Inflation now certainly has a big influence on my behavior.
It’s in the news, it’s everywhere. Rising prices. Increased costs. What to do?
When and Now
It became noticeable back in July of last year. see “Inflation is Already Here.” By that time, obvious price increases were making their way thorough the local economy. Fast forward to today, and it seems prices on just about everything are jumping upwards.
And it’s affects on retirement has been on our minds. “Will Your Retirement Survive Inflation?”
Retirement has two main common features. This varies for each person, but usually retirement has a situation of lowered and a less flexible income, and a reliance on selling assets. So a declining stock market combined with rising prices puts the retiree in a squeezed position. Lower asset prices makes it a losing propositon to sell assets, and rising prices reduces one’s ability to purchase necessities.
Cause and Effect
It is easy to see the effect of rising prices on our family’s behavior: we immediately and automatically have reduced our spending. Every purchase, even of necessities, is weighed and considered. Perhaps this is the same for many others. As such, one hopes that demand is reduced, which would cause manufacturers to reduce prices. One can only hope that the theories surrounding “supply and demand” still function; one never knows. After all, supply and demand are manipulations of the futures market system.
Where We Are
For retirees, a major aspect of income is often Social Security. Certainly, Social Security income increases when there is a measurable increase in the cost of living. However, as any retiree knows, there are limitations. Firstly, this increase happens only once per year. Secondly, a concomitant increase in the cost of Medicare often accompanies increases in Social Security. As a result of inflationary pressures and the increase in Medicare costs means the retirees are often left further behind despite a Social Security increase.
Income
Social Security is described as a “fixed” income. Once one starts receiving Social Security, one cannot get a larger benefit by working harder, working less, or being “more retired” than anyone else. There are no retiree evaluations. There is no “Social Security bonus” for anyone. So when prices rise and income is fixed what is one to do?
Reliance on selling assets (ie, stock) has two major problems. Firstly, with a general market decline, one will receive reduced income from the sale; and if there is a gain, taxes are also due. Secondly, selling means that once accomplished, one no longer owns the assets. Not a fun combination.
Income Plus
There is another way to get income from owning equities. By investing in dividend paying stock, I get income without needing to sell. Plus dividend income is much more stable than asset prices. Asset prices are volatile, and as we see in a declining market, can take a deep slump. By not selling, but instead receiving dividends, one can have one’s cake and eat it, too.
Cautions
Of course all is not rosy all the time in dividend-land. Dividends are a function of the business conditions of each specific company. Dividends can be cut or reduced. And dividend income takes time to approach substantive amounts. But over the long haul, dividends are a “forever”-type income. Once we own stock, the dividends are ours. As many increase over time. As long as we continue to own the shares, the dividends flow to us. And to my heirs, and so on.
How is inflation treating you? Let me know here.
The self-portrait of Filippo Balbi is from 1873. He was an Italian painter. He is shown with one of his paintings, a human head made of human bodies. Courtesy, Wellcome Library, London, UK.
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