When Inflation Works for You
Money matters...
I watched a YouTube video the other night about how inflation has increased the prices of everyday items in the US. It made me think. You see, today, we are actually benefitting from the inflation rate in the US. Let me explain.
Our Rich Journey
The video was made by a young couple (ahh…to be 40 again) that “retired” in Portugal at 39 or 40. I put retired in quotes because that is their word. I think what they did is better defined as leaving their jobs with a sizable nest egg and now working for themselves making YouTube videos, selling courses on moving to Portugal, investing, etc. I don’t begrudge them…most of the information they share on their YouTube channel is pretty good. (Though they are not certified financial planners and would not be able to say many of the things they say if they were.)
I attached their video to the end of this post because they compare current grocery prices in the US and Portugal. Frankly, having lived in Portugal now for nearly a year, I was shocked by some of the US prices they shared. Yikes! No wonder Biden’s numbers are in the dumps. (I am not saying they should be…just trying to understand.)
When Inflation Works for You
However, as an American living in Portugal, we are actually benefitting from the US’s current inflation rate. You see, Denise retired from the military. As such, she receives a monthly pension. The pension is adjusted each year to reflect inflation via a Cost of Living Allowance (COLA). For 2022 that increase is 5.9%. We have decided to postpone receiving Social Security for a few years, but if we were, it also would see the same increase for 2022. And while we are not collecting Social Security today, this adjusted rate becomes the new baseline on which future increases are calculated.
Last month the Social Security Administration unveiled the largest cost-of-living increase for nearly 40 years and recipients benefits payments will rise next year. — Greg Heilman
Meanwhile, the inflation rate in Portugal is currently 2.6%, among the lowest in Europe. So let me offer an example.
You are a single person and you receive the average Social Security payment of $1,558.54/month in 2021.
In 2022, you will receive $1650.49…a $91.05 increase.
Let’s say you were getting by in Portugal on your Social Security check. (You probably won’t be living in a major city or Cascais…but if you are very frugal it is doable.)
If inflation in Portugal remains at 2.6%, you effectively have $51/month more.
But Wait, Don’t Pack Just Yet
I am showing all figures in US Dollars. Keep in mind, one must also consider the exchange rate that fluctuates! As I write this (10:20 on 1 December 2022) $1.00 buys 0.88 euros. However, over the last year, we have seen rates ping-pong from as low as 0.81 to as high as 0.89. If the forecasts are accurate 2022 will see a less favorable swing.
So when the average 2022 Social Security check is converted to euros it could swing from as high as €1435 to as low as €1312…effectively wiping out the COLA.
Moving to Portugal
We are fortunate. The lower cost of living in Portugal when compared to the US was not the reason we choose to move! We left because of what we saw happening to the US, to seek a new adventure, to travel more throughout Europe, to explore a different way of living, etc, etc. And we are fortunate because Denise’s pension is just one part of our retirement income.
When we were retired in the US we kept 24-36 months of living expenses in “cash” so we could weather fluctuations in the stock market. While we don’t keep that much in our Portuguese bank account, we keep enough euros to weather currency fluctuations and attempt to time money transfers to get a more favorable exchange rate. (For example, we are transferring enough money to cover expected building costs to Portugal this month!)
One final note: There is always the possibility that it could be reversed (i.e. 2% inflation in the US while the country you are living in hits 5% or more). There is a lot to consider as you calculate retirement planning overseas.
As always, I enjoy your posts. Fixed-rate mortgage holders and stock investors are the big winners in the US. Imagine having a fixed 3% 30-year loan. If inflation continues to increase, that loan becomes even more advantageous. I mean, if you have a sub 3% fixed mortgage, you basically hit the lottery even at this point. Same with long-term investors in the S&P 500. The worst part of inflation is it can mess with the American psyche and isn't great for politicians currently in office. They want the slow boil of increased inflation and not the quick spurt we are experiencing. I believe inflation is just catching up with what has been historically low for the last 20+. The real unknown is how high inflation will continue to climb in the next 12-24 months. That will need to be controlled to prevent the current "good" economy from getting too far off track. Side note, if you have cash and want a conservative investment to protect that money from inflation. Check out I savings bonds that are currently producing 7% interest. You can do $10k in December and another $10k per social security number on January 1. Of course, understand the rules around this low risk savings product. Overall, the rules are pretty flexible for I bonds and better than sitting in your traditional bank savings account at this moment.
Thank you Nancy for this information on inflation! Can I ask why you decided on the place you are remodeling and the town? I know you love Caicais.