Retirement Strategy: Inflation Is A Scourge On Retirees' Well-Being

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Rarely do I write an article such as the one I am penning right now, but I think it is important to put inflation in perspective for regular folks, along with my opinion.

It seems that while the prices of everything we actually spend money on have never stopped increasing, the government numbers are finally showing signs of what it considers inflation. The Producer Price Index shot up in January, indicating that overall inflation is heading up. This is what the actual report had to say (emphasis added):

The Producer Price Index for final demand increased 0.4 percent in January, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices were unchanged in December and moved up 0.4 percent in November. (See table A.) On an unadjusted basis, the final demand index rose 2.7 percent for the 12 months ended in January.

You can read the report yourself and get as confused as I was, but the bottom line is that inflation is heading up, officially, even though we all knew that prices have gone up basically every day for as long as we have lived, “unofficially.” The hardest hit are fixed income folks, as well as the poor.

The value of the fixed amount these folks receive becomes less with every day that goes by, and it is simply an awful fate to have to face, and it just keeps getting worse.

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What Is Inflation Anyway?

As described right here, the brief overview is as follows:

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.

As a result of inflation, the purchasing power of a unit of currency falls. For example, if the inflation rate is 2%, then a pack of gum that costs $1 in a given year will cost $1.02 the next year. As goods and services require more money to purchase, the implicit value of that money falls.

While Central banks use all sorts of ways to reduce or contain inflation, it usually is just the raising or lowering of our interest rates. Hardly a panacea for those who are just trying to make ends meet.

How Inflation Eats A Portfolio

I found this interesting article with a very straightforward chart of what various levels of inflation can do to the amounts needed to spend to maintain the same lifestyle.

What starts out as $40,000/year spending can wind up anywhere between $70,000/year and $164,000/year after 30 years, just to maintain the same standard of living, depending on whether inflation averages just 2%/year or is as high as 5%/year.

Obviously, this can impact a portfolio of just about any size.

As A Fixed Income Retiree, We Can Run But Cannot Hide

I don’t need to tell anyone that, as a retired person, we have limited choices when directly facing inflation. We can avoid buying things, change brands to lower-priced ones, or simply go without. Not a pretty picture. Also, quite unrealistic.

The ONE way for a retiree to fight inflation is to play their own game. Let me explain:

  • While inflation affects consumers, it can actually help public companies, savers, and investors. Companies gain pricing power, which enables them to raise prices to cover costs, as well as adding a few points for pure profit (administered price inflation). This goes straight to the bottom line and increases earnings. I found this report on inflation to be revealing.

  • Companies will make more money and as a result become more profitable. By using interest rates as an inflationary guide, this article shows the relationship via a chart at different environments. For dividend growth investors, this should translate into continued dividend payments as well as higher increases by aristocrats and kings.

  • By investing in dividend paying blue chip dividend kings that have paid and increased dividends paid for a minimum of 50 consecutive years, an investor should be able to AT LEAST stay within “fighting” distance of the overall inflation rate by having their income stream from dividends continue to rise as long as the companies invested remain profitable and viable. The following chart and dividend growth facts show a typical look at how dividend growth stays up with, and even surpasses, average inflation of 2.4%/year:

PG Dividend data by YCharts

The Dividend King Retirement Portfolio Might Help Us Stay EVEN

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I am not saying that this approach is without risk or is foolproof, but it has seemed to work for many who follow this approach and should be at least considered by the average person as an investment approach. Not just for an income stream, but to keep up with inflation over the long term, when we need it the most!

The model Dividend King Retirement Portfolio currently consists of Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG), Johnson & Johnson (NYSE:JNJ), 3M (NYSE:MMM), Emerson Electric (NYSE:EMR), Cincinnati Financial (NASDAQ:CINF), Lowe’s (NYSE:LOW), Hormel (NYSE:HRL), Colgate-Palmolive (NYSE:CL), Dover (NYSE:DOV), and AT&T (T).

These stocks are not the high growth stocks they once were, and there is no way of telling if they ever will be again. That being said, these stocks have shown that through both good and bad times, low and high inflation, they have been able to pay and increase dividends continuously for over 1/2 century. It does not mean all of them will continue, but I like the history myself and feel my risk is being mitigated.

Take a look at each stock and see for yourselves. You CAN fight inflation! Simply by owning Dividend King stocks, if you so choose.

What is YOUR approach to inflationary pressure?

The Bottom Line

Nothing is risk-free, but inflation can eat away at our purchasing power. To me, dividend growth investing helps offset some of the disastrous effects of inflation during retirement.

Not To Bore You, But…

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Disclaimer: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author uses has worked for him, and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance. The long positions held are based upon what the model portfolio holds, and I personally could have held all of the stocks noted at one time or another.

Disclosure: I am/we are long CINF, CL, DOV, EMR, HRL, JNJ, KO, LOW, MMM, PG, T.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The portfolio is for educational purposes only and not an actual portfolio. The long positions are based on the model portfolios.