Why Government Inflation Numbers Don’t Reflect Retirement Inflation

This excerpt from an article by Amit Chopra hits on a key point we emphasize in retirement planning: often what the government reports as its official inflation numbers does not reflect what consumers actually experience. Retirees especially are aware of this. What makes it even worse is the fact that even though Social Security is supposed to be adjusted for rises in the cost of living, because government numbers are so out of sync from real inflation it does little to help retirees keep up.

Understanding this is crucial not only for retirement plan budgeting, but it also affects your investment management decisions. Because if the governments cost of living adjustments won’t keep your Social Security benefits at parity with inflation, your savings and investments will have to make up the difference.


As you enter retirement, spending habits tend to change drastically.

Most couples spend less on dry-cleaning, commuting and clothing, while outlays for health insurance, — which likely falls squarely on family rather than an employer — travel and leisure activities tend to increase. Food and energy consumption tend to remain relatively steady. While this might seem obvious, it is often overlooked when constructing budgets and investment portfolios.

The latest inflation report showed that consumer prices fell by about 1% over the past year, and that overall the world is facing a risk of being in a deflationary environment. Putting aside the economic impact of deflation, which is very dangerous, the reality for retirees and those approaching retirement, is that the official figures hardly add up.

First and most important to your wallet is wages. They no longer impact you. You’re retired and now live off your savings, a pension — if you're lucky enough to have one — and Social Security. Likewise, home prices are most likely inconsequential to you. Odds are you've already downsized and are unlikely to be a first-time home buyer.

On the flip side, rising health-care costs — up over 25% in the past three years by some estimates — certainly do matter. Food costs are up significantly as well. Here are a few examples from the U.S. Bureau of Labor Statistics of popular food items and their price changes over the past year:

Beef and veal +22.5%, Ground beef +21%, Steaks +14.9%, Pork +7.4%, Ham +11.5%, Whole Chicken +6.1%, Fresh Fish +3.5%, Eggs +8.2%, Cheese +7.8%, Fresh Vegetables +4.3%, Lettuce +12.2%, Tomatoes +9.6%, Coffee +6.7% and Butter +19.5%.

And more examples of climbing prices:

Car Insurance +5%, Medicinal Drugs +4.2%, Prescription Drugs +5.6%, Hospital Services +4.3%, Veterinarian Services +3.2%, Sporting Events +3.6% and Childcare and Nursery School +3%

Fuel and energy costs dropped, significantly in fact, which is certainly beneficial to all consumers. But given that this typically makes up less than 10% of overall consumer spending, it doesn’t make nearly the impact that many argue.

While Fed officials, policy makers and countless prognosticators talk about falling commodity prices, the rising dollar and when the Fed might raise interest rates, they’re all missing the most critical point: The actual cost of living for retirees continues to rise — and does so at a pretty sharp rate. Understanding this is critical to constructing a fair and accurate budget and making investment decisions that have a chance of keeping up with or outpacing inflation as it affects you personally. After all, that's what matters.