How Inflation Early In Life Positively Affected My Financial Situation Later In Life -- March 1, 2023

For the archives. 

Not ready for prime time.

There is yet more to be written. This has not been proofread; there will be content and typographical errors.

IN PROGRESS. 

Theme: how inflation early in life positively affected my financial situation late in life.

There are so many facets to this story, but first some important backstory data points.

1.  Background:

• I was a career officer in the USAF, from 1977 to 2007, 
• officially, exactly 30 years and a day 
• (official retirement has to occur on the first day of the following month in which you accrue 30 years. 
• significant inflation was pretty much a part of my life for the first twenty years of my career
• military pay: 
• we saw pay increases every year: COLA (cost of living adjustments); the higher inflation was, the higher the COLA 
• every two years: on top of COLA, we got an automatic pay increase just for serving two more years; also called longevity pay;
• promotion: officers were generally promoted every four to eight years; for me, average time between promotions was probably about five years
• special pays (and there were lots of them)
  
• I maxed out all my promotions by twenty years which meant no more promotions after my first twenty years; no promotions in my last ten years in the service (that's why most folks retire at twenty years rather than at thirty years)
  
• after twenty years, one could retire on 50% of one's basic pay
• after thirty years, one could retire on 75% of one's basic pay
• for me, my initial pension was probably close to 50% of total final active duty pay; possibly less
  
• there were some downsides and some unfairness to this system, but that's not the purpose of this discussion; stay focused on the data points above
• in thirty years of being a career officer, my pay was never, never interrupted due to anything: no interruptions due to illness; due to injury; due to job action (strikes); due to vacations (30-day paid vacations); due to job loss;
• income was never negatively impacted by surprise medical expenses; 
• groceries and department store items sold on base at quasi-governmental retail centers
  
• geared for low- to middle income folks; no local sales tax; 
• our pay never decreased; it could only go up;
• one could supplement basic pay with other pay, often significantly significant; much of that supplemental (additional) pay was tax-free (hazardous pay, combat pay)
• I'm sure I'm missing some things, but we can start there

2. Comment.

• not specific to the military but related to the pay one makes in many careers, the more you make at the front end of one's career has a greater effect on final pay than the amount one makes at the end of one's career, if that makes sense 
• (obviously many, many exceptions) 
• in other words, if I had the choice of a 10% COLA for five consecutive years,  I would ask for it at the beginning of my career rather than at the end (I'm not sure if that works, or always works, but I think you get the idea of what I'm trying to say

3. More background.

• early in my career I had relatively few expenses compared to the expenses I would have later in life;
• moving every one to three years, difficult to buy a house early in career (a huge financial break for most folks, although that's counterintuitive
• only one family car needed;
• no college expenses or additional car expenses for teenagers until late in life

4. Now, inflation. The reason for this post.

See this post. 

• As noted, I entered the service in 1977.

• From 1977 - 1980 I was in training and money meant absolutely nothing to me. I needed no money; it all went to my wife and she ran the household. We had no time for anything: no vacations, no travel, no boating, no nothing. I was working 80+ hour weeks; age three meals a day (generally at work) and came home to sleep. That was my entire life. [Having said that, we had wonderful date nights in San Francisco on a very regular basis.]
  

• But look at that "wonderful" inflation from 1977 - 1980 -- I wasn't spending any money; I lived on base, so no housing expenses and no increase in rent -- ever -- so, inflation? What inflation? I would not have noticed it but we would have received huge COLAs every one of those years, which exceeded our "longevity" pay (every two years).
  
  
  

• And, as Buffett would say, this was the secret sauce: all subsequent pay for the next 26 years (basic pay, COLA, promotion pay, etc) was based on the previous pay which went up significantly each year (1977 - 1980) due to inflation. Inflation that I never saw.

• And now, forty-six years later (2023 - 1977 = 46) my pension is significantly more than it would have been had we not had that inflation in those early years.

• And as noted at that site, we experienced significant inflation during the first twenty years -- the most important earning years -- of my career.

• An aside: much more important than the "true" inflation rate is the "official" inflation rate. Folks at the same point in their military career as I was in 1980 see stories of what "true" inflation is, and are greatly concerned, as well they should be, that the government is cleverly doing what it takes to bring the "official" inflation rate down. A lower "official" inflation rate will reduce the COLA and basic pay and special pays and that will have a cascading effect for the next twenty to thirty years.

5. Comment.

• "Inflation" is only one factor in one's earnings and expenses. And in the big scheme of things, it's a very, very small factor. So much more affects one's net income, but if I had to say the most important factor with regard to net income and "inflation," the most important factor is the amount of disposable income, or positive revenue stream. 

• For young military officers, who by the way, receive ongoing and frequent money-management education, the best thing they can do now is invest as much as possible with an eye toward Buffett's secret sauce. The "other" secret sauce that I mentioned above will take of itself and, at any rate, is out of one's control.