If you’re receiving Social Security, don’t expect a pay raise in 2016. That’s right, there is no cost of living adjustment next year. This happened in 2010 and 2011 due to low government reported inflation. The main reason for this is cited as falling gas prices. So, you can either have cheap gas or a pay raise, but not both.
If you’ll allow me to offer a more nuanced look at costs of living and inflation, consider this: retirees tend to spend money differently than others. For example, the next 20 years of my personal spending includes school activity fees, five (at least) annual shopping trips for school clothes, prom dresses, weddings, and aspirin. A retiree, on the other hand, has done all of this already, so the retiree’s shopping list each year looks much different than mine. Perhaps greater medical spending, but also more vacations and golf account for the dollars flowing through the hands of a 65 or 80 year-old. This means the basket of goods that comprises the measure of general inflation (CPI) each year may or may not accurately reflect your real inflation rate.
Many of those reading this newsletter have heard me discuss the “retirement smile,” the smile-shaped spending curve of the average retiree. It goes like this: early in retirement, spending tends to be highest because the lifestyle of a new retiree hasn’t changed much since paid work ended. With more free time, adding golf and travel tends to bring early retirement spending up near the level of spending at the end of a working career. However, as retirees age, they naturally slow down a bit. Fewer expensive vacations, a (little bit) less golf, fewer miles driven in the car, and other natural declines result in an equally declining spending curve. Later in life, as medical needs increase, some areas of spending increase again. The result is a smile-shaped spending curve, hence the “retirement smile.”
I share this again to remind us all that retirement is quite different than the accumulation stage of life in many respects. Does it stink to not get a raise from Social Security? Yes, it sure does. What’s more important is the fact that, while the stock market has performed poorly this year, your guaranteed income from Social Security wasn’t also negatively affected. And when income is the goal, trading lack of growth with a lack of potential loss is a trade a retiree should make all day long.
Finally, if Social Security payments remain fairly stagnant, how do we combat any inflation a retiree might experience? The best strategies are to maintain some long-term exposure to stocks, perhaps own some precious metals, and most importantly, own some sort of medical and long-term care protection. After all, if rising medical cost is the greatest risk to a retiree, wouldn’t we be wise to own an asset that is designed to pay for those costs?
Again, I’m sorry to be the bearer of bad news regarding Social Security’s lack of a pay raise, but I’m happy to report that good planning can allow you to prosper even when the news isn’t exactly what you wanted to hear.
All the best,
Adam Cufr, RICP®
