The Tooth Fairy Knows About Inflation
Our youngest son, Sutton, has lost 4 teeth in the last two months. Unfortunately for him, they are his top 4 front teeth. That's right, all of them in a row. So as you can imagine, the Tooth Fairy has been to our house at a pretty good clip.
Sutton has also been socking away some Tooth Fairy cheddar at a pretty good clip, too. Tooth Fairy in the StranClan house pays $2 per tooth. The Tooth Fairy has a stout collection of the very rare $2 bill as well as a good number of $1 coins, and that's what shows up under the pillows. Since they never see the $2 bill, and the $1 coin is pretty rare as well, the kids think these are pretty cool!
One of the kids on Sutton's basketball also lost a tooth recently. When I asked if the Tooth Fairy came to his house, he exclaimed, "YEAH!!! And I got FIVE DOLLARS!"
This got me to thinking. First, are we undercutting the Tooth Fairy with our $2? And then I wondered how much the Tooth Fairy dropped under my pillow when I was a kid. So I texted my mother-in-law and my mom to get some historical data. My mother-in-law confirmed $1 for all teeth. My mom recalled $0.25 (a Quarter!!) for the little teeth (front teeth?) and $1 for the molars.
Now I was really curious. Has the Tooth Fairy in our house kept up with inflation? Or were we falling behind?
Defined, inflation refers to the environment of generally rising prices of goods and services. As general prices go up, our ability to purchase them goes down. Here are some everyday examples of inflation in your life:
The price of gasoline: about $2.50/gallon where we live, and I remember filling up the 1 gallon lawn mower gas can for $0.90
Housing: average new home sales price in 2018 was $377,800 vs $144,400 in 1988(1)
Public Four-Year College Education: $9970 in 2017-2018 vs. $3190 in 1987-1988(2)
Your Income: that annual step up in salary? You may have heard it referred to as a cost of living increase. Many salaries increase by a set percentage each year to keep pace with projected inflation.
So now we know what inflation is and a few examples of it, why is it so dang important? I'm glad you asked.
Inflation is an important part of your financial plan and your retirement plan. It's the rust that never sleeps and the only answer to it is more money.
At some point down the road, you might decide you don't want to work any longer. And you need money to support that decision. That's why we save money. Put it in our 401(k), IRA, investment account, whatever.
We already know a few examples of inflation in our everyday life. And we know that inflation never sleeps. So when we get to the day we want to stop working or send our kid to college, we want our money - our savings, our retirement accounts - to also have grown. Ideally they have kept up with - or even outpaced - inflation over the same period.
How does that happen? By growing, or investing, our money.
That's why saving and investing - and starting EARLY - is so dang important.
And just because we GET to retirement, that doesn't mean inflation goes away either. Nope. It continues to lurk just under the surface and it challenges our retirement dollars to keep up. Why? Let's assume a flat 3% rate of inflation. That's a pretty standard rate. And let's also assume we step off into retirement with $1,000,000. Over 30 years in retirement, that same amount - $1,000,000 with a 3% inflation rate - will feel like just $412,000.
While we're working and saving, we invest our money to keep pace with and/or outpace inflation. And when we retire, we need our money to also keep up with inflation. Remember, inflation never stops.
Now back to my initial Tooth Fairy inflation quandary. Has the Tooth Fairy been keeping up with Inflation?
Since my brothers and Jill's brother are a little older than us, I'm going to use 1980 as my inflation starting point and the Bureau of Labor Statistics Inflation Calculator (https://data.bls.gov/cgi-bin/cpicalc.pl).
For my brothers and I earning $0.25 for the littler teeth, our $0.25 back then would have the same buying power today as $0.81. Our kids have only lost the little teeth (no molars yet!), so the Tooth Fairy's $2 today is worth more than double what my brothers and I received for the same type of teeth.
RESULT: for the little teeth, the Tooth Fairy has far outpaced inflation.
Now onto the $1 in 1980. Today it would have the same purchasing power as $3.23. And our Tooth Fairy is only dropping a $2 bill under the pillow. She has NOT kept up with inflation.
RESULT: for the molars, the Tooth Fairy has not kept up with inflation.
In our lives, this would be the equivalent of covering only 60% of your kids college education or only having a retirement lifestyle that's 40% lower than anticipated.
Remember, inflation doesn't stop and the only answer to it is more money. Meaning:
Good news, though. The kids don't know anything about inflation so the Tooth Fairy still has time to catch up when those molars start falling out!