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Inflation — Wreaking Havoc on Your Fixed Income Retirement Lifestyle

We’re currently dealing with the highest rates of inflation in 40 years. In December 2021, the rate was 7% a year in the United States. In January 2022, it was 7.5% a year, and 7.9% in February. Now it’s 9.1% and heading higher.

If that rate of increase continues, by the end of 2022, inflation in the U.S. could be into the low teens.

Inflation in Canada was 5.1% in January 2022. Not as bad. Definitely not good either. Especially since it was up to 5.7% in February, and over 7% now.

What Exactly Is Inflation?

If you asked 100 people on the street that question, almost all of them would give you an almost correct answer. If you asked most economists, they’d likely give you that same almost correct answer.

They’ll all tell you that inflation is the increase of prices of goods and services. And yes, that’s certainly how inflation shows up. When we go to the grocery store or pump gas, everything is more expensive month by month.

Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars’ worth of groceries. Now a five-year-old can do it.

– Henny Youngman

But it’s not the cost of things that’s going up. The value of the currency is going down. And it’s going down drastically.

As the U.S. dollar’s value drops, what each dollar can buy goes down as well.

Chart of the drop in purchasing power of the U.S. dollarThe dollar has dropped in value by over 96% since the creation of the Federal Reserve in 1913. This chart is over a year old, so it’s even worse now!
Source: Visual Capitalist

The problem with our current round of inflation is that the plummeting value of the dollar is being made worse by supply problems.

Supply Chain Disruptions

As you likely learned some time along your path to retirement, when demand goes up without an equal rise in supply, prices go up.

Why? Because people are (usually) prepared to pay more to get their hands on what they need. Especially if they have children.

In a normally functioning economy, a rise in prices would indicate to businesses that produce those goods that they need to pump up production to meet the demand.

Loaded container ship leaving portA container ship leaving port. U.S. ports have loading and unloading backlogs of days.

Since supply chains around the world have been disrupted, businesses can’t obtain the ingredients and/or supplies and/or equipment they need to ramp up production.

They can’t even meet previous levels of production, which is why there are empty shelves and aisles in supermarkets.

Unfortunately, there’s no immediate solution to our current supply chain issues. Especially when it comes to energy supplies.

They’ll work themselves out eventually, but “eventually” will be a few years, and possibly a decade.

In the meantime, prices will continue to go up due to shortages.

Employment Disruptions

Even if businesses in the U.S. were able to find everything they need to produce what the economy wants, they couldn’t. They don’t have the staff they need to function at full capacity.

Americans got a taste of the “good life” when Presidents Trump and Biden showered them with free money during 2020 and 2021. Some people earned more for staying home and shopping online than they made by going to work every day.

And they decided not to return to work, or at least to the job they’d had before lockdowns began. Called The Great Resignation by some, and The Big Quit by others, millions of workers have chosen to be idle.

McDonalds is currently offering a $35,000 starting wage plus benefits and other goodies to get people to work as order takers and burger flippers. Many other businesses have had to do the same thing.

These skyrocketing wage costs (if there are any takers for the jobs) are increasing prices, which in turn are fueling inflation.

The Money Supply

Above, I mentioned that supply problems were making inflation worse. They’re not the only cause. They’re not even the main cause.

The U.S.’s monetary policy is the main perpetrator.

Just about every country on the globe is at fault inside its borders. The USD, however, if the world’s reserve currency, so as its value goes down, anything bought with it is going up in price.

This includes oil and gas from the Middle East, electronics from Asia, fruits and vegetables from South America, and olive oil from Europe.

The U.S. debt (all the money owed by the U.S. government) is over $30 trillion. That’s just shy of 125% of the country’s GDP, or total economic output.

Said another way, if all the money that the economy makes in a year was used to pay down the U.S. debt, there would still be almost $6 trillion left to pay.

And that’s just federal government debt. That doesn’t include state and local debt, or consumer debt.

More importantly for retirees, it doesn’t include Social Security unfunded liabilities, which are about $22 trillion. And it doesn’t include almost $34 trillion in Medicare unfunded liabilities.

The trustees of the Security Security fund announced in June 2022 that the fund would run out of money in 2035.

That means anyone depending solely on SocSec during retirement will have no money at all in 2036. That’s just 14 years from now!

Medicare funds are expected to run out in 2028

About 80% of all the U.S. dollars in the global economy didn’t exist before 2020.

All of the money that the feds and the Federal Reserve (the Fed) have printed up have made each dollar worth less, simply because they added the money faster than it could be used in the economy.

The feds have used the money it created to compensate citizens for not working during lockdowns. It has also used the money to pay for the policies and regulations it creates every year.

The Fed gave some of the money it created to the big banks. The rest it used to keep interest rates artificially low so that the government wouldn’t go broke paying the interest on its growing debt.

The interest on the government’s debt is currently over $425 billion. If the Federal Reserve raised interest rates by just 1%, the cost of the government’s debt would increase to about $1.7 trillion annually.

The Fed had said it will likely raise the interest rate in March 2022, and probably a few more times in 2022, to get inflation under control. Due to war in Europe, experts are saying increases are unlikely at all in 2022.

That means inflation will continue to increase every month. It won’t be long before it’s out of control.

What You Can Do to Preserve Your Retirement Lifestyle

Earlier I mentioned that Social Security will run out of money in 2033. That means U.S. retirees and those nearing retirement age can’t count on the government to fund their retirement.

Unfortunately, many people retiring don’t have enough saved in retirement accounts (401k, IRA, Roth IRA, etc.) to fund their current lifestyle, or anything close to their current lifestyle.

So they have some choices to make. Do they go back to work (McDonalds at $35,000/year?) and start putting money aside? Do they start a business (freelance writing, or consulting, for example)?

Do they cut back now to ensure that they have more money later? Do they downsize, or share their house or apartment with others to cut down on housing expenses?

Inflation will likely be with us for many years, so any decisions you make now will have to take into account that everything will be more expensive at the end of this year, and even more expensive next year, and the year after that. 

Whether you choose to earn more income, or cut back on expenses, or both, you’ll have more money to pad your savings. 

But with the value of your savings dropping yearly due to inflation, it will be like swimming against a current. You’ll make progress, but not as much as you thought you would. And you’ll be exhausted by the effort.

Earn More Interest

One thing you can do to improve your situation now and in the future is to put your savings somewhere that earns more than a bank will pay you.

With inflation at 9.1% and banks paying 0.1% or less per year, your savings will be worth half what they are now in fewer than 10 years.

Money cut in half to indicate less value due to inflationCurrent inflation and bank account interest rates mean your savings will be cut in half in under 10 years.

If, instead, you convert your dollars to cryptocurrency stablecoins (which are pegged to the U.S. dollar), you can earn 20% to 43% in annual interest.

That, for now anyway, will let you grow your savings rather than watch them shrink due to inflation.

One place to park your funds is Freeway. I’m currently earning 43% APY on stablecoins, Bitcoin and Ethereum I deposited there.

If earning 43% is something that interests you (no pun intended), you can join and earn a bonus on the interest you earn for two years.

Click here to learn more about Freeway.

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