Inflation! How does it effect you?

According to an article by Tech Startups on May 22, 2021 40% of US dollars in existence were printed in the last 12 months alone.

Who cares? You may ask. It leads to inflation and devaluation. 

What is inflation? Inflation is the decline of purchasing power of a given currency over time. For the U.S. Dollar, this would mean you can buyer fewer goods and services, as the Dollar doesn’t hold the same value against that particular good as it once did.

“$1 in 1981 is equivalent in purchasing power to about $2.96 today, an increase of $1.96 over 40 years. The dollar had an average inflation rate of 2.75% per year between 1981 and today…”

This means that today's prices are 2.96 times higher than average prices since 1981, according to the Bureau of Labor Statistics consumer price index. A dollar today only buys 33.78% of what it could buy back then.” An example of this decline in purchasing power is to show that $100 today, in 2021, would only buy $33.78 worth of good/services in 1981.

“The current year-over-year inflation rate (2020 to 2021) is now 4.99%1. If this number holds, $1 today will be equivalent in buying power to $1.05 next year. The current inflation rate page gives more detail on the latest inflation rates.”

So lets break this down to reflect how this could reflect what an annuity is scheduled to do. Please keep in mind this is a hypothetical situation and to be used as an example and not financial advice. Your annuity was scheduled to pay you $1,000.00 every single month guaranteed for 40 years (from 1981-2021). Meanwhile inflation is increasing the prices of nearly everything you would be spending money on (food and beverages, housing, apparel, transportation, medical care, education, etc.)

If $1 in 1981 is equivalent to $2.96 in purchasing power today, you would have needed your monthly income to go from $1,000.00 monthly to $2,960.00 monthly just to keep up with the cost of goods today in 2021. Unfortunately your policy only paid you out $1,000.00 per month leaving you incapable of affording goods as years go buy.

You would have needed a 3% annual Cost of Living Adjustment (COLA) to keep up with inflation over the past 40 years. Many policies do not have this built in unfortunately. If you do, consider yourself in a better situation than most!

This article isn’t meant to scare you, but to encourage you to do your own research and seek out a financial advisor to help guide you on the best financial plan moving forward. This is meant to illustrate exactly what has happened historically over the past 40 years. History tends to repeat itself and specifically we are currently seeing high inflation here in 2021 and is forecasted to continue for years to come.

Your policy was setup to do a job, provide guaranteed monthly income according to the terms provided with your insurance company. It’s a great source of steady consistent income but in most cases FAILS to provide an annual Cost Of Living Adjustment (COLA) to increase your monthly income annually to keep up with inflation.

Comparison to S&P 500 Index

“The average inflation rate of 2.75% has a compounding effect between 1981 and 2021. As noted above, this yearly inflation rate compounds to produce an overall price difference of 196.14% over 40 years.

To help put this inflation into perspective, if we had invested $1 in the S&P 500 index in 1981, our investment would be nominally worth approximately $77.67 in 2021. This is a return on investment of 7,667.47%, with an absolute return of $76.67 on top of the original $1.

These numbers are not inflation adjusted, so they are considered nominal. In order to evaluate the real return on our investment, we must calculate the return with inflation taken into account.

The compounding effect of inflation would account for 66.23% of returns ($51.45) during this period. This means the inflation-adjusted real return of our $1 investment is $25.23. You may also want to account for capital gains tax, which would take your real return down to around $21 for most people.”

Lets use another example to break this down better. IF you invested $100,000.00 in the S&P 500 in 1981, the nominal value would be $7,667,470.00. While taking into account the rising inflation cost and capital gains taxes the real return would be roughly $2,100,000.00.

Given these examples which would you choose in 2021. Having your money invested in the S&P 500 for the last 40 years? Or Keeping the $1,000.00 monthly that only adds up to a grand total of $480,000.00 (total value of 480 monthly payments at $1,000.00 per month.)

Here are some more examples of how the cost of goods has increased over the past 40 years:

 Item 1981 Price 2021 Price

Gas $10.00 $24.74

Vehicle $15,000.00 $23,367.94

House $200,000.00 $611,450.15

Airline ticket $100.00 $249.59

All items are comparing dollars spent in 1981 to what that same item would cost in 2021 using www.in2013dollars.com/inflation-cpi-categories. Not actual price of a gallon of gas, eggs, coffe, etc. Simply money spent comparison for same good.

Other information is provided by: https://www.officialdata.org/us/inflation/1981?amount=1