firefox
04-13-2007, 06:34 AM
URL: http://www.freemarketnews.com/Analysis/81/7310/lewis.asp?wid=81&nid=7310
YOUR PERSONAL CPI
Thursday, April 12, 2007
Every year the American Institute for Economic Research (AIER) in Massachusetts publishes "The AIER Cost-of-living Guide." The January 2007 issue was a mixture of good news and bad news.
The good news: the overall rate of price inflation slowed in 2006! The CPI increased by 2.5% versus 3.4% in 2005 and 3.3% in 2004. The bad news? The CPI has increased every year since 1955! Since 1913 when the Federal Reserve Banking System was created by Congress to, among other things, fight price inflation, the purchasing power of the U.S. dollar has fallen by 95%.
On March 21, 2007 the Associated Press (AP) ran a story on MSNBC.com entitled "$1 million is just not what it used to be." Reaching millionaire status (measured by investment assets and excluding a primary residence) is a quest, but for many, sadly, a "pipe dream." Data indicates that roughly 2.9 million people in the U.S. and Canada (approximately 87/100 of 1% of the total population of both countries) have $1 million. But, says the story, "$1 million doesn't go as far these days as it use to . . . someone who bought $1 million worth of goods in 1957 would need $7.3 million to buy the same goods today." And you wonder why "the millionaire next door" is worried that he (she, they) will run out of money in retirement prior to death? MONEY. . . it ain't what it used to be!
If you want to play with your own numbers and assumptions go to the Cost-of-Living Calculator at www.aier.org. Suppose you wish to plan for a 30-year retirement and you want to know what you need in 2007 to equal $100 worth of buying power had you retired in 1977? The answer is $333.99.
You may download for free the January 2007 report by clicking on the prompt for "annual report on the cost-of-living" for a PDF file. On page 3 of the report is a detailed chart showing "Percent changes in Selected Price Indexes 1990 – 2006." Study the chart carefully!
Here's the planning point. Your Personal CPI Index is not a function of the all-items CPI. It depends on the things that you buy most often. For example, the percent change from 1990–2006 for all items was +60%. But look at what items rose substantially more than 60%.
How did inflation impact young families, prone to working, driving, car pooling, and educating children? College tuition and fees, +211.8%; elementary and high school tuition and fees, +197.1%; books and supplies, +143.6%; housing at school, excluding board, +132.2%; gasoline, +131.7%; car insurance, +95.5%; vehicle maintenance, +95.5; and perhaps the cruelest blow to parents and college students, alcoholic beverages away from home, +84.2%. With airfares up by +71.7% can you really afford to finance spring break?
For the retired or "planning to be retired," data is equally grim. Retirees are big consumers of services, in greater measure than goods.
"Services" in general have seen price pressures greater than average, especially those involving health care and drugs: hospital, nursing home, adult day care services, +184.2%; dental services, +131.0%; natural gas service, +126.3%; prescription drugs and medical supplies, +110.6%; physician's services, +91.5%.
Two major financial planning concerns, planning for education funding and retirement income security, require a realistic understanding of the erosional dynamics of inflation. For future funding, you have to increase your rate of saving (save more, more often) and craft an Investment Policy that increases the odds of REAL growth of capital, i.e., increased purchasing power net of inflation and taxes.
Suppose that you want real growth of capital of 3% annually on average over and above 3% inflation. You are in a 25% overall marginal tax rate (federal and state). Your targeted rate of return (ROR) becomes (3+3/ 1-.25 = 6/.75 =) 8%.
If you are retired and are spending 5% of your portfolio's value annually, but want a return that will hedge inflation, and we assume a lower tax bracket of 20%, your target becomes (5 + 3 = 8/.80 =) 10%. If you are spending only 4% ($40,000 per year on a $1 million portfolio), with the same assumptions, your target is (4 + 3 = 7/.80 =) 8.75%.
With fixed income yields at long term lows (CDs in the low 5% range before taxes), a healthy allocation to diversified equities (stocks) is required. This reality requires a well-thought-out process to manage volatility risk, as well as "sequence risk," the pattern of withdrawals as market values bounce up and down.
So you have interest rate risk, market risk, inflation risk, sequence risk, and longevity risk. Minimize one and you increase another. Sound like a "risky world"? It is. That's why you need a holistic plan. There are too many moving parts for simplistic approaches.
Wait a minute! At a 5% withdrawal rate, it takes $1 million in investment assets to produce $50,000 a year ($4167 per month) in retirement cash flow, and less than one percent of the population has a million or more? Washington, we have a problem! Since we aren't going to let people starve or die in the streets from lack of medical care, taxes to support an aging population are likely to skyrocket. Achievers and savers, be forewarned!
There's a link to a cool inflation calculator and other tools on that page. The dollar was worth twice as much as it is now as early as my birth year! Actually slightly more than 2x...
YOUR PERSONAL CPI
Thursday, April 12, 2007
Every year the American Institute for Economic Research (AIER) in Massachusetts publishes "The AIER Cost-of-living Guide." The January 2007 issue was a mixture of good news and bad news.
The good news: the overall rate of price inflation slowed in 2006! The CPI increased by 2.5% versus 3.4% in 2005 and 3.3% in 2004. The bad news? The CPI has increased every year since 1955! Since 1913 when the Federal Reserve Banking System was created by Congress to, among other things, fight price inflation, the purchasing power of the U.S. dollar has fallen by 95%.
On March 21, 2007 the Associated Press (AP) ran a story on MSNBC.com entitled "$1 million is just not what it used to be." Reaching millionaire status (measured by investment assets and excluding a primary residence) is a quest, but for many, sadly, a "pipe dream." Data indicates that roughly 2.9 million people in the U.S. and Canada (approximately 87/100 of 1% of the total population of both countries) have $1 million. But, says the story, "$1 million doesn't go as far these days as it use to . . . someone who bought $1 million worth of goods in 1957 would need $7.3 million to buy the same goods today." And you wonder why "the millionaire next door" is worried that he (she, they) will run out of money in retirement prior to death? MONEY. . . it ain't what it used to be!
If you want to play with your own numbers and assumptions go to the Cost-of-Living Calculator at www.aier.org. Suppose you wish to plan for a 30-year retirement and you want to know what you need in 2007 to equal $100 worth of buying power had you retired in 1977? The answer is $333.99.
You may download for free the January 2007 report by clicking on the prompt for "annual report on the cost-of-living" for a PDF file. On page 3 of the report is a detailed chart showing "Percent changes in Selected Price Indexes 1990 – 2006." Study the chart carefully!
Here's the planning point. Your Personal CPI Index is not a function of the all-items CPI. It depends on the things that you buy most often. For example, the percent change from 1990–2006 for all items was +60%. But look at what items rose substantially more than 60%.
How did inflation impact young families, prone to working, driving, car pooling, and educating children? College tuition and fees, +211.8%; elementary and high school tuition and fees, +197.1%; books and supplies, +143.6%; housing at school, excluding board, +132.2%; gasoline, +131.7%; car insurance, +95.5%; vehicle maintenance, +95.5; and perhaps the cruelest blow to parents and college students, alcoholic beverages away from home, +84.2%. With airfares up by +71.7% can you really afford to finance spring break?
For the retired or "planning to be retired," data is equally grim. Retirees are big consumers of services, in greater measure than goods.
"Services" in general have seen price pressures greater than average, especially those involving health care and drugs: hospital, nursing home, adult day care services, +184.2%; dental services, +131.0%; natural gas service, +126.3%; prescription drugs and medical supplies, +110.6%; physician's services, +91.5%.
Two major financial planning concerns, planning for education funding and retirement income security, require a realistic understanding of the erosional dynamics of inflation. For future funding, you have to increase your rate of saving (save more, more often) and craft an Investment Policy that increases the odds of REAL growth of capital, i.e., increased purchasing power net of inflation and taxes.
Suppose that you want real growth of capital of 3% annually on average over and above 3% inflation. You are in a 25% overall marginal tax rate (federal and state). Your targeted rate of return (ROR) becomes (3+3/ 1-.25 = 6/.75 =) 8%.
If you are retired and are spending 5% of your portfolio's value annually, but want a return that will hedge inflation, and we assume a lower tax bracket of 20%, your target becomes (5 + 3 = 8/.80 =) 10%. If you are spending only 4% ($40,000 per year on a $1 million portfolio), with the same assumptions, your target is (4 + 3 = 7/.80 =) 8.75%.
With fixed income yields at long term lows (CDs in the low 5% range before taxes), a healthy allocation to diversified equities (stocks) is required. This reality requires a well-thought-out process to manage volatility risk, as well as "sequence risk," the pattern of withdrawals as market values bounce up and down.
So you have interest rate risk, market risk, inflation risk, sequence risk, and longevity risk. Minimize one and you increase another. Sound like a "risky world"? It is. That's why you need a holistic plan. There are too many moving parts for simplistic approaches.
Wait a minute! At a 5% withdrawal rate, it takes $1 million in investment assets to produce $50,000 a year ($4167 per month) in retirement cash flow, and less than one percent of the population has a million or more? Washington, we have a problem! Since we aren't going to let people starve or die in the streets from lack of medical care, taxes to support an aging population are likely to skyrocket. Achievers and savers, be forewarned!
There's a link to a cool inflation calculator and other tools on that page. The dollar was worth twice as much as it is now as early as my birth year! Actually slightly more than 2x...