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Is low inflation good for retirees?

I'm reading a lot about how the economy needs inflation for investments to grow, but also that low inflation is helping people stretch their dollars after retirement. I can't figure out whether low inflation (stagflation?) is good for retirees or not. Any insights?

Feb 09, 2015 by Brennan from San Diego, CA in  |  Flag
9 Answers  |  12 Followers
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5 votes
Steve Casull Level 13

As I read over these various questions, I see a common thread, that tempts me to answer in the same way to most of them. "It depends". And that answer doesn't help anyone. In terms of "Inflation being good for retirees". How is the health of those retirees? What are their TRUE lifestyles? I say "TRUE" because 'travel to sandy beaches' may be a good and typical setting for Retirement brochures and sales literature, but the realities are, retirement isn't 'travel' intensive usually. At least not in my experience. Most of what I see is growing boredom. Retirement is freedom to get paid for doing what you want with your time. Most of this time is spent with family members. Fishing with Grand Kids. Counseling those grand kids on averting life's little problems. But for the most part, inflation is bad if the saving machine isn't TRULY keeping up.

1 Comment   |  Flag   |  Feb 09, 2015 from South Jordan, UT
Brennan

Agreed, Steven. "It depends" is always the answer with financial advice questions, so I take that as read. Thanks for your insight.

Flag |  Feb 09, 2015 near San Diego, CA

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4 votes

It depends is correct.

Generally it is thought by many economists that deflation is bad for the economy - but that doesn't necessarily mean it is bad for everyone in the economy. Lets say you are a retiree with a substantial pension (they do still exist!) - you would be tickled pink with an economy in deflation, as long as your pension plan doesn't go bust. Why? Your monthly fixed payment will buy more goods and services each month, its like getting a raise. In an inflationary environment that same retiree would see his lifestyle erode year after year.

In contrast, retirees living on savings or investments may be more ambivalent. Retirees with investments in stocks may suffer if the economy slows. On the other hand, fixed income investors would do just fine with no income at all - generating real income with money in the mattress.

Lastly, since this seems to be a largely theoretical discussion - I am not convinced that mild deflation is necessarily all that disruptive to the economy. Most people buy what they need when they need it - if they think prices will fall, sure they might defer a purchase for s short time, but if they think their INCOME is going to fall, they might just speed up that purchase. Most people who buy a car for instance are doing so because they need a car, not because they think it will be more expensive next month. Housing may be an exception to this rule, but most of the economy does not depend on rising prices to spur consumers into action.

3 Comments   |  Flag   |  Feb 09, 2015 from Bridgewater, NJ
Leo Nunez, CFP®

James,

Flag |  Feb 09, 2015 near Hollywood, FL
Leo Nunez, CFP®

Well said. An excellent example of the pensioner who's buying power increases in a deflationary environment. Very similar to the constant deflationary environment in technology that helps us have more power today in the palm of our hand for a reasonable price.

Flag |  Feb 09, 2015 near Hollywood, FL
Sean Steven Cooper

I tend to agree with James and Leo. Inflation has very few, if any advantages to retirees. In fact, I would argue the only people who benefit from inflation are those with large amounts of debt. Inflation affords them the opportunity to pay back their debt with “cheaper” dollars. From an economic standpoint, inflation is most definitely a factor in economic growth, but it is not necessarily a benefit and certainly not essential. That is the very reason we see economic growth measured by both nominal and real GDP (gross domestic product). Real GDP is essentially nominal GDP adjusted for inflation, or changes in prices.

Flag |  Feb 10, 2015

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3 votes

What retirees should hope for is a "goldilocks" economy....some mild inflation, moderate interest rates and consistent economic growth. Inflation results from tight money chasing growing demand, thereby bidding up the costs of production, usually including wages. Since retirees often don't participate in the growth of wages, and many depend on income that is fixed (a specific bond interest amount, annuity payment or pension check), inflation is generally more difficult for retirees than for the working population. Right now we have loose monetary policy and little demand growth so inflation is low...but interest rates are too which makes it difficult for retirees to keep up when the situation turns and inflation ramps up quickly (as it often does).

2 Comments   |  Flag   |  Feb 09, 2015 from Fort Washington, PA
John R. Myers, CFP®

One more thing...articles in the popular press often conflate the economy and the stock market...they are not the same. The market is generally believed to reflect economic expectations 6 months into the future. So a strong economy may not translate into a strong stock market. In recent years, the impact of the economy on the performance of the stock market has been somewhat overridden by the extraordinary actions of the Fed...it appears that more fundamental factors are once again returning to the fore.

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Flag |  Feb 09, 2015 near Fort Washington, PA
Brennan

I hope you're right about the fundamentals becoming more important to the end results.

Flag |  Feb 09, 2015 near San Diego, CA

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3 votes
Rich Winer Level 20

If you have real low inflation, that would be good for retirees because your cost of living would increase at a lower rate. That's good for all of us. However, the Government numbers on inflation may not accurately reflect the cost of living increases you may actually be experiencing. Maybe economists and financial experts are skeptical of the Government numbers.

2 Comments   |  Flag   |  Feb 09, 2015 from Woodland Hills, CA
Sean Steven Cooper

To add to Rich’s point; inflation is typically measured by the Consumer Price Index, (CPI). The Index measures the price of a basket of goods and services designed to represent the typical purchases of households. What comprises this basket has been revamped multiple times over the last several decades in order to adjust for what these households are actually buying (substitutes). However, if we continued to use the older versions of the CPI, we would measure inflation far in excess of the 3% average we typically see quoted. Possibly even in the 6%-12% range. (According to the Bureau of Labor Statistics, the calculation behind the CPI is facing the most significant change in the last 25 years, effective with this February’s release of the CPI estimate.)

Flag |  Feb 10, 2015
Brennan

That's shocking, Sean, but it explains why we hear on the news that CPI is steady but we still see a difference in our monthly expenses. Thanks for that point.

Flag |  Feb 27, 2015 near San Diego, CA

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3 votes

Variations of the rate of inflation make it very difficult for retirees to predict their cost of living going forward. There are even discrepancies in what 'inflation' actually covers. It can actually be different for each person, based on their expenses and the inflation impact on their own spending. Inflation has been low for some time, as have interest rates, so many retirees have invested the less volatile parts of their portfolio at a low rate, most likely even lower than the expected rate of inflation going forward. Therefore, they are, in many circumstances, loosing purchasing power, so I'm of the thought that low inflation for a long period of time is not good, because it means the expected future inflation rate is going to be very high and difficult, particularly for retirees. Another impact of low inflation (along with low fixed income rates, at least this time) is that some people will reach for more risk than they normally would accept, and if there is a market catastrophe (read in 2008) then they could realize the extra risk they took trying to do better than the available low fixed income.

Comment   |  Flag   |  Feb 09, 2015 from El Paso, TX

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2 votes
Steve Casull Level 13

I'd like to change my answer from "It Depends", to, "Who cares?". Inflation, deflation, or smooth sailing, it's happening. It's not like we can change it. And it doesn't change what our goal should be, "to make as much money for our clients as risk consciously as possible". And frankly, these questions are only bandied about among advisors. It starts to remind me of Bible interpretations. Yawn. Here's a good question: "During an ultra low interest rate climate, do you as an advisor put your clients within 5 years of retirement into a heavy 80-90% allocation to fixed income?" Or have you realized that proximity to retirement is meaningless in the true scheme of things?

Comment   |  Flag   |  Feb 11, 2015 from South Jordan, UT

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1 vote

Echoing Rich Wimer's comment, low inflation is good for retirees. Once you've built assets, root for low inflation. High inflation is good for debt repayment, such as a mortgage on a home (but not good for the lender, as they're being repaid with cheaper dollars).

Comment   |  Flag   |  Feb 11, 2015 from Cedar Park, TX

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0 votes

Great question and the answer for me is "Real Returns" are what matters for those who have most of their assets in a portfolio mixture of stocks and bonds. If inflation is 6% and my portfolio returns 10%, than my real return is 4%. If inflation is 4% but my portfolio returns 6%, my real return is only 2%. Root for the higher real return and worry less about inflation.

For those with fixed pensions? Root for low inflation. For example, one reason people look at those with defined benefit pensions with envy is that we have had a long period of low inflation. That means that those that retired with a pension have had their expenses not increase as much. If we were in a time of high inflation, these fixed pensions would not seem as attractive as people had a harder time stretching out their income.

Comment   |  Flag   |  Mar 23, 2015

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0 votes

Low inflation is good for retirees if they are getting their income from a pension or from a portfolio of stocks and bonds which tend to do well in times of low inflation and certainly have been lately. So, low inflation is generally good for those with a high net worth.

Low inflation is bad for retirees if they get their income from bank accounts and CDs where low inflation means low rates and thus low income. That tends to be the lower net worth retirees.

Low inflation is also bad for those just living on Social Security. That's because the inflation index used for Social Security understates true inflation, especially on health care, cable TV, automobiles and technology like phones and computers.

Bottom line: low inflation is usually good for those with high net worth and bad for those with low net worth. It is harder on the largest segment of retirees, the ones who can least afford it. So, overall, I'd have to say that low inflation needs to be bad for retirees unless they have a high net worth.

Comment   |  Flag   |  Apr 09, 2015 from Charlotte, NC

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