Government-Defined Inflation is Often Not Your Definition of Inflation

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For the second year in a row, Social Security benefits will not receive a cost-of-living adjustment.

Unfortunately, most folks — especially retirees — continue to feel lifestyle expenses increasing all around them. Between health care, long-term care, and property and local taxes, a large portion of your lifestyle expenses are experiencing exponentially high cost increases. Locally, we just heard that Dane County wishes to increase property taxes by 2.9%. Even if inflation is, say, 1.5% right now, this would be a 100% above-inflation increase while one of a retiree’s primary sources of income — Social Security — continues to run stagnant.

That’s why I often say “government-defined inflation is often not your definition of inflation.”

Furthermore, as you may know, interest on bonds is at an all time low. A couple years ago, you could buy CDs in the 2%-5% range depending on the CD term. Today you’re lucky to get 1%-3% depending on the term. Perhaps with inflation being so low (as the government defines it), it’s not that bad, because your real-return is still in-line with inflation. Of course, again, for those living on fixed income and Social Security, heavily tied to spending money on health care, long-term care, and/or property taxes, you may have seen a 10-50% pay cut in real inflation-adjusted terms. You have likely been making spending adjustments in the past two years.

Some things you might want to consider or, ideally, talk with your financial advisor or attorney about:

  1. If you own a home or investment property, determine whether your value is markedly less than the assessed value. If so, consider challenging it at the next assessment period (usually winter to spring). You will need an appraisal and you may need an attorney. If you just bought the home, a closing statement should work. Be sure to determine whether a property-tax savings will cover the costs to challenge. Unfortunately, local governments generally don’t plan for a significant drop in revenue, so even if your assessment goes down, the local government may simply raise the tax rates again.
  2. Shop used, online, and outlet stores. I shop those often and carefully — make sure you investigate the sellers. Good used stuff is often barely if ever used and the savings are huge. Outlets always have sales. Places like Costco have covered the membership in about two months; everything else is pure savings. Used cars offer huge savings. All-in, I see 5-40% off new retail, offsetting a lot of above-inflationary cost increases.
  3. I’ve also noticed, in the past two years, that the costs of labor and trades has dropped about 5-25%. Shopping around for home maintenance care has yielded good results with no noticeable difference in quality. In fact, I’m finding work to be done just as well if not better. I think that’s because two years ago, many were busy, demand was high, and complacency likely set it. That’s not the case today.

    That said, I think you always pay for quality. If you find someone great at what they do, pay what they charge. No one should know the value of their services better than the person pricing it. Saving 20% on something that could turn out to cost 50% of additional hours of headaches was not a good financial move for you.

  4. Depending on your age and health, evaluate purchasing long-term care insurance. A good long-term care insurance policy from a reputable and sound insurance company could be an excellent hedge against long-term above-inflationary cost increases. (Disclosure: I do not sell insurance.)

    I highly recommend folks work with a fee-only fiduciary financial planner and/or attorney on the analysis of the need for long-term care insurance and then also work with a reputable insurance agent or agency for company policy proposals and analysis feedback. The fiduciary works for you with no vested interests in the product. You will need an agent to buy the coverage. The agent should be the expert in the product offerings and should be an expert in the analysis as well. I believe a team approach utilizing a fiduciary financial planner, and/or attorney, and an insurance agent is best when it comes to insurance planning.

    As an aside, there are ways to buy insurance online without using a live-person agent. Some people believe this can save money. This is basically not true; almost all online insurance purchase sites are simply insurance agencies. The commissions are usually the same, while you have no one to refer to if something goes wrong other than a call-center. Work with a live-person on insurance purchases.

  5. Look into treasury inflation protected securities, inflation bonds, or no-loaded or low-loaded inflation adjusted annuities. This is a tough one because, again, treasury inflation protected securities and often inflation annuities are measured by the government definition of inflation, often not yours. The one very important thing these products do, though, is keep up with that government-defined CPI. Talk to an advisor about these products.

    With annuities, you have to be careful you understand what you’re buying. Annuities are ripe with ambiguity and confusion. Many annuities are “sold, not bought.” I see this quite often. Many annuities carry huge fees and costs and commissions often significantly handicapping your distribution rate. Fortunately, some annuities can be bought direct from the company, saving costs. Although that’s a small part of the market and you have to search for them. The team approach applies here as well. I think it would be a bad idea not to work with a qualified fiduciary and/or attorney to determine concept-appropriateness and then bring in a reputable agent for their opinion and if necessary, product placement. Annuities are insurance products and carry as many complexities as insurance; you need to know what you’re buying and what your options are.

  6. Finally, especially if you are retired, you may have to plan for cutting other expenses, likely in the form of discretionary or variable expenses, which you have the most control over. Hopefully you have other sources of income to offset these ongoing above-inflationary expenditures. Ideally, if you can, working is the best hedge.

At the end of the day, though, above-inflation tax increases simply can’t last. Eventually something breaks. Furthermore, there are things you can do today to offset the impact. I hope this perspective assists you in thinking through how your inflation is often different than what the government tells you and how you should be proactive in managing your finances under such ambiguity.

Sources and Notes:

  2. In the past I have been respectfully criticized for emphasizing using a fee-only planner. Yes, as a fee-only fiduciary financial planner, I am 100% biased toward the fee-only fiduciary financial planning model. There are many reputable financial advisors who are not fee-only. I mean them no disrespect; while it is highly likely a consumer would receive good and qualified help from them. I simply believe the fee-only fiduciary structure is the best model for delivering financial advice and it is why I chose to run my firm that way. We all have professional biases, fee-only fiduciary is my professional bias — always has been, always will be.

Michael Dubis is a fee-only Certified Financial Planner and President of Michael A. Dubis Financial Planning, LLC. He is also an adjunct lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at

This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described in this Web site or that of the author.

Mike Dubis does not guarantee the relevancy, appropriateness, or accuracy of any outside information or links. Mike Dubis does not render or offer to render personalized investment advice or financial planning advice through this medium. All references that might be made to an investment or portfolio’s performance are based on historical data and one should not assume that this performance will continue in the future.

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