income. That would be a nice round number like $2,000 per month. Just one week's worth of your money.

We will assume you have a nice landlord and your rent is increased only enough to cover inflation. You will not be gouged because his wife wants a new Lexus or he wants a bigger boat. Next year, say your rent only goes up to $2,080. The following year, it is up to $2,163; at the end of five years, it is $2,433. Rent is now eating away at more than 28% of your yearly fixed income. By the time you have been retired for just 10 years, your rent will be $2,960, more than 34% of your income, and, at the 20-year mark being used for our example, you will spend more than half of your money, $4,382 per month, to pay your rent. Remember, this is at only a 4% inflation rate, and we started at a less than the median cost of housing. Do you want to consider a 10% inflation rate, or more than 18% like it was in the 1980s, or trying to retire in New York City? I think not.

OUR GOLDEN YEARS

If you ever wondered why you see those gray-haired geezers on the evening news and out in the streets, protesting and fighting to keep inflation down and trying to save the Social Security system -- well, now you know. Once your income becomes fixed, inflation is murder, whether you know it or not. While you are still working, your wages will probably reflect some of the increase in inflation, but once you retire and your income is more or less locked in, inflation can and will eat you alive. Of course, maybe you love your job and can't even bear the thought of spending your golden years in retirement. Good for you! As for the rest of us ...





Bruce R. Faber


Title: Staff Writer
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