Tuesday, June 8, 2010

Inflation: A Silent Tax

Citizens and governments worldwide are arguing over pension plans.  Progressive social diddlers love schemes like social security and government funded pension plans because they are a pipeline of money from the taxpayers' wallets directly to the state.  It decreases citizens' ability to take care of themselves, making many of us wards of the state.

Any talk of privatizing social security and other government pension plans is squelched by those simply pointing to the stock market and the deflated 401K's that so many had staked their retirement dreams on.  Fair enough. 

Big Government conspires against against the self-sufficient saver
A dollar is not worth what it was.  It continues to shrink.  This makes your stash of money comparatively smaller and smaller as the years go by.  You can't make it on your own.  You need government assistance or you are forced to gamble your money in the stock market.

Inflation is a silent thief.  It is a colony of termites and vermin eating away at the consumer's savings and purchasing power.  It hits those on fixed incomes especially hard, and like the silent thief it is, we don't even notice the robbery.  It leaves us wondering at the end of the month where all our money went.

Inflation is also a Silent Tax.  Progressive governments love printing money, because the rickety ponzi schemes they've constructed require it.  They must expand the money supply faster than GDP growth to keep the fraud from collapsing (they are doing this now).  This in turn causes inflation, diminishing the value of the dollar.

The Solution:  Maintain the Dollar's Value
If government would simply maintain the value of our currency, we wouldn't need to gamble on the stock market or depend on social security.  Each of us could secure a comfy and safe retirement nest egg by simply putting money, say $200 per month, in a traditional bank account each month.

See For Yourself-An Example
The good folks at Dinkytown.net have a wonderful collection of financial planning calculators, ranging from simple to quite complex.  Their Savings, Taxes and Inflation Calculator is an eye-opener. 

Say you start with nothing at 20 years old and want to save $200 per month until you're 60, when you will retire with your savings.  I've kept all the parameters very conservative so no one accuses me of rigging the game: 

Here are the inputs
Monthly Amount:  $200
Number of Years:  40
Savings Interest:  2%
Annual Rate of Inflation:  2.1%
Total deposited:  $96,000

After 40 years, you would have:  $63, 811

That's less than the $96,000 you deposited over those 40 years!

With no inflation, your ending balance would be:  $146,530

At the same 2% rate, that sum would earn you $2,800 per annum on the balance.  Not quite enough to live a Hollywood lifestyle, but it's nothing to sneeze at either. 

Bump up your monthly contributions to $400 per month accruing at 3%, and work till you're 65, and you'll have over $450,000

With a paid-off house and no other debt, this money could at least keep you in beer and skittles well into your late 80's.

For more on inflation see: 
CPI Data
Thomas Del Beccaro - Destroying Your Wealth

11 comments:

Leticia said...

You had me until you mentioned beer and skittles, ewww...

This is very informative and I will look into this as well as learning the stock market.

I have to retire someday.

Most Rev. Gregori said...

If the present morons remain in power much longer, no one will be able to retire. Either we will all be wards of the State or we will be forced to work until we drop.

Ray said...

You're right Curt,even if you save on your own the value drops and drops with inflation.

I use those Dinkytown calculators on all the websites I do for my dad's real estate office. ;)

Fredd said...

Silver:

When you state 'with no inflation, your ending balance would be...', that's like saying:

"If King Kong were not 100 feet tall, he would not be so menacing."

Or, "if Shaquille O'Neal were not over 7 feet tall and over 300 pounds, he would not be so dominating in the paint."

Or, I like this one: 'if Helen Thomas were not so old, ugly and stupid, she could win a Miss America crown."

Then reality sets in: King Kong IS 100 feet tall (work with me here), Shaq IS huge, and Helen Thomas will never win a beauty pageant. Reality can't be assumed away.

One can't simply assume inflation away in any economic calculation. Would we like less inflation? Yes, but there's always going to be some level of inflation present in any economy: always has been, always will be. It's just the stuff of life.

You can't assume it away, Silverfiddle. You have to work around it. Getting out of the stock market because the volatility is uncomfortable is not the answer, either.

Silverfiddle said...

I disagree, Fred. If congress did its job and kept the fed from running the printing presses full blast, we would indeed be in a low inflationary environment and we would be maintaining the value of our currency.

Granted, you cannot maintain a theoretical perfect zero, but my point is that blatant currency manipulation by craven governments eats away at everybody's savings and earning power.

Fredd said...

I of course agree with your point, Silver. A pox on congress for being the spineless jellyfish that they are. Still, you cited a calculation using a 'theoretical zero' interest factor.

Technically, we are currently in an historically low inflationary period as I write this.

So, we both agree inflation eats away purchasing power. Inflation, accordingly, is bad. So are zits, but we are stuck with both at some point during our lives.

Silverfiddle said...

The Lord Jesus said the poor would always be with us, so by your logic we should just give up on charities.

It is worthless talking about corrupt Chicago Democrats and DC big spenders.

By your oown logic you are wasting your time by blogging about the ills that plague our nation.

Have fun throwing up your arms. I will stand and fight.

This post was to show how big government progressive policies end up conspiring against the ordinary people they profess to be helping.

Always On Watch said...

Bump up your monthly contributions to $400 per month accruing at 3%, and work till you're 65, and you'll have over $450,000!

Unless there's a medical catastrophe and you end up in a nursing home.

All assets are on the table for seizure -- even the spouse's assets.

Just a few years ago, my savings accounts earned quite a tidy sum (at roughly 5%). Now, due to medical expenses, the principal of those savings accounts is depleted, and the interest income is neglible.

I hate to say it....But if not for my husband's SSDI, we'd be deep in the hole.

At times such as this household is going through, I often wish that I'd put my principles aside and worked a government job, where benefits, particularly health insurance and retirement, are much better. Instead, both my husband and I established small businesses. We're behind the eight ball now! We had planned well for retirement, but have also watched that plan become one which is unfeasible without selling the assets we weren't planning to sell until closer to retirement age.

If things in America continue as they are, with government as primary employer, America will become completely socialistic.

I do wonder how long government retirement plans will be able to meet their obligations without oppressive taxation for those who are still working.

Okay. Enough whining.

The problem is indeed the government. Just think of how much money we'd all have if taxes were cut to the core!

Fredd said...

Silver:

Again, we both agree on your point. You win, you are right.

BUT...I am not throwing up my arms and giving up on holding congressional feet to the fire for infaming things.

I said you had to work around an inherent evil, not pretend it doesn't exist, or work to make it go away (which it won't, it's part of the human condition).

On this point you are sounding rather Utopian, and I know you don't want to get lumped with THAT crowd, do you? (and you know who I am talking about).

The perfect is the enemy of the good.

Silverfiddle said...

This was merely an exercise to show how inflation eats away at the dollar.

Financial planning is all about planning because, as Einstein pointed out, it's all relative.

AOW: Unfortunately, Obamacare fights against catastrophic insurance. As you point out progressive statism makes even the most conservative of us (as you are) look wistfully at the state. That is the insidious nature of statism, and I definitely do not hold it against you.

Always On Watch said...

Silverfiddle,
I don't think that I look wistfully at the state.

I do, however, think that forcing a couple into medical bankruptcy, which would put both Mr. AOW and me on Medicaid as our primary insurance for the rest of our lives, is a problem with the health-care system.

The health insurance plans which Mr. AOW and I have are considered catastrophic coverage. Unfortunately, catastrophic coverage doesn't cover long-term care. Yes, there are insurance plans for that purpose, but they're turning into scams as nursing homes know (One so stated to me!) "there is a pool of money to get."

A few years ago, I read that the entire health-insurance system is going to come down. Indeed, the Obama administration is pushing it down and trying to force all of us into state care.

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