DAILY FINANCE: …. Like any statistic, the Consumer Price Index, which measures inflation, is only as effective as the assumptions it makes — in this case, about what you spend money on. If you spend more on certain things than most people, then the CPI will do a terrible job of reflecting the prices you actually pay.
In particular, retirees often don’t fit the CPI profile well at all. Many retirees have already paid off their mortgages, and despite still having to cover utility costs, property taxes, and maintenance and upkeep, their spending on their housing needs falls well short of 40%. And declining home prices have only benefited those who didn’t own homes prior to the housing bust. Far from getting any benefit, retirees who own their homes have taken big hits to their finances.
At the same time, medical care places an ever-increasing drain on many retirees’ finances. Hospital costs have risen at nearly twice the rate of overall inflation in the past 12 months, and over the longer run, health care has seen huge price increases that are straining government programs like Medicare and Medicaid to the breaking point. Yet, medical costs make up only 7% of the CPI — a far cry from the estimated $230,000-$250,000 that retirees can expect to pay for health-care expenses over the course of their retirement years… (more)
