Five years is a very long time. Ten years is an eternity. 18 years is almost unthinkable. But 32 years for a stock market recovery? When the pandemic hit the recovery was just 164 days, the shortest ever. The Great Recession drop lasted just three to four years. This latest inflation crunch has been less than three years, four or five for some. But 32 years?

The purchasing power of $100,000 invested in the S&P 500 with the dividends reinvested in 1961 would not have recovered to be even with the increases in the Consumer Price Index until 1993: 32 years later. In other words, what you could buy with $1 in 1961 would cost $6 in 1993. The S&P 500 took 32 years to increase sixfold to equal the CPI increase.

But think about what we have seen since 2000 at the turn of the century:

  • Gas prices increased from $1.31 to $3.50 per gallon (167%)
  • Propane increased from $1.01 to $2.70 (167%)
  • Annual medical cost: $5,844 to $16,192 (177%)
  • Pet Services: 109.300 to 317.279 (190%)1
  • Homeowners’ Annual Insurance: $508 to $1,489 (193%)
  • Medicare Part B Monthly Premium $45.50 to $164.90 (262%)
  • Dental Services: $286 to $1,073 (275%)
  • Heating Oil: $1.15 per gallon to $4.34 (279%)
  • Prescription Drug Out of Pocket Cost: $1,102 to $4,524 (311%)
  • Eggs Grade A: $0.98 to $4.21 per dozen (332%)2

The Consumer Price Index: 76.9% (an average of 2.5% annually)

Social Security COLA Increases: 62.1%

You may be listening to the gurus who expect inflation to subside and the Federal Reserve to lower rates by the end of 2023. You may have a financial plan that shows inflation even at three percent or less (3%). That rate of inflation is what we experienced for the last 23 years. But look at the list above. One-third of the Consumer Price Index is based on what people are paying for rent. Most of us are not renting. We have a fixed-rate mortgage or no mortgage at all. The consumer price index understates the real cost of living for most of us.

For the first 23 years of this century we have been living in a relatively benign inflation time, even with the pop up to 9%. But with 4 million more jobs than there are workers to fill those jobs, wage increases continue to pressure inflation. It seems very possible that inflation increases will not subside but begin to soar as they did in the 1970s.

In the 1970s it was oil and an oil embargo which sent prices rocketing upward. In the 2020s it could very possibly be wages which cause inflation to shoot upward.

During inflationary times almost all assets suffer. The stock and bond markets drop as do many commodities. Commercial real estate suffers as cap rates increase, decreasing the price of that commercial real estate.

The solution can be straightforward.  Don’t wait for 32 years to break even.

Having enough money to maintain your quality of life to the end is undoubtedly an expectation most readers of this letter have. So why not hear what we have to say?

 

 

Notes:

  • Bureau of Labor Statistics Index
  • “10 Retiree Costs That Have Risen Most Since 2000”, by Michael Fischer, Think Advisor, May 10, 2023