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How Inflation Affects You
By David Chazin
It’s been a long time, over 100 years, since Chevron came into existence (under the name Pacific Coast Oil Company and later Standard Oil Company of California). At that time, you could find all sorts of wrapped candies for just a penny apiece. Today, Chevron employees and their families would be lucky to find anything, candy included, that costs just a penny. That’s what inflation has done.
Officially, inflation* has been relatively modest in recent years. Compared to the double-digit inflation rates of the past (e.g., 13.3% in 1979 and 12.4% in 1980), the rates of the past several years (e.g., 1.5% in 2010 and 3.0% in 2011) seem downright tame. However, even a low rate of inflation during your Chevron years will put a serious dent in your buying power over time, and that will affect the amount you’ll need to retire comfortably.
For example, imagine you stop receiving raises of any kind from Chevron. If your buying power were reduced just 3% again in 2012, and then 3% every year thereafter, your salary would have only half the buying power in a little more than 20 years. If you wanted to maintain your lifestyle, you’d need a high-paying part-time job in the hours you’re not at Chevron.
Inflation Deflates Buying Power
No one knows how much inflation we will experience in the future (some years can be higher than others). But looking at the aforementioned 3% scenario and a hypothetical 5% scenario, you can see the potential impact of inflation on your purchasing power. The example below is for illustrative purposes only. Your actual savings may be more or less than $200,000, and the actual inflation rate may be different.
Today you have
At an annual inflation rate of
In 10 years you’ll need
In 20 years you’ll need
This is especially critical for those of you thinking of retiring from Chevron in the next few years. You can’t afford to have risky investments as you draw income from your savings, but you can’t just put your money in cash either. Without proper planning, inflation can drastically reduce your lifestyle in retirement.
Above Average Increases
Some costs have been rising even faster than the “official” inflation rate, most notably college costs and medical expenses. With more and more health care costs being passed on to retirees, health care inflation could have a particularly detrimental effect by lowering how far your retirement finances will go. Many Chevron employees are counting on hitting 90 points and letting Chevron pay for their retiree health care, but Chevron’s contribution increases by a maximum of 4% annually, whereas I typically estimate 8% annual increases when doing financial plans, and the Chevron employee is responsible for that difference.
Taming inflation can be particularly challenging for retirement planners. Fortunately, you can combat inflation’s effect on the savings you’re building through the ESIP and the pension (CRP). Here are three strategies to consider:
- Increase the amount you’re putting into your ESIP each pay period; it would be wise to put in enough money to take full advantage of Chevron’s employer match if you aren’t already (not many companies are this generous, so using this strategy helps put you ahead of the curve).
- Pay attention to your ESIP. Chevron stock has beat inflation handily over the years, but it’s dangerous to keep too much of your portfolio in any one investment.
- Choose at least some investments that have the potential to provide inflation-beating returns, such as treasury-inflation protected securities (TIPS).
Into the Future
Penny candy may be gone forever, but inflation is probably here to stay. Someday Chevron retirees might tell their grandchildren how much cheaper things were back in 2012 (“Back in 2012, you could get a cheeseburger, fries, and a soda off the McDonald’s dollar menu!). But as long as you plan and invest wisely, you should be able to take them out for popcorn and a movie.
I’d be happy to sit down with you to discuss the ways in which you can properly account for inflation. Because I work with Chevron executives, managers, employees and retirees, I'm knowledgeable about your various compensation plans and benefit offerings, plus other issues specific to Chevron employees (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of my Chevron clients and you can ask them how working with a financial planner has helped them.
Please contact me at (925) 659-0251 with specific questions or to schedule a time to meet in either my San Ramon or Point Richmond office. Or for more information, please visit our website www.insight2wealth.com.
* As measured by the CPI, the Consumer Price Index