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Inflation: More Comments

August 7, 2014

The 1953 movie How to Marry a Millionaire was about Marilyn Monroe, Betty Grable and Lauren Bacall trying to meet and marry a millionaire.  They thought they would have it made if they did.  At that time, that was probably so, but not today.  To buy today what a million dollars would have bought in 1953 would take almost $9 million because of inflation.  Or, to put it another way, today’s buying power of 1953’s $1 million is $112,000.

A quick way to measure inflation is to look at the basic postage rate for a one ounce letter.  In 1988 it was 25¢; today it is 49¢ which is consistent with the overall inflation increase during this period.  Other ways of measuring inflation is to compare frequent items purchased between two periods.  A quart of milk, a loaf of bread, movie and theatre admissions, dinner out, a dress, suit of clothes or pair of socks or underwear.  Inflation’s sword cuts at our spending and standard of living.

Over time, some things have increased greater than the inflation rate and some less, but that is usually due to other circumstances such as changes in patterns of what we buy or aggregate quantities available or improvements in the product.  Computers, televisions, dishwashers and cell phones have all come down in price while greatly improving their benefits.  Health care, assisted living and college costs have outpaced inflation.

The same works with bequests indicated in wills.  What you leave today is not what they will get later.  Let’s assume a parent leaves $6,000,000 equally to three children – $2,000,000 each.  What do they get?  Well, if received today, then a lot of money – if received in twenty years, then not so much money (but still more than they would have had if it wasn’t left to them at all).  What does $2,000,000 mean?  Well, it can be used to eliminate debt, pay off a mortgage, buy a vacation home or fund higher education costs.  It can also be a source of cash flow that relieves some of the burdens of day–to-day living. $2,000,000 invested in long term tax free bonds can provide an $80,000 annual income – not putting someone in the lap of luxury, but not too shabby either. However, inflation will erode the spending value of this over time.

Another thing to look at is life insurance.  Many people buy the “perfect’ whole life insurance policy only to have inflation depreciate the policy’s benefit over 20, 30 or even 40+ until the death of the insured.  Premiums are paid with dear current money to provide discounted benefits at a much later time.

Those primarily depending upon income from bonds can see cash flow greatly curtailed with inflation.  Those with taxable bond interest might also have to deal with possible tax rate increases.  If you are investing to accumulate funds for a later time, then current income will compound and grow assuring a greater future cash flow.  If interest is withdrawn to live on, then the bond principal will remain static if intended and able to be held until maturity regardless of market value fluctuations.  This needs to be considered in your asset allocation.

Inflation is a stealth encumbrance on assets.  It also compounds over time with each year’s current inflation percent applied to the previous year’s inflation rate.  Inflation is a slow but accelerating growth.

Inflation is always there, but if properly factored into your planning, it does not need to put a damper on your future financial security.

One Comment leave one →
  1. 6hawthorne permalink
    August 7, 2014 11:51 am

    Hi Ed inflation is a;ways going to be with us companies raise the prices people want morefor the work that they doInflation is herebob

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