Inflation, do you really have to out earn it?

[smooth_rough]

There's only so much cost cutting you can do as the greater economy around you changes.

smooth_rough,

Which is obviously wrong.

"It depends"

Personal finance is personal. This is an inconvenient fact for those that claim otherwise. For any household, there are fixed annual expense and discretionary spending. If someone's annual expense are largely discretionary, the person has the choice of not spending the money. They are discretionary.

Some household spends a large percentage of their annual expense in basic food and shelter. Some don't.

"Inflation can be difficult to understand "

I disagreed. Inflation is easy to understand. Personal finance is hard. It is obvious from this thread that many folks do not understand personal finance.

KlangFool

Inflation impacts everything in the economy, fixed or discretionary. I can't explain in terms you understand.

[MA405]

Thanks to all posters here for their thoughts.

I'd like to see if I could get an answer for a very relevant simple question:
To estimate if my current portfolio can support my retirements needs, could I use "real return" to estimate my future needs in current dollars? Instead of unknown future dollar purchasing power?
I.e. if I could assume current purchasing power of, say $50K, to have same purchasing power it has now, if I use "real return" (stock market return minus inflation rate) to estimate my potential future resources? Sorry if that sounds confusing, that's because I am confused myself (thus looking for feedback from more clear minded folks). I made spreadsheets to evaluate my future projected income at "real return" = 0, 2, 4%, using today's dollars and they all look encouraging, but I am wondering if I could be making a major mistake in my assumption.

To be clear, my assumption is if the "real return" is zero, future portfolio will have exactly same purchasing power as it does now, regardless if inflation was 2% or 10%, as long as my portfolio return matched it exactly.

Basically, can I use current dollars to estimate what I would need in the future if use "real return" rate in my assumptions?

[PotashDoggerd]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

Your only valid point is that a personal inflation rate is what counts. Sometimes you hear things all the time because they're correct.

No, personal inflation rate doesn't matter at all. It's illusory. I can change my "personal inflation rate" arbitrarily by simply selecting different quantities and types of goods and services to consume. But doing so doesn't change, at all, how inflation impacts my assets. In fact, the economy wide inflation rate out of necessity automatically incorporates these sorts of individual consumption choices/preferences.

If steak doubles in price In January, overall people will stop buying so much steak, and start buying more chicken (for example), which let's say is much cheaper at the beginning of the year. The amount of steak bought will tend to decline, and based on supply and demand, the price of steak will tend to decline; the amount of chicken bought will tend to increase, and the price of chicken will tend to increase, until a new equilibrium is reached.

So every individual's preferences and choices, and changes in those preferences and choices as a result of inflation re: their consumption are already part of the official inflation rate.

If steak doubles, it doesn't matter whether or not you personally choose to eat steak. If you want to buy steak, it will cost you double too. If you are choosing to buy chicken instead of steak because steak doubled, then of course the official inflation rate impacted you--it limited your ability to spend your available assets on a prior consumption item, steak (assuming you used to buy steak and had to stop because when it doubled, it no longer could be fit into your personal budget.)

And the argument is valid even if you don't like steak and would never buy steak at any price. Your MONEY can only buy half as much steak.

Same applies if the overall inflation rate is 7% for the entire economy. Your money only buys 93% of what it bought the year before, and it doesn't matter what you specifically choose to buy, even if you buy nothing at all.

People don't really substitute clothes for steak, though. That's why personal inflation rate matters. Not everybody buys the same things every month. When the overall inflation rate is "7% for the entire economy," my expenses may have gone up 5% and yours may have gone up 10%, because maybe you drive a gas guzzler and I have a Prius, while you pay rent, and I have a paid off mortgage.

I don't care if my "MONEY can only buy half as much steak" if I never eat steak and never will.

You missed the point. It doesn't matter what you, specifically, buy. That's always going to be your choice. You don't have to buy anything. Zero. Your assets will decline in real value by the amount of official inflation. Failing to recognize that is cognitive bias.

[PotashDoggerd]

Thanks to all posters here for their thoughts.

I'd like to see if I could get an answer for a very relevant simple question:
To estimate if my current portfolio can support my retirements needs, could I use "real return" to estimate my future needs in current dollars? Instead of unknown future dollar purchasing power?
I.e. if I could assume current purchasing power of, say $50K, to have same purchasing power it has now, if I use "real return" (stock market return minus inflation rate) to estimate my potential future resources? Sorry if that sounds confusing, that's because I am confused myself (thus looking for feedback from more clear minded folks). I made spreadsheets to evaluate my future projected income at "real return" = 0, 2, 4%, using today's dollars and they all look encouraging, but I am wondering if I could be making a major mistake in my assumption.

To be clear, my assumption is if the "real return" is zero, future portfolio will have exactly same purchasing power as it does now, regardless if inflation was 2% or 10%, as long as my portfolio return matched it exactly.

Basically, can I use current dollars to estimate what I would need in the future if use "real return" rate in my assumptions?

If your real return is zero, than any inflation will definitely reduce your real dollars and hence you will have less purchasing power. That's precisely what inflation is. It reduces the real purchasing power of your nominal assets.

Maybe you are saying that if your real return matches the inflation rate, your real spending power (accounting for decreases due to consumption along the way), will remain constant? So if you start with $100.00, inflation is 2% so you end up with $98.00 real dollars. You would need $102.04081 Year 2 dollars to equal the purchasing power of $100.00 Year 1 dollars after 2% inflation occurs.

[toddthebod]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

Your only valid point is that a personal inflation rate is what counts. Sometimes you hear things all the time because they're correct.

No, personal inflation rate doesn't matter at all. It's illusory. I can change my "personal inflation rate" arbitrarily by simply selecting different quantities and types of goods and services to consume. But doing so doesn't change, at all, how inflation impacts my assets. In fact, the economy wide inflation rate out of necessity automatically incorporates these sorts of individual consumption choices/preferences.

If steak doubles in price In January, overall people will stop buying so much steak, and start buying more chicken (for example), which let's say is much cheaper at the beginning of the year. The amount of steak bought will tend to decline, and based on supply and demand, the price of steak will tend to decline; the amount of chicken bought will tend to increase, and the price of chicken will tend to increase, until a new equilibrium is reached.

So every individual's preferences and choices, and changes in those preferences and choices as a result of inflation re: their consumption are already part of the official inflation rate.

If steak doubles, it doesn't matter whether or not you personally choose to eat steak. If you want to buy steak, it will cost you double too. If you are choosing to buy chicken instead of steak because steak doubled, then of course the official inflation rate impacted you--it limited your ability to spend your available assets on a prior consumption item, steak (assuming you used to buy steak and had to stop because when it doubled, it no longer could be fit into your personal budget.)

And the argument is valid even if you don't like steak and would never buy steak at any price. Your MONEY can only buy half as much steak.

Same applies if the overall inflation rate is 7% for the entire economy. Your money only buys 93% of what it bought the year before, and it doesn't matter what you specifically choose to buy, even if you buy nothing at all.

People don't really substitute clothes for steak, though. That's why personal inflation rate matters. Not everybody buys the same things every month. When the overall inflation rate is "7% for the entire economy," my expenses may have gone up 5% and yours may have gone up 10%, because maybe you drive a gas guzzler and I have a Prius, while you pay rent, and I have a paid off mortgage.

I don't care if my "MONEY can only buy half as much steak" if I never eat steak and never will.

You missed the point. It doesn't matter what you, specifically, buy. That's always going to be your choice. You don't have to buy anything. Zero. Your assets will decline in real value by the amount of official inflation. Failing to recognize that is cognitive bias.

I think you are missing the point: The value of your assets is only in what you want or need to buy with them. Telling me that my assets can only buy 10 Lamborghinis instead of 12 Lamborghinis due to an increase in the price of Lamborghinis has absolutely no significance to me.

[PotashDoggerd]

Your only valid point is that a personal inflation rate is what counts. Sometimes you hear things all the time because they're correct.

No, personal inflation rate doesn't matter at all. It's illusory. I can change my "personal inflation rate" arbitrarily by simply selecting different quantities and types of goods and services to consume. But doing so doesn't change, at all, how inflation impacts my assets. In fact, the economy wide inflation rate out of necessity automatically incorporates these sorts of individual consumption choices/preferences.

If steak doubles in price In January, overall people will stop buying so much steak, and start buying more chicken (for example), which let's say is much cheaper at the beginning of the year. The amount of steak bought will tend to decline, and based on supply and demand, the price of steak will tend to decline; the amount of chicken bought will tend to increase, and the price of chicken will tend to increase, until a new equilibrium is reached.

So every individual's preferences and choices, and changes in those preferences and choices as a result of inflation re: their consumption are already part of the official inflation rate.

If steak doubles, it doesn't matter whether or not you personally choose to eat steak. If you want to buy steak, it will cost you double too. If you are choosing to buy chicken instead of steak because steak doubled, then of course the official inflation rate impacted you--it limited your ability to spend your available assets on a prior consumption item, steak (assuming you used to buy steak and had to stop because when it doubled, it no longer could be fit into your personal budget.)

And the argument is valid even if you don't like steak and would never buy steak at any price. Your MONEY can only buy half as much steak.

Same applies if the overall inflation rate is 7% for the entire economy. Your money only buys 93% of what it bought the year before, and it doesn't matter what you specifically choose to buy, even if you buy nothing at all.

People don't really substitute clothes for steak, though. That's why personal inflation rate matters. Not everybody buys the same things every month. When the overall inflation rate is "7% for the entire economy," my expenses may have gone up 5% and yours may have gone up 10%, because maybe you drive a gas guzzler and I have a Prius, while you pay rent, and I have a paid off mortgage.

I don't care if my "MONEY can only buy half as much steak" if I never eat steak and never will.

You missed the point. It doesn't matter what you, specifically, buy. That's always going to be your choice. You don't have to buy anything. Zero. Your assets will decline in real value by the amount of official inflation. Failing to recognize that is cognitive bias.

I think you are missing the point: The value of your assets is only in what you want or need to buy with them. Telling me that my assets can only buy 10 Lamborghinis instead of 12 Lamborghinis due to an increase in the price of Lamborghinis has absolutely no significance to me.

So you are mentally discounting the impact of inflation by ignoring that it decreases the real value of your assets, because you think you are over-funded. That's a cognitive bias. I already said it doesn't matter what you buy or don't buy, how much you do or don't buy, and indeed, whether you don't buy anything at all. Your assets still are reduced in real purchasing power by the amount of official inflation, not by whatever arbitrary way you claim to figure out "personal inflation" might be.

That's why I expressly did not
tell you "that my assets can only buy 10 Lamborghinis instead of 12 Lamborghinis due to an increase in the price of Lamborghinis". You're the one who is incorrectly fixated on what you do or don't buy as having anything to do with inflation at all. Not me.

[Triple digit golfer]

Your assets will decline in real value by the amount of official inflation.

That is false. You are wrong.

Are you saying that assets decline in value every year due to inflation?

If you're assuming a zero real return, using "official inflation" in your assumptions, you're still wrong.

"Official inflation" is an average basket of goods. Personal inflation rates differ.

If one year I have $100 and it buys me basket of goods X, and "official inflation" is 5% but basket of goods X now costs $103 and my investment return was 4%, and therefore real return using "official inflation" was negative, my assets did not decline in real value. In fact, they increased. Now I have $104 to pay for something that costs $103.

If my goal is to maintain purchasing power, I'm taking that every year despite people on internet forums telling me that my assets are declining in value.

[Johm221122]

Inflation can be difficult to understand if person never had the base courses and doesn't understand difference between micro-economics (personal monthly budget) and macro-economics (monetary policy, banking, financial markets). There's only so much cost cutting you can do as the greater economy around you changes. Anybody who says otherwise is gaslighting. Who would have incentive to "gaslight" you? Politicans who want your vote, financial advisor who put you into bad investments, other various?

If we lived in a place where we survived and just bought basic food and shelter I'd agree. But we live in extreme excess in many cases. And cutting unnecessary expenses that bring no real value and investing that money in assets that long-term can beat inflation can effect your financial situation enough to outpace the effects of inflation at no real cost to your lifestyle

[Northern Flicker]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

Interest rates also rose. You need less principal to fund the cost of funding expenses.

But what you are touching on is that one's personal inflation rate does not necessarily match CPI-U. This is especially true for homeowners. Housing cost is a sizable component of CPI-U.

[KlangFool]

Basically, can I use current dollars to estimate what I would need in the future if use "real return" rate in my assumptions?

MA405,

A) If your goal is to have an useless estimate, then, go ahead. If not, you need to do a better job of estimating your personal inflation rate and use a nominal return.

B) To a bigger picture, does this really matters if your portfolio is big enough? For example, 50X your annual expense?

C) If your portfolio is not so big, then, having a useless estimate does not help you to arrive a good enough answer.

D) It is easy to find your personal inflation rate. You know your annual expense every year for the last 10+ years. You should know exactly how they changes every year. If you don't, you need to know in order to plan for your retirement.

What is your goal? A good answer or an useless answer?

KlangFool

[Triple digit golfer]

No, personal inflation rate doesn't matter at all. It's illusory. I can change my "personal inflation rate" arbitrarily by simply selecting different quantities and types of goods and services to consume. But doing so doesn't change, at all, how inflation impacts my assets. In fact, the economy wide inflation rate out of necessity automatically incorporates these sorts of individual consumption choices/preferences.

If steak doubles in price In January, overall people will stop buying so much steak, and start buying more chicken (for example), which let's say is much cheaper at the beginning of the year. The amount of steak bought will tend to decline, and based on supply and demand, the price of steak will tend to decline; the amount of chicken bought will tend to increase, and the price of chicken will tend to increase, until a new equilibrium is reached.

So every individual's preferences and choices, and changes in those preferences and choices as a result of inflation re: their consumption are already part of the official inflation rate.

If steak doubles, it doesn't matter whether or not you personally choose to eat steak. If you want to buy steak, it will cost you double too. If you are choosing to buy chicken instead of steak because steak doubled, then of course the official inflation rate impacted you--it limited your ability to spend your available assets on a prior consumption item, steak (assuming you used to buy steak and had to stop because when it doubled, it no longer could be fit into your personal budget.)

And the argument is valid even if you don't like steak and would never buy steak at any price. Your MONEY can only buy half as much steak.

Same applies if the overall inflation rate is 7% for the entire economy. Your money only buys 93% of what it bought the year before, and it doesn't matter what you specifically choose to buy, even if you buy nothing at all.

People don't really substitute clothes for steak, though. That's why personal inflation rate matters. Not everybody buys the same things every month. When the overall inflation rate is "7% for the entire economy," my expenses may have gone up 5% and yours may have gone up 10%, because maybe you drive a gas guzzler and I have a Prius, while you pay rent, and I have a paid off mortgage.

I don't care if my "MONEY can only buy half as much steak" if I never eat steak and never will.

You missed the point. It doesn't matter what you, specifically, buy. That's always going to be your choice. You don't have to buy anything. Zero. Your assets will decline in real value by the amount of official inflation. Failing to recognize that is cognitive bias.

I think you are missing the point: The value of your assets is only in what you want or need to buy with them. Telling me that my assets can only buy 10 Lamborghinis instead of 12 Lamborghinis due to an increase in the price of Lamborghinis has absolutely no significance to me.

So you are mentally discounting the impact of inflation by ignoring that it decreases the real value of your assets, because you think you are over-funded. That's a cognitive bias. I already said it doesn't matter what you buy or don't buy, how much you do or don't buy, and indeed, whether you don't buy anything at all. Your assets still are reduced in real purchasing power by the amount of official inflation, not by whatever arbitrary way you claim to figure out "personal inflation" might be.

That's why I expressly did not
tell you "that my assets can only buy 10 Lamborghinis instead of 12 Lamborghinis due to an increase in the price of Lamborghinis". You're the one who is incorrectly fixated on what you do or don't buy as having anything to do with inflation at all. Not me.

Personal inflation rate is all that matters. It absolutely does matter what one buys or doesn't buy. You can't say that an assets's purchasing power is decreased and say it doesn't matter what one purchases.

[Northern Flicker]

If your real return is zero, than any inflation will definitely reduce your real dollars and hence you will have less purchasing power. That's precisely what inflation is. It reduces the real purchasing power of your nominal assets.

That is only true if you spend all of the asset today. The associated rise in interest rates makes future expenses cheaper to fund, offsetting some, all, or more than the effect of inflation, as the case may be.

[Da5id]

I think you may be missing part of his point. Inflation rate can be personal. e.g. I have a fully paid off house. I'm not exposed to housing cost inflation (unless you are dinging me for imputed rent) in the same way a renter whose rent may increase annually at a market rate might be. Someone else may have a really generous health plan with premiums mostly or entirely paid by their employer, they aren't exposed to inflation in the way I am with a Health Connector plan.

Prepaying future expenses can be a good way to lock in a cost of living, at least for a time. But even in housing you are still very affected by inflation, just indirectly or on a different time scale.

And my opinion is we should ding you for imputed rent. But that’s me

Fair, I mentioned imputed rent because it is clearly an important concept if one is accounting or choosing between alternatives. But it isn't impacting my actual cash flow in a way that, say, a rent increase does to a renter, grocery prices do for the huge majority of us who don't grow our own food (which I guess has its own imputed costs), or a premium increase do for the various insurances I carry.

Yeah, but it’ll affect the next place you move to (if u ever do). Of course, I’d expect current housing values to more or less keep up with inflation. But that’s a different animal than saying one is unaffected by inflation.

If my dwelling keeps up with inflation in value, and if my cash flow is not changed by the inflation w.r.t. my housing cost, how affected would I be by inflation in housing costs seen in the rental market?

My point isn't that inflation isn't bad, and isn't that it doesn't affect me. It is more to do with the fact that inflation impacts different people differently. And I think someone who owns their house outright *or* has a fixed rate mortgage feels the housing component of inflation differently than those who are more directly exposed to rent increases.

[Harmanic]

Recent BLS stats show that wage inflation is around 4-7% depending on the sector, but with the labor shortage, people are working longer hours to take up the slack and therefore annual wages are up 20% even as hourly wages are barely keeping up with inflation. I am not sure what this means for inflation going forward, but it seems that many people are indeed "out earning it."

Walmart announced they are increasing their minimum wage from 12 to 14 dollars an hour, which by my calculation is a 16.7% increase. Presumably this will affect other low wage employers in the vicinity of a Walmart.

There has been a lot of misinformation in the news about negative real wage increases. CNBC posted a video about "quiet hiring" which is basically assigning workers to other tasks and responsibilities that are outside their normal duties. The combined impact of wage inflation and quiet hiring leading to 20% nominal wage increases would certainly suggest that a wage-price spiral could be underway. If Walmart's competitors match their wage increases then that would only add to it.

[toddthebod]

No, personal inflation rate doesn't matter at all. It's illusory. I can change my "personal inflation rate" arbitrarily by simply selecting different quantities and types of goods and services to consume. But doing so doesn't change, at all, how inflation impacts my assets. In fact, the economy wide inflation rate out of necessity automatically incorporates these sorts of individual consumption choices/preferences.

If steak doubles in price In January, overall people will stop buying so much steak, and start buying more chicken (for example), which let's say is much cheaper at the beginning of the year. The amount of steak bought will tend to decline, and based on supply and demand, the price of steak will tend to decline; the amount of chicken bought will tend to increase, and the price of chicken will tend to increase, until a new equilibrium is reached.

So every individual's preferences and choices, and changes in those preferences and choices as a result of inflation re: their consumption are already part of the official inflation rate.

If steak doubles, it doesn't matter whether or not you personally choose to eat steak. If you want to buy steak, it will cost you double too. If you are choosing to buy chicken instead of steak because steak doubled, then of course the official inflation rate impacted you--it limited your ability to spend your available assets on a prior consumption item, steak (assuming you used to buy steak and had to stop because when it doubled, it no longer could be fit into your personal budget.)

And the argument is valid even if you don't like steak and would never buy steak at any price. Your MONEY can only buy half as much steak.

Same applies if the overall inflation rate is 7% for the entire economy. Your money only buys 93% of what it bought the year before, and it doesn't matter what you specifically choose to buy, even if you buy nothing at all.

People don't really substitute clothes for steak, though. That's why personal inflation rate matters. Not everybody buys the same things every month. When the overall inflation rate is "7% for the entire economy," my expenses may have gone up 5% and yours may have gone up 10%, because maybe you drive a gas guzzler and I have a Prius, while you pay rent, and I have a paid off mortgage.

I don't care if my "MONEY can only buy half as much steak" if I never eat steak and never will.

You missed the point. It doesn't matter what you, specifically, buy. That's always going to be your choice. You don't have to buy anything. Zero. Your assets will decline in real value by the amount of official inflation. Failing to recognize that is cognitive bias.

I think you are missing the point: The value of your assets is only in what you want or need to buy with them. Telling me that my assets can only buy 10 Lamborghinis instead of 12 Lamborghinis due to an increase in the price of Lamborghinis has absolutely no significance to me.

So you are mentally discounting the impact of inflation by ignoring that it decreases the real value of your assets, because you think you are over-funded. That's a cognitive bias. I already said it doesn't matter what you buy or don't buy, how much you do or don't buy, and indeed, whether you don't buy anything at all. Your assets still are reduced in real purchasing power by the amount of official inflation, not by whatever arbitrary way you claim to figure out "personal inflation" might be.

That's why I expressly did not
tell you "that my assets can only buy 10 Lamborghinis instead of 12 Lamborghinis due to an increase in the price of Lamborghinis". You're the one who is incorrectly fixated on what you do or don't buy as having anything to do with inflation at all. Not me.

CPI-U reflects the average increase in costs of literally thousands of items weighted by the average spending of American families. You are arguing that because you commute further to work than I do (and thus buy more $6/gallon gas) that my money is worth less.

[ramram22]

For decades, the financial press has been telling readers that their investments MUST keep pace with or beat inflation. I have interpreted this crude, often unquestioned, and almost universal advice as trying to pressure or guilt investors into staying heavily invested in equities (a stance which benefits publications' mutual fund advertisers), even when an investor's portfolio could sustain significant below-inflation returns throughout their lifetime. If a portfolio is large enough, there is no monetary imperative to keep pace with or beat inflation; it becomes a psychological thing reflecting fear of losing purchasing power, even when what all that purchasing power would be ultimately used for cannot be specified.

Huh? Having a portfolio with negative real returns over any extended period of time -- and certainly over a "lifetime" -- would be a disaster for all but the very wealthiest investors. Suggesting that you need to beat that is not a marketing ploy. To begin with, accumulating the portfolio in the first place becomes much harder: in that case, you are compounding losses over time, not gains.

[JayB]

For decades, the financial press has been telling readers that their investments MUST keep pace with or beat inflation. I have interpreted this crude, often unquestioned, and almost universal advice as trying to pressure or guilt investors into staying heavily invested in equities (a stance which benefits publications' mutual fund advertisers), even when an investor's portfolio could sustain significant below-inflation returns throughout their lifetime. If a portfolio is large enough, there is no monetary imperative to keep pace with or beat inflation; it becomes a psychological thing reflecting fear of losing purchasing power, even when what all that purchasing power would be ultimately used for cannot be specified.

Huh? Having a portfolio with negative real returns over any extended period of time -- and certainly over a "lifetime" -- would be a disaster for all but the very wealthiest investors. Suggesting that you need to beat that is not a marketing ploy. To begin with, accumulating the portfolio in the first place becomes much harder: in that case, you are compounding losses over time, not gains.

I was essentially embracing William Bernstein's philosophy that "If You've Won the Game, Stop Playing." Many BHers, including myself, are far from being very wealthy, but don't need equity risk -- or even to beat the CPI -- to live comfortably to a very old age without running out of money. In the accumulation phase, a high savings rate can help win the game. In retirement, it comes down to portfolio burn rate. If the burn rate is low enough, substantial and sustained portfolio return shortfalls relative to the CPI can be demonstrated to be non-problematic through financial modeling.

[tibbitts]

For decades, the financial press has been telling readers that their investments MUST keep pace with or beat inflation. I have interpreted this crude, often unquestioned, and almost universal advice as trying to pressure or guilt investors into staying heavily invested in equities (a stance which benefits publications' mutual fund advertisers), even when an investor's portfolio could sustain significant below-inflation returns throughout their lifetime. If a portfolio is large enough, there is no monetary imperative to keep pace with or beat inflation; it becomes a psychological thing reflecting fear of losing purchasing power, even when what all that purchasing power would be ultimately used for cannot be specified.

Huh? Having a portfolio with negative real returns over any extended period of time -- and certainly over a "lifetime" -- would be a disaster for all but the very wealthiest investors. Suggesting that you need to beat that is not a marketing ploy. To begin with, accumulating the portfolio in the first place becomes much harder: in that case, you are compounding losses over time, not gains.

I was essentially embracing William Bernstein's philosophy that "If You've Won the Game, Stop Playing." Many BHers, including myself, are far from being very wealthy, but don't need equity risk -- or even to beat the CPI -- to live comfortably to a very old age without running out of money. In the accumulation phase, a high savings rate can help win the game. In retirement, it comes down to portfolio burn rate. If the burn rate is low enough, substantial and sustained portfolio return shortfalls relative to the CPI can be demonstrated to be non-problematic through financial modeling.

This is sort of like saying the good news is that you're going to be dead soon, which actually does limit the long-term harm from inflation in retirement.

[JayB]

For decades, the financial press has been telling readers that their investments MUST keep pace with or beat inflation. I have interpreted this crude, often unquestioned, and almost universal advice as trying to pressure or guilt investors into staying heavily invested in equities (a stance which benefits publications' mutual fund advertisers), even when an investor's portfolio could sustain significant below-inflation returns throughout their lifetime. If a portfolio is large enough, there is no monetary imperative to keep pace with or beat inflation; it becomes a psychological thing reflecting fear of losing purchasing power, even when what all that purchasing power would be ultimately used for cannot be specified.

Huh? Having a portfolio with negative real returns over any extended period of time -- and certainly over a "lifetime" -- would be a disaster for all but the very wealthiest investors. Suggesting that you need to beat that is not a marketing ploy. To begin with, accumulating the portfolio in the first place becomes much harder: in that case, you are compounding losses over time, not gains.

I was essentially embracing William Bernstein's philosophy that "If You've Won the Game, Stop Playing." Many BHers, including myself, are far from being very wealthy, but don't need equity risk -- or even to beat the CPI -- to live comfortably to a very old age without running out of money. In the accumulation phase, a high savings rate can help win the game. In retirement, it comes down to portfolio burn rate. If the burn rate is low enough, substantial and sustained portfolio return shortfalls relative to the CPI can be demonstrated to be non-problematic through financial modeling.

This is sort of like saying the good news is that you're going to be dead soon, which actually does limit the long-term harm from inflation in retirement.

When a person has "won the game," some will choose to maintain or increase their portfolio risk level and some will choose to dial back. The world is big enough for both approaches. Not worth debating here. To OP's original point, no you don't really have to out earn [inflation].

[tetractys]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

Your thinking short term. Overall inflation, and coincidentally expenses, even out over time to match indicators like the CPI-U. So over the life of your portfolio, if you’re nominal return is 8% and the CPI-U during that time has averaged 2%, then your real return is 6%.

[Jack FFR1846]

B) What is your personal inflation rate? How much your annual expense actually increase?

ding ding ding ding

It really matters what things are going up that YOU buy. When I hear housing is skyrocketing (when it is), I could care less. I'm not buying a house. If you drive an electric car and gas has skyrocketed and you charge your car with solar panels, do you care? With those examples, some of the big generic inflation things are of no effect on you.

People often also change behavior when inflation on something they buy is high. Gas has gone up in the past year and so instead of driving my gas guzzling Jeep, I take our efficient Crosstrek. So my gallons of gas to buy is reduced which reduces the effect on me for inflation. I also have gone over the top to reduce my heating oil use by burning wood in our wood furnace harvested off my land. My first seasonal bill before doing this was $800. My next, having used the wood furnace extensively was $49. So for me, the cost of gas and heating oil have not increased and have actually decreased.

Also remember that things that are tied to inflation FOR us can also go up. That's why Ally keeps sending notices that their interest rate is going up. Not as much as the base rate or what loans cost, but it is higher. So there's some counter to costs going up.

[KlangFool]

Your thinking short term. Overall inflation, and coincidentally expenses, even out over time to match indicators like the CPI-U. So over the life of your portfolio, if you’re nominal return is 8% and the CPI-U during that time has averaged 2%, then your real return is 6%.

It does not. If someone does not live and spend like an average person at all, over long term, the person still does not live and spend like an average person.

Personal finance is hard. Personal finance is personal. Please stop simplifying it by assuming that we are average.

KlangFool

[Triple digit golfer]

Overall inflation, and coincidentally expenses, even out over time to match indicators like the CPI-U

You don't know this. You're saying that over time, every person's inflation rate matches the CPI-U. I think it's fairly safe to say that is not true.

[smooth_rough]

Inflation can be difficult to understand if person never had the base courses and doesn't understand difference between micro-economics (personal monthly budget) and macro-economics (monetary policy, banking, financial markets). There's only so much cost cutting you can do as the greater economy around you changes. Anybody who says otherwise is gaslighting. Who would have incentive to "gaslight" you? Politicans who want your vote, financial advisor who put you into bad investments, other various?

If we lived in a place where we survived and just bought basic food and shelter I'd agree. But we live in extreme excess in many cases. And cutting unnecessary expenses that bring no real value and investing that money in assets that long-term can beat inflation can effect your financial situation enough to outpace the effects of inflation at no real cost to your lifestyle

Who owns dozen lambos? Ultra high net worth are least impacted by inflation. I held my last car for 26 years, and depreciated the hell out of it until it wasn't worth cost of repairing. But again that's confusing micro-economics with macro-economics. Which leads to unproductive exchange like dog chasing its own tail. Good luck if you don't think you need to be concerned about inflation impacting your AA because "reasons".

[GreenLawn]

Let's not forget MMF paid less than inflation prior to Covid. Inflation was somewhere around 2 percent and MMF were paying around 1 percent. Ironically, my real rate of return from my MMF is better today than pre-2020, if you take the recent month to month inflation data.

[KlangFool]

Who owns dozen lambos? Ultra high net worth are least impacted by inflation. I held my last car for 26 years, and depreciated the hell out of it until it wasn't worth cost of repairing. But again that's confusing micro-economics with macro-economics. Which leads to unproductive exchange like dog chasing its own tail. Good luck if you don't think inflation impacts your AA because "reasons".

smooth_rough,

I think you are totally confused. We are discussing about personal finance here. It has nothing to do with economic at all.

Personal finance is hard for those who confused it with economic.

How does your annual expenses changes as the official inflation rate?

"Good luck if you don't think inflation impacts your AA because "reasons"."

Common sense would tell you that your annual expense does not change exactly as per the official inflation rate. Are you claiming this to be true? If not, why would your portfolio be affected exactly as per the official inflation rate? It will not.

"I held my last car for 26 years, and depreciated the hell out of it until it wasn't worth cost of repairing."

Bingo! So, how does the change in the price of the car affects you the same way as someone that change their cars more frequently as per the official inflation rate?

KlangFool

[vxdx]

It seems almost everyone here missed the point.

The question wasn’t whether one has to outpace CPI measured inflation specifically.

Some folks are right that technically one doesn’t have to outpace CPI because CPI might not be the right metric for them.

Others are right that practically one does have to outpace inflation and unless you want to track the inflation of every item you buy, CPI is a good aggregate metric.

Inflation as a concept is real regardless of what you buy, and one’s investments do have to outpace it to maintain purchasing power.

[smooth_rough]

Who owns dozen lambos? Ultra high net worth are least impacted by inflation. I held my last car for 26 years, and depreciated the hell out of it until it wasn't worth cost of repairing. But again that's confusing micro-economics with macro-economics. Which leads to unproductive exchange like dog chasing its own tail. Good luck if you don't think inflation impacts your AA because "reasons".

smooth_rough,

I think you are totally confused. We are discussing about personal finance here. It has nothing to do with economic at all.

Personal finance is hard for those who confused it with economic.

How does your annual expenses changes as the official inflation rate?

"Good luck if you don't think inflation impacts your AA because "reasons"."

Common sense would tell you that your annual expense does not change exactly as per the official inflation rate. Are you claiming this to be true? If not, why would your portfolio be affected exactly as per the official inflation rate? It will not.

"I held my last car for 26 years, and depreciated the hell out of it until it wasn't worth cost of repairing."

Bingo! So, how does the change in the price of the car affects you the same way as someone that change their cars more frequently as per the official inflation rate?

KlangFool

How would it possible to discuss inflation without macro-economics? Don't want to get blocked for being contentious, but this thread has run its course for me. Good luck with your AA.

[KlangFool]

It seems almost everyone here missed the point.

The question wasn’t whether one has to outpace CPI measured inflation specifically.

Some folks are right that technically one doesn’t have to outpace CPI because CPI might not be the right metric for them.

Others are right that practically one does have to outpace inflation and unless you want to track the inflation of every item you buy, CPI is a good aggregate metric.

Inflation as a concept is real regardless of what you buy, and one’s investments do have to outpace it to maintain purchasing power.

vxdx,

Yes. But, that has nothing to do with the official inflation rate. In the personal finance level, it is the personal inflation rate that matters.

It is those that claim the official inflation rate applies to everyone miss the point.

"you want to track the inflation of every item you buy, CPI is a good aggregate metric."

We do at the personal finance level. It is our annual expense. And, we need to track it in order to plan for our retirement and financial independence. We do not need CPI for that. And, CPI is totally useless and irrelevant anyhow.

Do you track your annual expense? Over the last 5 years? 10+ years? For many of us that cares about our personal finance, we do that.

KlangFool

[Oldaroo3]

Maybe this article would be helpful for the discussion:

https://www.forbes.com/advisor/investin ... ice-index/

[Triple digit golfer]

Maybe this article would be helpful for the discussion:

https://www.forbes.com/advisor/investin ... ice-index/

I have to nitpick. The first sentence in the article is wrong. Grocery prices were up about 12%, not 6.5% in 2022.

[vxdx]

We do at the personal finance level. It is our annual expense. And, we need to track it in order to plan for our retirement and financial independence. We do not need CPI for that. And, CPI is totally useless and irrelevant anyhow.

Do you track your annual expense? Over the last 5 years? 10+ years? For many of us that cares about our personal finance, we do that.

Yes I track my spending, but I also look to estimate what may my investments be worth in 30 years and how will that support something like my current lifestyle, and over that period of time the only sensible estimate to use is based on historical CPI type of aggregate data because my own spending historically is far more variable.

The CPI vs personal inflation argument ignores the real misconception in the OP.

Whatever the inflation in the cost of all the future goods you will buy with this money, if your rate of return doesn’t keep up with that you are losing buying power. If I have $5 today earmarked to buy eggs in 30 years, and they increase in price at 3% per year on average, I’ll need to have $12 when I buy the eggs. I didn’t spend any of that money this year, but I still need to make 3% on that amount every year on average to buy the same eggs.

[Oldaroo3]

Sorry, I forgot to use the quote feature originally when replying to Triple Digit Golfer. Fixed it below.

[Oldaroo3]

Maybe this article would be helpful for the discussion:

https://www.forbes.com/advisor/investin ... ice-index/

I have to nitpick. The first sentence in the article is wrong. Grocery prices were up about 12%, not 6.5% in 2022.

They probably used this as their source:

NEWS RELEASES
CPI for all items falls 0.1% in December as gasoline decreases
01/12/2023

In December, the Consumer Price Index for All Urban Consumers decreased 0.1 percent, seasonally adjusted, and rose 6.5 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.3 percent in December (SA); up 5.7 percent over the year (NSA).

Here's the link:
https://www.bls.gov/cpi/

[Johm221122]

Maybe this article would be helpful for the discussion:

https://www.forbes.com/advisor/investin ... ice-index/

It also doesn’t include estimates of how different subgroups are experiencing inflation, such as the elderly or those living in poverty. By creating blanket assumptions of how people across varying demographics are experiencing inflation, monetary policy can’t fully capture or reach the needs of these different subgroups.

The CPI also includes substitution bias, which means it can overstate how much the cost of living has changed. For example, if the CPI captures a large increase in the price of an item, it doesn’t take into account people substituting that item for a cheaper one. Not taking this into account wrongly assumes that people continue to buy the more expensive item and experience a higher inflation rate than what they’re actually enduring.

I agree

[KlangFool]

We do at the personal finance level. It is our annual expense. And, we need to track it in order to plan for our retirement and financial independence. We do not need CPI for that. And, CPI is totally useless and irrelevant anyhow.

Do you track your annual expense? Over the last 5 years? 10+ years? For many of us that cares about our personal finance, we do that.

Yes I track my spending, but I also look to estimate what may my investments be worth in 30 years and how will that support something like my current lifestyle, and over that period of time the only sensible estimate to use is based on historical CPI type of aggregate data because my own spending historically is far more variable.

The CPI vs personal inflation argument ignores the real misconception in the OP.

Whatever the inflation in the cost of all the future goods you will buy with this money, if your rate of return doesn’t keep up with that you are losing buying power. If I have $5 today earmarked to buy eggs in 30 years, and they increase in price at 3% per year on average, I’ll need to have $12 when I buy the eggs. I didn’t spend any of that money this year, but I still need to make 3% on that amount every year on average to buy the same eggs.

vxdx,

In summary,

A) You cannot control your spending.

B) But, you hope and believe that your spending will track the official inflation rate over 30 years.

C) Good luck to you if you believe your estimate based on CPI will be useful or relevant to you.

"If I have $5 today earmarked to buy eggs in 30 years, and they increase in price at 3% per year on average, I’ll need to have $12 when I buy the eggs. I didn’t spend any of that money this year, but I still need to make 3% on that amount every year on average to buy the same eggs."

D) If you only spend $5 per month on eggs, why should you care? You don't. It is such small percentage of your annual expense to you, it won't matter.

E) I spend $5,000 per month. Why would I care about $5 or $12 eggs?

KlangFool

[KlangFool]

Maybe this article would be helpful for the discussion:

https://www.forbes.com/advisor/investin ... ice-index/

It also doesn’t include estimates of how different subgroups are experiencing inflation, such as the elderly or those living in poverty. By creating blanket assumptions of how people across varying demographics are experiencing inflation, monetary policy can’t fully capture or reach the needs of these different subgroups.

The CPI also includes substitution bias, which means it can overstate how much the cost of living has changed. For example, if the CPI captures a large increase in the price of an item, it doesn’t take into account people substituting that item for a cheaper one. Not taking this into account wrongly assumes that people continue to buy the more expensive item and experience a higher inflation rate than what they’re actually enduring.

I agree

In summary, CPI is pretty much useless at the personal finance level.

KlangFool

[vxdx]

vxdx,

In summary,

A) You cannot control your spending.

B) But, you hope and believe that your spending will track the official inflation rate over 30 years.

C) Good luck to you if you believe your estimate based on CPI will be useful or relevant to you.

"If I have $5 today earmarked to buy eggs in 30 years, and they increase in price at 3% per year on average, I’ll need to have $12 when I buy the eggs. I didn’t spend any of that money this year, but I still need to make 3% on that amount every year on average to buy the same eggs."

D) If you only spend $5 per month on eggs, why should you care? You don't. It is such small percentage of your annual expense to you, it won't matter.

E) I spend $5,000 per month. Why would I care about $5 or $12 eggs?

KlangFool

A) my expenses being variable implies I cannot control my spending?

D) because, like CPI, I buy a whole gamut of things that change price independently and make up a significant percentage of my annual spending. I prefer not to track and calculate the price of every single thing I buy. I prefer to use a consistently calculated and publicly available data. It’s one factor, but not the only one, in my estimated future spending.


Implying that I believe that CPI alone determines what I will spend seems unnecessarily reductive, and I suspect no one here is actually claiming that.

[KlangFool]

vxdx,

In summary,

A) You cannot control your spending.

B) But, you hope and believe that your spending will track the official inflation rate over 30 years.

C) Good luck to you if you believe your estimate based on CPI will be useful or relevant to you.

"If I have $5 today earmarked to buy eggs in 30 years, and they increase in price at 3% per year on average, I’ll need to have $12 when I buy the eggs. I didn’t spend any of that money this year, but I still need to make 3% on that amount every year on average to buy the same eggs."

D) If you only spend $5 per month on eggs, why should you care? You don't. It is such small percentage of your annual expense to you, it won't matter.

E) I spend $5,000 per month. Why would I care about $5 or $12 eggs?

KlangFool

A) my expenses being variable implies I cannot control my spending?

D) because, like CPI, I buy a whole gamut of things that change price independently and make up a significant percentage of my annual spending. I prefer not to track and calculate the price of every single thing I buy. I prefer to use a consistently calculated and publicly available data. It’s one factor, but not the only one, in my estimated future spending.


Implying that I believe that CPI alone determines what I will spend seems unnecessarily reductive, and I suspect no one here is actually claiming that.

Personal finance is personal. Then, there are folks like me that CPI tracks an insignificant portion of my annual expenses. Hence, it is irrelevant and useless.

KlangFool

[8301]

vxdx,

In summary,

A) You cannot control your spending.

B) But, you hope and believe that your spending will track the official inflation rate over 30 years.

C) Good luck to you if you believe your estimate based on CPI will be useful or relevant to you.

"If I have $5 today earmarked to buy eggs in 30 years, and they increase in price at 3% per year on average, I’ll need to have $12 when I buy the eggs. I didn’t spend any of that money this year, but I still need to make 3% on that amount every year on average to buy the same eggs."

D) If you only spend $5 per month on eggs, why should you care? You don't. It is such small percentage of your annual expense to you, it won't matter.

E) I spend $5,000 per month. Why would I care about $5 or $12 eggs?

KlangFool

A) my expenses being variable implies I cannot control my spending?

D) because, like CPI, I buy a whole gamut of things that change price independently and make up a significant percentage of my annual spending. I prefer not to track and calculate the price of every single thing I buy. I prefer to use a consistently calculated and publicly available data. It’s one factor, but not the only one, in my estimated future spending.


Implying that I believe that CPI alone determines what I will spend seems unnecessarily reductive, and I suspect no one here is actually claiming that.

Personal finance is personal. Then, there are folks like me that CPI tracks an insignificant portion of my annual expenses. Hence, it is irrelevant and useless.

KlangFool

Well, I will take cattle over hat.

[Northern Flicker]

Having real rates be positive should make inflation less concerning, not more concerning.

Focus on future inflation. CPI is water over the dam.

[ClaycordJCA]

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