What do you use for inflation? [for retirement planning]

[ch4au2]

One thing that's difficult to accurately determine in retirement calculations is inflation. Of course you can use the standard number that is published and based on CPI. But inflation from say, age 60 to age 90, is much different from what's in the published numbers.

So when you run tools like firecalc, what do you use for inflation?

Thanks

[jebmke]

I haven't used Firecalc in years but whenever possible, any analytics I do are done in real terms - that is, I ignore inflation and look at everything in today's dollars.

[JoeRetire]

So when you run tools like firecalc, what do you use for inflation?

three percent

[Cyclesafe]

The CPI for SS. This rendition allows one to pick and choose factors to determine "personal inflation", but some may argue that such an effort is a bridge too far.

https://www.bls.gov/news.release/cpi.t01.htm

[arcticpineapplecorp.]

3%-4% is the historical average. that includes low inflation like now and high inflation like the 80s.

unless we have hyperinflation, I think that's reasonable.

[checkyourmath]

If RetireJoe is using 3 you should probably use 4. Technology doesn't deflated anything and the change in the money supply is currently reflected that is why everything has become so much more expensive. I highly recommend following DXY it is much more fun to think about human behavior from macro level.

[JoeRetire]

If RetireJoe is using 3 you should probably use 4. Technology doesn't deflated anything and the change in the money supply is currently reflected that is why everything has become so much more expensive. I highly recommend following DXY it is much more fun to think about human behavior from macro level.

I have no idea what you are trying to say.

For my long-term projections, I'll stick with 3 percent. Thanks anyway.

[megabad]

I don't. At least not directly in this case. I just use real returns which indirectly uses it in the data sets. Which exact BLS metric the data set uses for inflation doesn't really matter to me over the long run as long as it is consistent. I'll have a little bit of TIPS and not worry about it too much. I think I am likely to be wrong on my market returns anyway, not sure it matters if I am wrong on the inflation piece or the nominal piece.

[nisiprius]

In the past I just used real returns for everything. It's just as easy to say "I expect the real return of the stock market to be about the same as its historical average of 7%" as to say "I expect the stock market to return 10% and inflation to be 3%," and it's at least as robust and predictive. It's much easier to guess at your future expenses in real terms by using present-day dollar numbers. There is nothing to be gained by trying to make two predictions (nominal returns and inflation) when you can just make one (real returns).

And I find it much easier to visualize the future in terms of a standard of living like $75,000/year today" than "$500,000/year but $40 for a Big Mac and $250,000 for a car."

[TN_Boy]

One thing that's difficult to accurately determine in retirement calculations is inflation. Of course you can use the standard number that is published and based on CPI. But inflation from say, age 60 to age 90, is much different from what's in the published numbers.

So when you run tools like firecalc, what do you use for inflation?

Thanks

2% long term.

I don't agree that "inflation from say, age 60 to age 90, is much different from what's in the published numbers"

I think many seniors will see a lower inflation rate than before retirement. Most seniors are no longer paying rapidly increasing higher education costs for children. And if you own a house, rising home prices (an issue in some areas) is not a problem.

If you want to be rather conservative, you could use 3%.

SS will increase at CPI-W, so that part of your income is relatively safe from inflation.

There have been many threads on inflation here ... you might want to peruse them for insight on the general question of "does CPI understate real inflation."

[KlangFool]

OP,

0%. I do not care about the official inflation rate. It has no relevance to my annual expense. My annual expense had stayed around 60K per year for the past 10+ years. My personal inflation rate is 0%.

So, what is your personal inflation rate? What are your annual expenses over the past few years?

KlangFool

[ch4au2]

Thanks for all the replies. I'm starting to agree with the later posts of 0%. I see a lot of early responders using the 3-4% standard inflation rates.

To me the standard inflation rate includes a lot of things that don't apply, at least to me. For instance, it's 33% based on housing costs, but I own my house. Among other things.

I've been retired now for about 8 years. My sole income is draw downs from my portfolio. I haven't increased my draw down yet and really haven't found the budget getting tight, but one can always spend more money.

I've also talked to many people who've retired, including my parents and parent-in-laws. None of them increased their income nearly as much as standard inflation. Most, if not all of them, just shift money around. In early retirement, they spend a lot on travel, going out to eat, entertainment, etc. Later in retirement that slowed and they shifted money to healthcare and basic needs. So even though those prices went up substantially, their overall budget didn't increase that much.

I like the thought that you just remove the inflation calculation and not have two separate things to consider. I estimate future returns at 3%, so a 3-4% calculation on inflation is as much as my returns. But since I've been retired I've averaged almost 15% and haven't even increased draw downs per my inflation calculation. Which has changed what I could draw down by a big factor. But I haven't changed it yet, I'm still fairly young and who knows what's going to happen. Right now I just consider it a hedge against a big correction. But I'm thinking I should at least increase my draw down by what I originally calculated for inflation.

And going forward, especially since I'm so conservative on my returns, maybe I should lower my inflation or take it out all together.

[Watty]

I see a lot of early responders using the 3-4% standard inflation rates.

A agree with using the "real" numbers to take the inflation out of your planning.

A big problem with trying to estimate what the average inflation will be is that you could be right about the inflation average but the sequence of the inflation each year will also matter so you have a sequence of returns risk. For example when you are the ages 60 to 90 the average inflation could be 4% but it if you have five years of high inflation when you are in your 60s that is a lot worse for you than if you had that same five years of high inflation when you are in your 80s.

[TN_Boy]

Thanks for all the replies. I'm starting to agree with the later posts of 0%. I see a lot of early responders using the 3-4% standard inflation rates.

To me the standard inflation rate includes a lot of things that don't apply, at least to me. For instance, it's 33% based on housing costs, but I own my house. Among other things.

I've been retired now for about 8 years. My sole income is draw downs from my portfolio. I haven't increased my draw down yet and really haven't found the budget getting tight, but one can always spend more money.

I've also talked to many people who've retired, including my parents and parent-in-laws. None of them increased their income nearly as much as standard inflation. Most, if not all of them, just shift money around. In early retirement, they spend a lot on travel, going out to eat, entertainment, etc. Later in retirement that slowed and they shifted money to healthcare and basic needs. So even though those prices went up substantially, their overall budget didn't increase that much.

I like the thought that you just remove the inflation calculation and not have two separate things to consider. I estimate future returns at 3%, so a 3-4% calculation on inflation is as much as my returns. But since I've been retired I've averaged almost 15% and haven't even increased draw downs per my inflation calculation. Which has changed what I could draw down by a big factor. But I haven't changed it yet, I'm still fairly young and who knows what's going to happen. Right now I just consider it a hedge against a big correction. But I'm thinking I should at least increase my draw down by what I originally calculated for inflation.

And going forward, especially since I'm so conservative on my returns, maybe I should lower my inflation or take it out all together.

I think you are on the right track. Just assume a low real return from your investments if you want to be extra-safe. Simple to compute. You can also look at safe withdrawal studies to see what number you get for a safe amount of money to spend.

Will you have SS? That will provide a nice cushion to your portfolio income.

[willthrill81]

To me the standard inflation rate includes a lot of things that don't apply, at least to me. For instance, it's 33% based on housing costs, but I own my house. Among other things.

We too own our home, but property appreciation means that we're now paying close to 50% more in taxes than we did six years ago and more in insurance as well. Home maintenance materials also inflate in price over time.

[flyingaway]

Thanks for all the replies. I'm starting to agree with the later posts of 0%. I see a lot of early responders using the 3-4% standard inflation rates.

To me the standard inflation rate includes a lot of things that don't apply, at least to me. For instance, it's 33% based on housing costs, but I own my house. Among other things.

I've been retired now for about 8 years. My sole income is draw downs from my portfolio. I haven't increased my draw down yet and really haven't found the budget getting tight, but one can always spend more money.

I've also talked to many people who've retired, including my parents and parent-in-laws. None of them increased their income nearly as much as standard inflation. Most, if not all of them, just shift money around. In early retirement, they spend a lot on travel, going out to eat, entertainment, etc. Later in retirement that slowed and they shifted money to healthcare and basic needs. So even though those prices went up substantially, their overall budget didn't increase that much.

I like the thought that you just remove the inflation calculation and not have two separate things to consider. I estimate future returns at 3%, so a 3-4% calculation on inflation is as much as my returns. But since I've been retired I've averaged almost 15% and haven't even increased draw downs per my inflation calculation. Which has changed what I could draw down by a big factor. But I haven't changed it yet, I'm still fairly young and who knows what's going to happen. Right now I just consider it a hedge against a big correction. But I'm thinking I should at least increase my draw down by what I originally calculated for inflation.

And going forward, especially since I'm so conservative on my returns, maybe I should lower my inflation or take it out all together.

If I were you, I would spend more money when I still have time to do that.

[prd1982]

You do need to pick an inflation rate if you have a non-COLA pension or annuity. I picked 3% since that is the historical number. So far, I have been lucky that my pension hasn't decreased in value as much as expected.

[JoeRetire]

Thanks for all the replies. I'm starting to agree with the later posts of 0%.

I like the thought that you just remove the inflation calculation and not have two separate things to consider. I estimate future returns at 3%, so a 3-4% calculation on inflation is as much as my returns. But since I've been retired I've averaged almost 15%

It makes me wonder...

If you are planning to ignore inflation completely, and estimating future returns at 3% even though you are in fact seeing a 15% return - what value do you find in any long-term projections? What's the point?

Seems like it would be simpler to just chuck it all and not worry.

[Soon2BXProgrammer]

One thing that's difficult to accurately determine in retirement calculations is inflation. Of course you can use the standard number that is published and based on CPI. But inflation from say, age 60 to age 90, is much different from what's in the published numbers.

So when you run tools like firecalc, what do you use for inflation?

Thanks

If your running a Monte Carlo analysis, I generally recommend people do two projections.

1) Reasonable rates of return and reasonable interest, etc. Ideally you will have a very high success rate
2) low rate of return and higher inflation (creating a squeeze effect)... even a 50% success rate might be enough.

[MathWizard]

I try to avoid inflation estimates, and do everything om real numbers.

For a small non-inflation adjusted pension my wife has, I use 2.5% to change the numbers from nominal to real.

I also use 2% above CPI for medical, since medical expenses are a big expense
in retirement, and in general rise much faster than CPI.

[ch4au2]

It makes me wonder...

If you are planning to ignore inflation completely, and estimating future returns at 3% even though you are in fact seeing a 15% return - what value do you find in any long-term projections? What's the point?

Seems like it would be simpler to just check it all and not worry.

Not sure what "check it all and not worry" means. But, of course the 15% return is past performance. Past performance has no bearing on future performance, as they say.

The value in long term projections? I would advise anyone who is retired and thinks they have more than 30 years left to continually do long term projections. How else do you know if you're over/under spending?

For me, I don't have anyone to leave any money to, children/relatives/etc. As the saying goes, "my optimum would be for the last check I write is for my funeral, and it's the first one to ever bounce!" That's a pipe dream and won't happen, so the alternative is to not run out, but not have a bunch left.

Even though I have not yet given myself a raise, it's probably time. My CPA even says, "you need to spend more money!" The only way to decide how much to spend/draw is to do long term projections. Sure, there are going to be assumptions that don't pan out, that's why you do it every year or even more often, to continually assess what you're doing.

Thanks everyone for all the advice!

[H-Town]

In the past I just used real returns for everything. It's just as easy to say "I expect the real return of the stock market to be about the same as its historical average of 7%" as to say "I expect the stock market to return 10% and inflation to be 3%," and it's at least as robust and predictive. It's much easier to guess at your future expenses in real terms by using present-day dollar numbers. There is nothing to be gained by trying to make two predictions (nominal returns and inflation) when you can just make one (real returns).

And I find it much easier to visualize the future in terms of a standard of living like $75,000/year today" than "$500,000/year but $40 for a Big Mac and $250,000 for a car."

Agree.

It’s not an exact science so don’t try to make it to be. Many variables go into this calc. If you own a house, you essentially reduce inflation by a great margin. Also your pattern of consumption affect on the real inflation that impact you personally.

[KlangFool]

The value in long term projections? I would advise anyone who is retired and thinks they have more than 30 years left to continually do long term projections. How else do you know if you're over/under spending?

ch4au2,

I disagreed.


A) Let's say you do your projection this year and it is fine.


B) By next year, even after your annual spending, your portfolio is up X%.


C) If your projection at the beginning of the year is fine, then, your projection at the end of the year should be fine too. Your portfolio is up X%.

D) If this continues for a few more years, your portfolio may be 50X or more times your annual expense, there is no point to do any projection.


My older brother and older sister early retired at 49 years old. We are the kind of life long saving 1 year of expense every year kind of person. We can control our annual expense to stay about the same. We would not run out of money for retirement.


KlangFool

[ch4au2]

ch4au2,

I disagreed.


A) Let's say you do your projection this year and it is fine.


B) By next year, even after your annual spending, your portfolio is up X%.


C) If your projection at the beginning of the year is fine, then, your projection at the end of the year should be fine too. Your portfolio is up X%.

D) If this continues for a few more years, your portfolio may be 50X or more times your annual expense, there is no point to do any projection.


My older brother and older sister early retired at 49 years old. We are the kind of life long saving 1 year of expense every year kind of person. We can control our annual expense to stay about the same. We would not run out of money for retirement.


KlangFool

Interesting, so you're saying that no matter how much money you have, you're spending is not going to increase. You're just going to live on your budget regardless. If that works for you, then great.

For me, if my portfolio doubles, I'm going to spend more money. Not necessarily twice as much, but I may take that vacation I thought about but didn't think I could afford. When I buy a new car, maybe I get the BMW instead of the Buick. Maybe I remodel the kitchen because the wife would like it, but it's not a necessity. Maybe I pay someone to take care of the lawn instead of doing it myself.

How much do I do/spend? Don't know, it depends on my long range projections. I wouldn't do it based on a one year improved return either. But after multiple years, and almost two fold increase in portfolio value, I'm thankfully ready to spend a bit more.

And I do mean THANKFULLY!! This is all a fun exercise as it means the past 8-10 years things have gone a lot better than expected!! YAY!

Thanks

[KlangFool]

ch4au2,

I disagreed.


A) Let's say you do your projection this year and it is fine.


B) By next year, even after your annual spending, your portfolio is up X%.


C) If your projection at the beginning of the year is fine, then, your projection at the end of the year should be fine too. Your portfolio is up X%.

D) If this continues for a few more years, your portfolio may be 50X or more times your annual expense, there is no point to do any projection.


My older brother and older sister early retired at 49 years old. We are the kind of life long saving 1 year of expense every year kind of person. We can control our annual expense to stay about the same. We would not run out of money for retirement.


KlangFool

Interesting, so you're saying that no matter how much money you have, you're spending is not going to increase. You're just going to live on your budget regardless. If that works for you, then great.

For me, if my portfolio doubles, I'm going to spend more money. Not necessarily twice as much, but I may take that vacation I thought about but didn't think I could afford. When I buy a new car, maybe I get the BMW instead of the Buick. Maybe I remodel the kitchen because the wife would like it, but it's not a necessity. Maybe I pay someone to take care of the lawn instead of doing it myself.

How much do I do/spend? Don't know, it depends on my long range projections. I wouldn't do it based on a one year improved return either. But after multiple years, and almost two fold increase in portfolio value, I'm thankfully ready to spend a bit more.

And I do mean THANKFULLY!! This is all a fun exercise as it means the past 8-10 years things have gone a lot better than expected!! YAY!

Thanks

ch4au2,

I spend about 60K per year for the past 10+ years. If I have a lot more money, I will pay off the mortgage and save 15K per year from the mortgage. Then, I will still spend 60K per year.


KlangFool

[JoeRetire]

It makes me wonder...

If you are planning to ignore inflation completely, and estimating future returns at 3% even though you are in fact seeing a 15% return - what value do you find in any long-term projections? What's the point?

Seems like it would be simpler to just check it all and not worry.

Not sure what "check it all and not worry" means.

It means "check and all and not worry" when you make a typo.

But, of course the 15% return is past performance. Past performance has no bearing on future performance, as they say.

The value in long term projections? I would advise anyone who is retired and thinks they have more than 30 years left to continually do long term projections. How else do you know if you're over/under spending?

Seems to me there's little value in any long term projection that has arbitrary values applied to significant variables. Pretty much garbage in, garbage out.

But if it works for you, that's all that counts. Good luck.

[Zetorman]

OP,

0%. I do not care about the official inflation rate. It has no relevance to my annual expense. My annual expense had stayed around 60K per year for the past 10+ years. My personal inflation rate is 0%.

So, what is your personal inflation rate? What are your annual expenses over the past few years?

KlangFool

This is an interesting point. Just the other day I was showing DW our 2020 annual spend and it was very similar to our 2010 annual spend minus mortgage and kids school tuition. Then I told her that it appears as though we can mute a big part of any inflation increase simply because we know how to bargain shop and avoid going places or doing things that become overpriced per our historical perspective. While we will never avoid all inflation, we can avoid things like pickup trucks at 80k and 50 dollar trips to the movies.

[Wiggums]

In the past I just used real returns for everything. It's just as easy to say "I expect the real return of the stock market to be about the same as its historical average of 7%" as to say "I expect the stock market to return 10% and inflation to be 3%," and it's at least as robust and predictive. It's much easier to guess at your future expenses in real terms by using present-day dollar numbers. There is nothing to be gained by trying to make two predictions (nominal returns and inflation) when you can just make one (real returns).

And I find it much easier to visualize the future in terms of a standard of living like $75,000/year today" than "$500,000/year but $40 for a Big Mac and $250,000 for a car."

We do the same. I find it difficult to work with future values.
we track our annual expenses, which are fairly consistent except for years when we replace a car or replace an air conditioner.

Those calculators can be helpful, but I don’t always understand how the input value should be entered. I.e. .0325 or 3.25%. Are long term projections are really helpful? I’m not sure since we have consistent spending and a portfolio that is a little bigger than what we anticipate needing.

multiply your annual retirement expenses X years in retirement to see if your portfolio size is reasonable. That’s what works for us.

[ruralavalon]

I would just use real return numbers.

In fact I don't do projections at all.

I don't agree that "inflation from say, age 60 to age 90, is much different from what's in the published numbers"

I think many seniors will see a lower inflation rate than before retirement. Most seniors are no longer paying rapidly increasing higher education costs for children. And if you own a house, rising home prices (an issue in some areas) is not a problem.

Bankrate.com (8/25/2014), "Inflation is different for seniors". "Inflation is everyone’s enemy because it erodes purchasing power. But it’s even more insidious to seniors because of how much they spend on health care."

Morningstar (9/30/2019), "Inflation and Your Retirement", link. "Among the 10 fastest-growing costs cited in the survey [of retired and disabled households] were prescription drugs, homeowners insurance and property taxes, several food items, and Medicare premiums.

Looking to the future, two categories of spending look worrisome: housing and healthcare costs."

[chassis]

Use CPI.

I calculate geometric average 1, 2, 5, 10, 15, 20 and 30 year averages.

Forecasting inflation is a guideline and is not precise. Your plan should have a margin of comfort built in and your consumption in the present (and future) moment should be flexible.

[TN_Boy]

I would just use real return numbers.

In fact I don't do projections at all.

I don't agree that "inflation from say, age 60 to age 90, is much different from what's in the published numbers"

I think many seniors will see a lower inflation rate than before retirement. Most seniors are no longer paying rapidly increasing higher education costs for children. And if you own a house, rising home prices (an issue in some areas) is not a problem.

Bankrate.com (8/25/2014), "Inflation is different for seniors". "Inflation is everyone’s enemy because it erodes purchasing power. But it’s even more insidious to seniors because of how much they spend on health care."

Morningstar (9/30/2019), "Inflation and Your Retirement", link. "Among the 10 fastest-growing costs cited in the survey [of retired and disabled households] were prescription drugs, homeowners insurance and property taxes, several food items, and Medicare premiums.

Looking to the future, two categories of spending look worrisome: housing and healthcare costs."

Depends on insurance and the specifics of their medical needs.

The first linked article didn't show much detail. And it included this paragraph:

The results aren’t as clear cut as you’d expect. Over the 1983-2011 time frame, the CPI-E, in general, outpaced the other measures of inflation. But from 2006-2011 the CPI-W outpaced both CPI-E and CPI-U — not by much — just 0.1 percent, with CPI-W at 2.4 percent versus 2.3 percent for the other two. If President Obama is right about the Affordable Care Act reining in medical cost inflation, then CPI-W could continue to outpace CPI-E.

CPI-E is the experimental inflation rate for seniors.

The second article depends upon studies by the "Senior Citizens League" and I'd want to carefully look at it (from the summary the study partly depends upon self-reported numbers by seniors, and well, I'm not sure how good that data is).

Edited to add: And if housing cost inflation is an issue, why would be it be different/more of an issue for someone retired? CPI should be capturing that.

[Vegomatic]

This works well.

https://www.amazon.com/Electric-Portabl ... B074NZY3SQ

[JoeRetire]

OP,

0%. I do not care about the official inflation rate. It has no relevance to my annual expense. My annual expense had stayed around 60K per year for the past 10+ years. My personal inflation rate is 0%.

So, what is your personal inflation rate? What are your annual expenses over the past few years?

KlangFool

This is an interesting point. Just the other day I was showing DW our 2020 annual spend and it was very similar to our 2010 annual spend minus mortgage and kids school tuition. Then I told her that it appears as though we can mute a big part of any inflation increase simply because we know how to bargain shop and avoid going places or doing things that become overpriced per our historical perspective. While we will never avoid all inflation, we can avoid things like pickup trucks at 80k and 50 dollar trips to the movies.

Unless you only bargain shop, avoid going places, and avoid doing things that become overpriced during a year where there is inflation, then you are still paying more each year due to inflation.

You aren't really avoiding the effects of inflation this way.

[furlin]

The 30 year treasury rate is 1.82% and the 30 year real treasury rate is -0.28%. The market is expecting 2.1% annual inflation over the next 30 years. Gvien that the target is 2.0% you need to have a very good reason to use something different in forecasts.

[H-Town]

OP,

0%. I do not care about the official inflation rate. It has no relevance to my annual expense. My annual expense had stayed around 60K per year for the past 10+ years. My personal inflation rate is 0%.

So, what is your personal inflation rate? What are your annual expenses over the past few years?

KlangFool

https://www.in2013dollars.com/us/inflat ... ount=60000

Cumulative price change from 2010 to 2021 is 19.45% (or 1.63% per year). $60k in 2010 is worth $72k today. A new Camry sold in 2010 for $20k. A new Camry sold in 2021 for $25k.

Now that we get the math out of the way. When you have $60k budget, an American household can make do with 60k. In other words, they can adjust their spending behavior so that they can stay within 60k budget. It does not mean stuff aren't more expensive today than it was in 2010. It means that your personal spending pattern will help alleviate the impact of inflation.

In the above link, you can scroll to the bottom for Inflation by City. It's very interesting data.

[goldendad]

2% long term. I own my house so that cost is fixed.

[Zetorman]

OP,

0%. I do not care about the official inflation rate. It has no relevance to my annual expense. My annual expense had stayed around 60K per year for the past 10+ years. My personal inflation rate is 0%.

So, what is your personal inflation rate? What are your annual expenses over the past few years?

KlangFool

This is an interesting point. Just the other day I was showing DW our 2020 annual spend and it was very similar to our 2010 annual spend minus mortgage and kids school tuition. Then I told her that it appears as though we can mute a big part of any inflation increase simply because we know how to bargain shop and avoid going places or doing things that become overpriced per our historical perspective. While we will never avoid all inflation, we can avoid things like pickup trucks at 80k and 50 dollar trips to the movies.

Unless you only bargain shop, avoid going places, and avoid doing things that become overpriced during a year where there is inflation, then you are still paying more each year due to inflation.

You aren't really avoiding the effects of inflation this way.

Take a quick look at what I wrote. I said "mute" the effects of inflation. I also said "while we will never avoid all inflation." Still, I do agree with your statement overall. However, our records demonstrate that whatever WE are doing, it is keeping our costs rather constant. Will this continue? Don't know!

[rgs92]

It's a non-issue. Fi

When using Firecalc (or similar retirement calculator) you don't need to choose any inflation rate because that is implicitly taken into account in the underlying analysis.

Each sample case generated will automatically include the inflation that has occurred within each year considered. It is already in the historical data.
That is the beauty of Monte Carlo simulation.

That is also why most of the failures happen from the retirement cases in each simulation that begin in the mid 1960s, when inflation peaked at the beginning of retirement drawdowns.

Try using Cfiresim (the new improved version is great, with a much more user-friendly simplified user interface). There is no inflation input.

[000]

I don't find forecasted returns very useful, but I would probably use 5% - 10%.

[JoeRetire]

Take a quick look at what I wrote. I said "mute" the effects of inflation. I also said "while we will never avoid all inflation." Still, I do agree with your statement overall. However, our records demonstrate that whatever WE are doing, it is keeping our costs rather constant. Will this continue? Don't know!

Yup. If you are willing to buy less this year, next year, the year after, and to repeat this every year, then you can mute the effects of inflation.
Eventually, you'll need to purchase much, much less than you had in the past.

[Admiral]

2% long term. I own my house so that cost is fixed.

I agree with 2%, with 1% standard deviation.

However, even if you have a mortgage, the cost is fixed. So, that part is not relevant. (Obv if you rent, then cost is not fixed.) Taxes almost always go up, now down.

However, inflation in some areas (healthcare being the main one, but also food and activities associated with travel) can also affect retirees. If you own a car, eventually you will need to replace it, and the new one will cost more. Utilities cost more. (Wonder what my Comcast rate of inflation is? 10% )

So, I do use an inflation rate since I am looking at a 30 year period of retirement.

Interesting, RPM (Retiree Portfolio Model) which many Bhs use, uses only inflated numbers,.

[Prudence]

In the past I just used real returns for everything. It's just as easy to say "I expect the real return of the stock market to be about the same as its historical average of 7%" as to say "I expect the stock market to return 10% and inflation to be 3%," and it's at least as robust and predictive. It's much easier to guess at your future expenses in real terms by using present-day dollar numbers. There is nothing to be gained by trying to make two predictions (nominal returns and inflation) when you can just make one (real returns).

And I find it much easier to visualize the future in terms of a standard of living like $75,000/year today" than "$500,000/year but $40 for a Big Mac and $250,000 for a car."

Suppose you had an all cash portfolio (0/0 stocks/bonds)? Would you need to include an inflation assumption in your expense projections?

[LivingTheDream]

In the past I just used real returns for everything. It's just as easy to say "I expect the real return of the stock market to be about the same as its historical average of 7%" as to say "I expect the stock market to return 10% and inflation to be 3%," and it's at least as robust and predictive. It's much easier to guess at your future expenses in real terms by using present-day dollar numbers. There is nothing to be gained by trying to make two predictions (nominal returns and inflation) when you can just make one (real returns).

And I find it much easier to visualize the future in terms of a standard of living like $75,000/year today" than "$500,000/year but $40 for a Big Mac and $250,000 for a car."

Suppose you had an all cash portfolio (0/0 stocks/bonds)? Would you need to include an inflation assumption in your expense projections?

or a negative real return?

I've always been confused by the term "real" return (not really confused, just don't like it). There seems to me to be nothing real about it (it simply adjusts the nominal return by inflation). It's not actual; 30 years from now, I will NOT get the same value of consumption from $75k as I do now. And my portfolio value will actually reflect nominal returns. And in my opinion, it doesn't really simplify anything, in that it takes 2 separate assumptions (rate of return & inflation rate) & combines it into a single calculated number.

But... to each there own. I acknowledge that MANY/MOST people on this forum are smarter than I am; I just have to use processes/approaches that make sense to me.

[Admiral]

In the past I just used real returns for everything. It's just as easy to say "I expect the real return of the stock market to be about the same as its historical average of 7%" as to say "I expect the stock market to return 10% and inflation to be 3%," and it's at least as robust and predictive. It's much easier to guess at your future expenses in real terms by using present-day dollar numbers. There is nothing to be gained by trying to make two predictions (nominal returns and inflation) when you can just make one (real returns).

And I find it much easier to visualize the future in terms of a standard of living like $75,000/year today" than "$500,000/year but $40 for a Big Mac and $250,000 for a car."

Suppose you had an all cash portfolio (0/0 stocks/bonds)? Would you need to include an inflation assumption in your expense projections?

or a negative real return?

I've always been confused by the term "real" return (not really confused, just don't like it). There seems to me to be nothing real about it (it simply adjusts the nominal return by inflation). It's not actual; 30 years from now, I will NOT get the same value of consumption from $75k as I do now. And my portfolio value will actually reflect nominal returns. And in my opinion, it doesn't really simplify anything, in that it takes 2 separate assumptions (rate of return & inflation rate) & combines it into a single calculated number.

But... to each there own. I acknowledge that MANY/MOST people on this forum are smarter than I am; I just have to use processes/approaches that make sense to me.

It's actual in the sense of what a dollar buys... which is all that really matters from a practical perspective. I don't really care that a loaf of bread that costs $3 today will cost $10 in 30 years. All I care about is what it costs me with respect to what I have to spend. Inflation does make a difference if your wages (or investments, if living off those) do not keep up with it. In that case, things cost more, and I have less to spend in real (i.e. practical) terms.

[Zetorman]

Take a quick look at what I wrote. I said "mute" the effects of inflation. I also said "while we will never avoid all inflation." Still, I do agree with your statement overall. However, our records demonstrate that whatever WE are doing, it is keeping our costs rather constant. Will this continue? Don't know!

Yup. If you are willing to buy less this year, next year, the year after, and to repeat this every year, then you can mute the effects of inflation.
Eventually, you'll need to purchase much, much less than you had in the past.

Actually, spending less as we age is a fair assumption. Thanks for validating my point. Meanwhile our portfolio can just keep on growing.

[alex123711]

Thanks for all the replies. I'm starting to agree with the later posts of 0%. I see a lot of early responders using the 3-4% standard inflation rates.

To me the standard inflation rate includes a lot of things that don't apply, at least to me. For instance, it's 33% based on housing costs, but I own my house. Among other things.

I've been retired now for about 8 years. My sole income is draw downs from my portfolio. I haven't increased my draw down yet and really haven't found the budget getting tight, but one can always spend more money.

I've also talked to many people who've retired, including my parents and parent-in-laws. None of them increased their income nearly as much as standard inflation. Most, if not all of them, just shift money around. In early retirement, they spend a lot on travel, going out to eat, entertainment, etc. Later in retirement that slowed and they shifted money to healthcare and basic needs. So even though those prices went up substantially, their overall budget didn't increase that much.

I like the thought that you just remove the inflation calculation and not have two separate things to consider. I estimate future returns at 3%, so a 3-4% calculation on inflation is as much as my returns. But since I've been retired I've averaged almost 15% and haven't even increased draw downs per my inflation calculation. Which has changed what I could draw down by a big factor. But I haven't changed it yet, I'm still fairly young and who knows what's going to happen. Right now I just consider it a hedge against a big correction. But I'm thinking I should at least increase my draw down by what I originally calculated for inflation.

And going forward, especially since I'm so conservative on my returns, maybe I should lower my inflation or take it out all together.

But do you need to calculate the opportunity cost of owning your own home? E.g if you need to own your own home to avoid housing costs inflation then you would need to work out what its costing you in owning your own home vs what that money would be making in the index.

[JoeRetire]

Take a quick look at what I wrote. I said "mute" the effects of inflation. I also said "while we will never avoid all inflation." Still, I do agree with your statement overall. However, our records demonstrate that whatever WE are doing, it is keeping our costs rather constant. Will this continue? Don't know!

Yup. If you are willing to buy less this year, next year, the year after, and to repeat this every year, then you can mute the effects of inflation.
Eventually, you'll need to purchase much, much less than you had in the past.

Actually, spending less as we age is a fair assumption. Thanks for validating my point. Meanwhile our portfolio can just keep on growing.

It might be a "fair assumption" for some.

As long as you are willing to spend less as the purchasing power of your assets decrease every year, I suppose it's a "fair assumption". For a 30 year retirement, that means you may need to cut your spending approximately in half (or a lot more if inflation increases more than it did the past 30 years).

It's not the option I'm planning on, but perhaps it will work for you.

[Zetorman]

Take a quick look at what I wrote. I said "mute" the effects of inflation. I also said "while we will never avoid all inflation." Still, I do agree with your statement overall. However, our records demonstrate that whatever WE are doing, it is keeping our costs rather constant. Will this continue? Don't know!

Yup. If you are willing to buy less this year, next year, the year after, and to repeat this every year, then you can mute the effects of inflation.
Eventually, you'll need to purchase much, much less than you had in the past.

Actually, spending less as we age is a fair assumption. Thanks for validating my point. Meanwhile our portfolio can just keep on growing.

It might be a "fair assumption" for some.

As long as you are willing to spend less as the purchasing power of your assets decrease every year, I suppose it's a "fair assumption". For a 30 year retirement, that means you may need to cut your spending approximately in half (or a lot more if inflation increases more than it did the past 30 years).

It's not the option I'm planning on, but perhaps it will work for you.

Please do not worry about me. I'm 3mil+ @50/50 targeting 100k/yr not even factoring in 2xSS, debt free, AND I have not quit my job yet. Keep preaching. I am certain that you have a congregation out there somewhere.

[Admiral]

Take a quick look at what I wrote. I said "mute" the effects of inflation. I also said "while we will never avoid all inflation." Still, I do agree with your statement overall. However, our records demonstrate that whatever WE are doing, it is keeping our costs rather constant. Will this continue? Don't know!

Yup. If you are willing to buy less this year, next year, the year after, and to repeat this every year, then you can mute the effects of inflation.
Eventually, you'll need to purchase much, much less than you had in the past.

Actually, spending less as we age is a fair assumption. Thanks for validating my point. Meanwhile our portfolio can just keep on growing.

It might be a "fair assumption" for some.

As long as you are willing to spend less as the purchasing power of your assets decrease every year, I suppose it's a "fair assumption". For a 30 year retirement, that means you may need to cut your spending approximately in half (or a lot more if inflation increases more than it did the past 30 years).

It's not the option I'm planning on, but perhaps it will work for you.

Please do not worry about me. I'm 3mil+ @50/50 targeting 100k/yr not even factoring in 2xSS, debt free, AND I have not quit my job yet. Keep preaching. I am certain that you have a congregation out there somewhere.

No need to be rude. We are all here to get/offer help. If this post does not help you it might help someone else. Right?
Congrats on your success.

[DVMResident]

Inflation is personal as our consumption does not match the basket of goods defined by CPI.

Consumption of some inelastic expenses are difficult to control like tax law changes, medical treatment, and food. Inflation in these expense are important and medical is the real wild card that make my true FI number elusive. Others we can modulate our consumption in response to like oil prices means we may drive less and travel more if hotel prices drop.

I don’t know how to make any sense of applying macro inflation to my budget.