Amount needed to retire - inflation adjusted

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321jer
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Amount needed to retire - inflation adjusted

Post by 321jer »

*Bottom Line Question - what is your nest egg goal and how did you arrive at that number?*

I'm hoping to get as many responses as possible to see the spectrum of ideas and opinions. Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement.

What is your savings goal? The oft cited recommendation is 25 X's yearly spent and you can spend aprox 4%. Do you shoot for $1,250,000 or do you adjust for inflation?

Assuming 3% inflation, if retirement is 20 years away one would need almost double that (rule of 72; $100,000/year or $2,500,000 nest egg) to maintain your spending power.

How about including inflation for 30 years of retirement? Just to make math easy, double it again 5,000,000.

Is aiming for that 25 X's yearly spend just assuming that the growth in value of my investments will cover inflation and I don't need to inflate my nest egg over $1.25 mil?

Anyway what are you setting as your goal and how did you arrive at that number?
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FiveK
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Re: Amount needed to retire - inflation adjusted

Post by FiveK »

321jer wrote: Mon Jun 22, 2020 12:37 am ...if retirement is 20 years away....
Then a quick back-of-the-envelope estimate is probably the most one can justify doing. Change your expected investment return by only +/- 2% to see how much the results differ.
How about including inflation for 30 years of retirement?
That is already part of the way safe withdrawal rates have been estimated.
MathWizard
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Re: Amount needed to retire - inflation adjusted

Post by MathWizard »

1,400 K , about 375K of that in Roth. This is a number I will have in a few months assuming a drop in equities of about 1/3.

This assumes retire at 63, and includes
Health care , I can stay on employer plan, and medicare at 65 drugs are included.
I assume health care costs increase at 2% per year
SS benefits taken at 70, my wife takes it at FRA, then switched to spousal when I take mine. My SS at FRA would be 28K if I quit at 63.
I plan using only 75% of SS benefits.
A 3K/year pension my wife has.
Both federal and state taxes estimated.
Roth conversions up to top of current 12% bracket until 70.
Only take 1/2 of Roth earnings while I am alive, using up more of tax deferred while we are both alive.
I live until 85, wife lives until 100 based on family history.

All figures in real dollars

This gives us 64.5 K after health insurance and taxes, and taxes are almost zero for my widowed wife (or me if she go first)
This amount is what we have been spending for our lifestyle which includes fairly nice cars and overseas vacations every 5 years, domestic vacations otherwise.

I have calculated this all myself, but i-orp.com gives similar figures.
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snackdog
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Re: Amount needed to retire - inflation adjusted

Post by snackdog »

3-5% of whatever I have when I retire...
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KEotSK66
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Re: Amount needed to retire - inflation adjusted

Post by KEotSK66 »

321jer wrote: Mon Jun 22, 2020 12:37 am *Bottom Line Question - what is your nest egg goal and how did you arrive at that number?*

I'm hoping to get as many responses as possible to see the spectrum of ideas and opinions. Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement.

What is your savings goal? The oft cited recommendation is 25 X's yearly spent and you can spend aprox 4%. Do you shoot for $1,250,000 or do you adjust for inflation?

it's best to add up the inflation-adjusted yearly expenses (ie, the "$50ks") over 25 years of retirement, and you may need to adjust for the inflation between now and 25 yrs away for some/many/most expenses

Assuming 3% inflation, if retirement is 20 years away one would need almost double that (rule of 72; $100,000/year or $2,500,000 nest egg) to maintain your spending power.

How about including inflation for 30 years of retirement? Just to make math easy, double it again 5,000,000.

Is aiming for that 25 X's yearly spend just assuming that the growth in value of my investments will cover inflation and I don't need to inflate my nest egg over $1.25 mil?

once you add up the 25 yrs of inflation-adjusted spending you'll have the target for what you need when you retire in nominal dollars, then you can calculate your needed return (or AA) to take your portfolio value from what it is now to what you need it to be when you retire

Anyway what are you setting as your goal and how did you arrive at that number?
Last edited by KEotSK66 on Mon Jun 22, 2020 7:17 am, edited 1 time in total.
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smitcat
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Re: Amount needed to retire - inflation adjusted

Post by smitcat »

321jer wrote: Mon Jun 22, 2020 12:37 am *Bottom Line Question - what is your nest egg goal and how did you arrive at that number?*

I'm hoping to get as many responses as possible to see the spectrum of ideas and opinions. Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement.

What is your savings goal? The oft cited recommendation is 25 X's yearly spent and you can spend aprox 4%. Do you shoot for $1,250,000 or do you adjust for inflation?

Assuming 3% inflation, if retirement is 20 years away one would need almost double that (rule of 72; $100,000/year or $2,500,000 nest egg) to maintain your spending power.

How about including inflation for 30 years of retirement? Just to make math easy, double it again 5,000,000.

Is aiming for that 25 X's yearly spend just assuming that the growth in value of my investments will cover inflation and I don't need to inflate my nest egg over $1.25 mil?

Anyway what are you setting as your goal and how did you arrive at that number?
"Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement."
Easier and better to work in present dollars - $50k remains your goal for planning today.

"What is your savings goal? The oft cited recommendation is 25 X's yearly spent and you can spend aprox 4%. Do you shoot for $1,250,000 or do you adjust for inflation?"
That general rule of thumb already takes into consideration inflation.

"Is aiming for that 25 X's yearly spend just assuming that the growth in value of my investments will cover inflation and I don't need to inflate my nest egg over $1.25 mil?"
Exactly - yes.

"Anyway what are you setting as your goal and how did you arrive at that number?"
We had 3 personal goal numbers
1st - amount that we required for all essential (but not spartan) living expenses
2nd - additional amount we needed to do planned non essential spending
3rd - additional amount we wanted to give away to heirs and charity
1st number was arrived at by viewing our last 10 years of actual expenses.
jebmke
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Re: Amount needed to retire - inflation adjusted

Post by jebmke »

I a retired now but we never had a number target. We had savings rules based on categories of income and simply stuck to that strategy for 30+ years.
When you discover that you are riding a dead horse, the best strategy is to dismount.
Nowizard
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Re: Amount needed to retire - inflation adjusted

Post by Nowizard »

We achieved our goal in a simple manner. As with all things investing, we knew there would be periods of positive and negative returns and focused on two things under our control: 1. Regular investing; 2. Saving as much as possible while also considering a balanced life and not attempting to squeeze every, potential, compounded dollar from avoiding that McDonald's cheeseburger.
As for now (Retired), we are stable financially and compare asset totals at the first of the year and end of the year with the ideal goal of maintaining principle (and principal) after expenditures. That may happen some years but not others since we do not determine market returns and may have one-time, significantly increased expenditures such as purchasing two new automobiles this year. We add an inflation amount to the asset total at the beginning of the year to determine the ideal goal at the end of the year. What I have found is that the average inflation rate over the past 18-20 years is 2.36%, so we figure 2.5-3.0% as a goal. We are, for example, at a point where if our assets remain the same at the end of this year as now, we will meet our goal. Though flat for 2020, 2019 was a good year, and provided a significant cushion for this year. Others may arrive at their figures in a more analytical sense using spread sheets, algorithms, etc., but we are just focused on the pragmatics since our asset allocations are not likely to change over time.

Tim
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Re: Amount needed to retire - inflation adjusted

Post by Jack FFR1846 »

321jer wrote: Mon Jun 22, 2020 12:37 am *Bottom Line Question - what is your nest egg goal and how did you arrive at that number?*

I'm hoping to get as many responses as possible to see the spectrum of ideas and opinions. Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement.
When my spending was calculated at $50k a year, for a typical 30 year retirement, I targeted $2.5M or 50 times spending. I've since honed my expected spending based on what I've learned about taxes and health insurance and that's jumped to $61,500 with a generous amount for travel. So for me, my target is $3,075,000. It's overly conservative to make sure that things that I'm sure I missed for spending are taken care of. I won't live anywhere near that full 30 years, so that gives me more margin. I doubt DW will either. So perhaps I'll add in a spending bump like a GT-3 or GT-R or something.

DW and I both paid our own way through college and still have that student mindset that we may not even be able to afford a pizza, so like depression era folks have much more saved than is reasonable. It's served us quite well, however, paying full boat for private college with not even a flinch. Not that I like sending $60k checks, but it hasn't really set us back at all.

I do no figuring for inflation. I do have a yearly income/spending spread sheet and use assumed portfolio and tax increase percentages that are changeable easily each year. It's how I figure where we stand. Not just a number X of spending.
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smitcat
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Re: Amount needed to retire - inflation adjusted

Post by smitcat »

Jack FFR1846 wrote: Mon Jun 22, 2020 7:46 am
321jer wrote: Mon Jun 22, 2020 12:37 am *Bottom Line Question - what is your nest egg goal and how did you arrive at that number?*

I'm hoping to get as many responses as possible to see the spectrum of ideas and opinions. Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement.
When my spending was calculated at $50k a year, for a typical 30 year retirement, I targeted $2.5M or 50 times spending. I've since honed my expected spending based on what I've learned about taxes and health insurance and that's jumped to $61,500 with a generous amount for travel. So for me, my target is $3,075,000. It's overly conservative to make sure that things that I'm sure I missed for spending are taken care of. I won't live anywhere near that full 30 years, so that gives me more margin. I doubt DW will either. So perhaps I'll add in a spending bump like a GT-3 or GT-R or something.

DW and I both paid our own way through college and still have that student mindset that we may not even be able to afford a pizza, so like depression era folks have much more saved than is reasonable. It's served us quite well, however, paying full boat for private college with not even a flinch. Not that I like sending $60k checks, but it hasn't really set us back at all.

I do no figuring for inflation. I do have a yearly income/spending spread sheet and use assumed portfolio and tax increase percentages that are changeable easily each year. It's how I figure where we stand. Not just a number X of spending.

"When my spending was calculated at $50k a year, for a typical 30 year retirement, I targeted $2.5M or 50 times spending."
That is what we would do ...after considering any SS , pensions or the like that will be covered separately from the portfolio.
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SmileyFace
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Re: Amount needed to retire - inflation adjusted

Post by SmileyFace »

I find it easier to keep inflation OUT of all my primary calculations.
I assume no inflation - compute what I need in today's dollars based upon expenses; remove inflation from investments for the calculations on future value of future investments and future value of current investments to see how much I will have - see my over-age or shortage based upon various retirement dates and assumptions. It's much easier for me to wrap my head around things using today's dollars.
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David Jay
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Re: Amount needed to retire - inflation adjusted

Post by David Jay »

DaftInvestor wrote: Mon Jun 22, 2020 7:57 am I find it easier to keep inflation OUT of all my primary calculations.
I assume no inflation - compute what I need in today's dollars based upon expenses; remove inflation from investments for the calculations on future value of future investments and future value of current investments to see how much I will have - see my over-age or shortage based upon various retirement dates and assumptions. It's much easier for me to wrap my head around things using today's dollars.
This!

Do your calculations in “real” dollars, it is much easier. SWR (sustainable withdrawal rate) percentages - 4%, 3.5%, 3%, whatever) include future inflation adjustments.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Amount needed to retire - inflation adjusted

Post by sailaway »

If your retirement is 20 years out, you are just as likely to need to revisit the numbers due to lifestyle changes as inflation.
KlangFool
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Re: Amount needed to retire - inflation adjusted

Post by KlangFool »

321jer wrote: Mon Jun 22, 2020 12:37 am *Bottom Line Question - what is your nest egg goal and how did you arrive at that number?*

I'm hoping to get as many responses as possible to see the spectrum of ideas and opinions. Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement.

What is your savings goal? The oft cited recommendation is 25 X's yearly spent and you can spend aprox 4%. Do you shoot for $1,250,000 or do you adjust for inflation?

Assuming 3% inflation, if retirement is 20 years away one would need almost double that (rule of 72; $100,000/year or $2,500,000 nest egg) to maintain your spending power.

How about including inflation for 30 years of retirement? Just to make math easy, double it again 5,000,000.

Is aiming for that 25 X's yearly spend just assuming that the growth in value of my investments will cover inflation and I don't need to inflate my nest egg over $1.25 mil?

Anyway what are you setting as your goal and how did you arrive at that number?
321jer,

1) The number is 1.25 million.

2) At 50K level, social security would cover about 50% of the expense after you reach 62/67/70 years old.

3) My expense stays about the same at 50K to 60K level for the last 10+ years. So, inflation does not affect me.

KlangFool
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22twain
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Re: Amount needed to retire - inflation adjusted

Post by 22twain »

David Jay wrote: Mon Jun 22, 2020 8:32 am
DaftInvestor wrote: Mon Jun 22, 2020 7:57 am I find it easier to keep inflation OUT of all my primary calculations.
I assume no inflation - compute what I need in today's dollars based upon expenses; remove inflation from investments for the calculations on future value of future investments and future value of current investments to see how much I will have - see my over-age or shortage based upon various retirement dates and assumptions. It's much easier for me to wrap my head around things using today's dollars.
This!

Do your calculations in “real” dollars, it is much easier. SWR (sustainable withdrawal rate) percentages - 4%, 3.5%, 3%, whatever) include future inflation adjustments.
And every few years, adjust your target to account for inflation that has already taken place (i.e. re-express the target in "new today's" dollars) and re-evaluate your annual spending/lifestyle goals, get a better estimate of Social Security, etc.
Help save endangered words! When you write "princiPLE", make sure you don't really mean "princiPAL"!
Rudedog
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Re: Amount needed to retire - inflation adjusted

Post by Rudedog »

I prepared many spreadsheets and made a lot of "what if" calculations.
Last edited by Rudedog on Tue Jun 23, 2020 6:25 pm, edited 1 time in total.
sean.mcgrath
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Re: Amount needed to retire - inflation adjusted

Post by sean.mcgrath »

321jer wrote: Mon Jun 22, 2020 12:37 am What is your savings goal? The oft cited recommendation is 25 X's yearly spent and you can spend aprox 4%. Do you shoot for $1,250,000 or do you adjust for inflation?

Is aiming for that 25 X's yearly spend just assuming that the growth in value of my investments will cover inflation and I don't need to inflate my nest egg over $1.25 mil?
As posted above, at twenty years out ignore inflation for now. Assume salary / savings / investments will all have that baked in. Your spend will rise with inflation over the twenty years, so your goal will rise as well. But so will your savings, assets value, etc.

321jer wrote: Mon Jun 22, 2020 12:37 am *Bottom Line Question - what is your nest egg goal and how did you arrive at that number?*

I'm hoping to get as many responses as possible to see the spectrum of ideas and opinions. Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement.
I miss two inputs from you about the $50k: how much will be covered by Social Security, and how much will be "non deeply painful to cut" discretionary expenses. In my own case, I made a model where we spend more than now in the first decade of retirement, and much less after twenty-five years. I take Social Security and Pension into account.

I just checked, as I never calculated this before. In my model I end at 3.8%: 4% withdrawal minus 1% taxes + Social Security and Pension. I have a very high discretionary portion. If that were lower, I would probably start at 3.5% instead of 4%.
smitcat
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Re: Amount needed to retire - inflation adjusted

Post by smitcat »

KlangFool wrote: Mon Jun 22, 2020 9:02 am
321jer wrote: Mon Jun 22, 2020 12:37 am *Bottom Line Question - what is your nest egg goal and how did you arrive at that number?*

I'm hoping to get as many responses as possible to see the spectrum of ideas and opinions. Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement.

What is your savings goal? The oft cited recommendation is 25 X's yearly spent and you can spend aprox 4%. Do you shoot for $1,250,000 or do you adjust for inflation?

Assuming 3% inflation, if retirement is 20 years away one would need almost double that (rule of 72; $100,000/year or $2,500,000 nest egg) to maintain your spending power.

How about including inflation for 30 years of retirement? Just to make math easy, double it again 5,000,000.

Is aiming for that 25 X's yearly spend just assuming that the growth in value of my investments will cover inflation and I don't need to inflate my nest egg over $1.25 mil?

Anyway what are you setting as your goal and how did you arrive at that number?
321jer,

1) The number is 1.25 million.

2) At 50K level, social security would cover about 50% of the expense after you reach 62/67/70 years old.

3) My expense stays about the same at 50K to 60K level for the last 10+ years. So, inflation does not affect me.

KlangFool

"3) My expense stays about the same at 50K to 60K level for the last 10+ years. So, inflation does not affect me."
You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.
The car that you just had a problem with will be more costly to repair or replace and that will continue to go up.

So perhaps your expenses are adjusted in a consumption manner but inflation has affected the costs of many items we all consume.
02nz
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Re: Amount needed to retire - inflation adjusted

Post by 02nz »

+1 on DaftInvestor's suggestion - use today's dollars for expenses and real returns. That takes care of your inflation adjustment. So if your expenses are $50K, take those real dollars (maybe add a buffer for expenses that grow faster than inflation, like medical care), and whatever multiplier - 25X or 30X or whatever - that you want to use.

When projecting growth of your portfolio, use real not nominal returns. So instead of assuming say 6% annual growth nominal, assume 3 or 3.5% real.

This has another advantage: your projected portfolio amount is in today's dollars, which is more useful for projecting income taxes, RMDs, Roth conversions, etc., because income tax brackets are indexed for inflation. (However, keep in mind that the formula for calculating how much of SS benefits get taxed is NOT indexed for inflation.)

As FiveK noted, with 20 years out you can only do a rough estimate, so don't try to get overly precise. There ares lots of known and unknown unknowns. :wink:
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Re: Amount needed to retire - inflation adjusted

Post by Robot Monster »

Someone created a spreadsheet for me that takes as inputs: initial assets, yearly spend amount, inflation, and after-tax income. So if I run:

Initial assets: $5,000,000
Yearly spend amount: $50,000
Inflation: 3%
After-tax income: 1%

I'll run out of money year 2076 when I'm 102 years old.
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
KlangFool
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Re: Amount needed to retire - inflation adjusted

Post by KlangFool »

smitcat wrote: Mon Jun 22, 2020 10:10 am

"3) My expense stays about the same at 50K to 60K level for the last 10+ years. So, inflation does not affect me."
You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.
The car that you just had a problem with will be more costly to repair or replace and that will continue to go up.

So perhaps your expenses are adjusted in a consumption manner but inflation has affected the costs of many items we all consume.
smitcat,

If inflation does not affect my overall annual expense, how does it affect the costs of many items matter to me? It does not.

<<You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.>>

And, as long as I can substitute the items and reduce consumption, why would that matter to me? I had controlled my expense at the 50K to 60K for the last 10+ years. It is not a theoretical statement.

KlangFool
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Re: Amount needed to retire - inflation adjusted

Post by CyclingDuo »

321jer wrote: Mon Jun 22, 2020 12:37 am *Bottom Line Question - what is your nest egg goal and how did you arrive at that number?*

I'm hoping to get as many responses as possible to see the spectrum of ideas and opinions. Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement.

What is your savings goal? The oft cited recommendation is 25 X's yearly spent and you can spend aprox 4%. Do you shoot for $1,250,000 or do you adjust for inflation?

Assuming 3% inflation, if retirement is 20 years away one would need almost double that (rule of 72; $100,000/year or $2,500,000 nest egg) to maintain your spending power.

How about including inflation for 30 years of retirement? Just to make math easy, double it again 5,000,000.

Is aiming for that 25 X's yearly spend just assuming that the growth in value of my investments will cover inflation and I don't need to inflate my nest egg over $1.25 mil?

Anyway what are you setting as your goal and how did you arrive at that number?
Assume you retire at FRA and take SS at age 67 (and have no pension). This is what Fidelity suggests:

Image

Our savings factors are based on the assumption that a person saves 15% of their income annually beginning at age 25, invests more than 50% on average of their savings in stocks over their lifetime, retires at age 67, and plans to maintain their preretirement lifestyle in retirement (see footnote 1 for more details).

https://www.fidelity.com/viewpoints/ret ... retirement.
"Save like a pessimist, invest like an optimist." - Morgan Housel
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firebirdparts
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Re: Amount needed to retire - inflation adjusted

Post by firebirdparts »

Since we're going for variety, I'll say 30X. Kinda high, I know. You could almost bury it in coffee cans and still be okay.
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smitcat
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Re: Amount needed to retire - inflation adjusted

Post by smitcat »

KlangFool wrote: Mon Jun 22, 2020 10:44 am
smitcat wrote: Mon Jun 22, 2020 10:10 am

"3) My expense stays about the same at 50K to 60K level for the last 10+ years. So, inflation does not affect me."
You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.
The car that you just had a problem with will be more costly to repair or replace and that will continue to go up.

So perhaps your expenses are adjusted in a consumption manner but inflation has affected the costs of many items we all consume.
smitcat,

If inflation does not affect my overall annual expense, how does it affect the costs of many items matter to me? It does not.

<<You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.>>

And, as long as I can substitute the items and reduce consumption, why would that matter to me? I had controlled my expense at the 50K to 60K for the last 10+ years. It is not a theoretical statement.

KlangFool
"It is not a theoretical statement."
Neither is the fact that inflation reduced purchasing power over time

"And, as long as I can substitute the items and reduce consumption, why would that matter to me?"
As long as you can reduce consumption then it does not matter to you - so your answer would then be valid for one couple.

Anyone can utilize a calculator to get the past inflation rates, here is one....
https://www.usinflationcalculator.com/
Price erosion due to inflation ...
18% - past 10 years
49% - past 20 years
KlangFool
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Re: Amount needed to retire - inflation adjusted

Post by KlangFool »

smitcat wrote: Mon Jun 22, 2020 11:39 am
KlangFool wrote: Mon Jun 22, 2020 10:44 am
smitcat wrote: Mon Jun 22, 2020 10:10 am

"3) My expense stays about the same at 50K to 60K level for the last 10+ years. So, inflation does not affect me."
You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.
The car that you just had a problem with will be more costly to repair or replace and that will continue to go up.

So perhaps your expenses are adjusted in a consumption manner but inflation has affected the costs of many items we all consume.
smitcat,

If inflation does not affect my overall annual expense, how does it affect the costs of many items matter to me? It does not.

<<You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.>>

And, as long as I can substitute the items and reduce consumption, why would that matter to me? I had controlled my expense at the 50K to 60K for the last 10+ years. It is not a theoretical statement.

KlangFool
"It is not a theoretical statement."
Neither is the fact that inflation reduced purchasing power over time

"And, as long as I can substitute the items and reduce consumption, why would that matter to me?"
As long as you can reduce consumption then it does not matter to you - so your answer would then be valid for one couple.

Anyone can utilize a calculator to get the past inflation rates, here is one....
https://www.usinflationcalculator.com/
Price erosion due to inflation ...
18% - past 10 years
49% - past 20 years
smitcat,

<<As long as you can reduce consumption then it does not matter to you - so your answer would then be valid for one couple.>>

This a personal finance forum. As long as OP is one of those that can control their annual expenses independent of the inflation, that will work for OP too.

<<Neither is the fact that inflation reduced purchasing power over time>>

40% to 50% of inflation is related to housing. If someone buys an affordable house with a low-interest fixed mortgage, that portion of the inflation no longer impacts the person.

As for the property tax, in my case, the price of the house goes up but the property tax rate goes down. Hence, it is a wash. House insurance? We shop around every 2 years and keep the rate constant or lower.

KlangFool
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Portfolio7
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Re: Amount needed to retire - inflation adjusted

Post by Portfolio7 »

321jer wrote: Mon Jun 22, 2020 12:37 am *Bottom Line Question - what is your nest egg goal and how did you arrive at that number?*

I'm hoping to get as many responses as possible to see the spectrum of ideas and opinions. Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement.

What is your savings goal? The oft cited recommendation is 25 X's yearly spent and you can spend aprox 4%. Do you shoot for $1,250,000 or do you adjust for inflation?

Assuming 3% inflation, if retirement is 20 years away one would need almost double that (rule of 72; $100,000/year or $2,500,000 nest egg) to maintain your spending power.

How about including inflation for 30 years of retirement? Just to make math easy, double it again 5,000,000.

Is aiming for that 25 X's yearly spend just assuming that the growth in value of my investments will cover inflation and I don't need to inflate my nest egg over $1.25 mil?

Anyway what are you setting as your goal and how did you arrive at that number?
My goal is $3.5M NW, of which $3M are investments in retirement funds. I suspect we'll be doing well to get to $2.5M in retirement funds before I retire... but DW will probably work a bit longer than I do, and we have assets of uncertain valuation that could pump that number higher.

$2.5M would cover our wish list for spending in retirement, best as I can figure. The additional $1M is for growth in medical costs and for legacy purposes.

I got to the $2.5M by looking at x income, x expenses, but most importantly doing a 40 year cash flow analysis. Yes, it had a lot of assumptions included, but it gives me a framework to understand the impact of various actions.

Those numbers include inflation. I uplift expenses for inflation, and match that to inflation in my returns assumption. One can work either way.
"An investment in knowledge pays the best interest" - Benjamin Franklin
smitcat
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Re: Amount needed to retire - inflation adjusted

Post by smitcat »

KlangFool wrote: Mon Jun 22, 2020 11:54 am
smitcat wrote: Mon Jun 22, 2020 11:39 am
KlangFool wrote: Mon Jun 22, 2020 10:44 am
smitcat wrote: Mon Jun 22, 2020 10:10 am

"3) My expense stays about the same at 50K to 60K level for the last 10+ years. So, inflation does not affect me."
You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.
The car that you just had a problem with will be more costly to repair or replace and that will continue to go up.

So perhaps your expenses are adjusted in a consumption manner but inflation has affected the costs of many items we all consume.
smitcat,

If inflation does not affect my overall annual expense, how does it affect the costs of many items matter to me? It does not.

<<You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.>>

And, as long as I can substitute the items and reduce consumption, why would that matter to me? I had controlled my expense at the 50K to 60K for the last 10+ years. It is not a theoretical statement.

KlangFool
"It is not a theoretical statement."
Neither is the fact that inflation reduced purchasing power over time

"And, as long as I can substitute the items and reduce consumption, why would that matter to me?"
As long as you can reduce consumption then it does not matter to you - so your answer would then be valid for one couple.

Anyone can utilize a calculator to get the past inflation rates, here is one....
https://www.usinflationcalculator.com/
Price erosion due to inflation ...
18% - past 10 years
49% - past 20 years
smitcat,

<<As long as you can reduce consumption then it does not matter to you - so your answer would then be valid for one couple.>>

This a personal finance forum. As long as OP is one of those that can control their annual expenses independent of the inflation, that will work for OP too.

<<Neither is the fact that inflation reduced purchasing power over time>>

40% to 50% of inflation is related to housing. If someone buys an affordable house with a low-interest fixed mortgage, that portion of the inflation no longer impacts the person.

As for the property tax, in my case, the price of the house goes up but the property tax rate goes down. Hence, it is a wash. House insurance? We shop around every 2 years and keep the rate constant or lower.

KlangFool
Perhaps another approach on the subject:
"And, as long as I can substitute the items and reduce consumption, why would that matter to me?"
- because we are trying to help others and a post that says expenses will be flat in retirement is misleading
- because we do care about others
- because new readers may actually believe that inflation may not matter to them

"As long as OP is one of those that can control their annual expenses independent of the inflation, that will work for OP too."
Yes - as long as a person can lower expenses to make up for inflation then they will be OK

"40% to 50% of inflation is related to housing. If someone buys an affordable house with a low-interest fixed mortgage, that portion of the inflation no longer impacts the person."
Expenses are expenses - if the person is holding a 30 year fixed mortgage in retirement (non advisable) that will not be inflationary at all.

"As for the property tax, in my case, the price of the house goes up but the property tax rate goes down"
Property taxes in your area have gone down over the past 10 and 20 years?

"House insurance? We shop around every 2 years and keep the rate constant or lower."
Home insurance rates do not go down in 10 and 20 year intervals. You can change the insurance parameters to lower the rate, or you may have a higher rate to begin with.
smitcat
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Re: Amount needed to retire - inflation adjusted

Post by smitcat »

Portfolio7 wrote: Mon Jun 22, 2020 12:39 pm
321jer wrote: Mon Jun 22, 2020 12:37 am *Bottom Line Question - what is your nest egg goal and how did you arrive at that number?*

I'm hoping to get as many responses as possible to see the spectrum of ideas and opinions. Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement.

What is your savings goal? The oft cited recommendation is 25 X's yearly spent and you can spend aprox 4%. Do you shoot for $1,250,000 or do you adjust for inflation?

Assuming 3% inflation, if retirement is 20 years away one would need almost double that (rule of 72; $100,000/year or $2,500,000 nest egg) to maintain your spending power.

How about including inflation for 30 years of retirement? Just to make math easy, double it again 5,000,000.

Is aiming for that 25 X's yearly spend just assuming that the growth in value of my investments will cover inflation and I don't need to inflate my nest egg over $1.25 mil?

Anyway what are you setting as your goal and how did you arrive at that number?
My goal is $3.5M NW, of which $3M are investments in retirement funds. I suspect we'll be doing well to get to $2.5M in retirement funds before I retire... but DW will probably work a bit longer than I do, and we have assets of uncertain valuation that could pump that number higher.

$2.5M would cover our wish list for spending in retirement, best as I can figure. The additional $1M is for growth in medical costs and for legacy purposes.

I got to the $2.5M by looking at x income, x expenses, but most importantly doing a 40 year cash flow analysis. Yes, it had a lot of assumptions included, but it gives me a framework to understand the impact of various actions.

Those numbers include inflation. I uplift expenses for inflation, and match that to inflation in my returns assumption. One can work either way.
"My goal is $3.5M NW, of which $3M are investments in retirement funds."
"Those numbers include inflation. I uplift expenses for inflation, and match that to inflation in my returns assumption."
So those goals are with inflation adjustments then? How far into the future are the goals? What % inflation do you use?
02nz
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Re: Amount needed to retire - inflation adjusted

Post by 02nz »

KlangFool wrote: Mon Jun 22, 2020 10:44 am
smitcat wrote: Mon Jun 22, 2020 10:10 am

"3) My expense stays about the same at 50K to 60K level for the last 10+ years. So, inflation does not affect me."
You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.
The car that you just had a problem with will be more costly to repair or replace and that will continue to go up.

So perhaps your expenses are adjusted in a consumption manner but inflation has affected the costs of many items we all consume.
smitcat,

If inflation does not affect my overall annual expense, how does it affect the costs of many items matter to me? It does not.

<<You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.>>

And, as long as I can substitute the items and reduce consumption, why would that matter to me? I had controlled my expense at the 50K to 60K for the last 10+ years. It is not a theoretical statement.

KlangFool
It is very simple. :P This bears no relation to most people's reality. Yes, if the price of chicken goes up, I may be able to substitute with pork, but substitutes tend to also go up in price (as we saw recently with the meat "shortage.") And inflation measures the change in prices of a whole basket of goods, some of which cannot easily be substituted. Medical care has generally gone up faster than inflation - what's your substitute for that? Or just use less? ("911, I need to be taken to the ER, but please only give me the same amount of care that my nominal dollars would have bought a decade ago.")

If you are truly able to hold expenses to the same in nominal dollars as a decade ago, great for you. Can you manage that over 2, 3, 4 decades? Highly unlikely unless you were starting from a very high level of consumption.
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Re: Amount needed to retire - inflation adjusted

Post by KlangFool »

02nz wrote: Mon Jun 22, 2020 3:58 pm
KlangFool wrote: Mon Jun 22, 2020 10:44 am
smitcat wrote: Mon Jun 22, 2020 10:10 am

"3) My expense stays about the same at 50K to 60K level for the last 10+ years. So, inflation does not affect me."
You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.
The car that you just had a problem with will be more costly to repair or replace and that will continue to go up.

So perhaps your expenses are adjusted in a consumption manner but inflation has affected the costs of many items we all consume.
smitcat,

If inflation does not affect my overall annual expense, how does it affect the costs of many items matter to me? It does not.

<<You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.>>

And, as long as I can substitute the items and reduce consumption, why would that matter to me? I had controlled my expense at the 50K to 60K for the last 10+ years. It is not a theoretical statement.

KlangFool
It is very simple. :P This bears no relation to most people's reality. Yes, if the price of chicken goes up, I may be able to substitute with pork, but substitutes tend to also go up in price (as we saw recently with the meat "shortage.") And inflation measures the change in prices of a whole basket of goods, some of which cannot easily be substituted. Medical care has generally gone up faster than inflation - what's your substitute for that? Or just use less? ("911, I need to be taken to the ER, but please only give me the same amount of care that my nominal dollars would have bought a decade ago.")

If you are truly able to hold expenses to the same in nominal dollars as a decade ago, great for you. Can you manage that over 2, 3, 4 decades? Highly unlikely unless you were starting from a very high level of consumption.
02nz,

<<This bears no relation to most people's reality.>>

Most people cannot afford to retire in the first place. There is no point in talking about them.

<<Highly unlikely unless you were starting from a very high level of consumption.>>

Do you consider 50K to 60K per year of annual expense = high level of consumption?

The answer would have to be yes. The median US Household income is only 50K to 60K per year.

KlangFool
02nz
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Re: Amount needed to retire - inflation adjusted

Post by 02nz »

KlangFool wrote: Mon Jun 22, 2020 4:07 pm
02nz wrote: Mon Jun 22, 2020 3:58 pm
KlangFool wrote: Mon Jun 22, 2020 10:44 am
smitcat wrote: Mon Jun 22, 2020 10:10 am

"3) My expense stays about the same at 50K to 60K level for the last 10+ years. So, inflation does not affect me."
You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.
The car that you just had a problem with will be more costly to repair or replace and that will continue to go up.

So perhaps your expenses are adjusted in a consumption manner but inflation has affected the costs of many items we all consume.
smitcat,

If inflation does not affect my overall annual expense, how does it affect the costs of many items matter to me? It does not.

<<You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.>>

And, as long as I can substitute the items and reduce consumption, why would that matter to me? I had controlled my expense at the 50K to 60K for the last 10+ years. It is not a theoretical statement.

KlangFool
It is very simple. :P This bears no relation to most people's reality. Yes, if the price of chicken goes up, I may be able to substitute with pork, but substitutes tend to also go up in price (as we saw recently with the meat "shortage.") And inflation measures the change in prices of a whole basket of goods, some of which cannot easily be substituted. Medical care has generally gone up faster than inflation - what's your substitute for that? Or just use less? ("911, I need to be taken to the ER, but please only give me the same amount of care that my nominal dollars would have bought a decade ago.")

If you are truly able to hold expenses to the same in nominal dollars as a decade ago, great for you. Can you manage that over 2, 3, 4 decades? Highly unlikely unless you were starting from a very high level of consumption.
02nz,

<<This bears no relation to most people's reality.>>

Most people cannot afford to retire in the first place. There is no point in talking about them.

<<Highly unlikely unless you were starting from a very high level of consumption.>>

Do you consider 50K to 60K per year of annual expense = high level of consumption?

The answer would have to be yes. The median US Household income is only 50K to 60K per year.

KlangFool
Actually it's about $63K, per the Census Bureau.

50-60K/year for a couple is a comfortable but far from lavish level of spending. Of course you're in a better position to make adjustments (e.g., fewer dinners out, fewer trips, fewer gifts). But you just wave inflation away as though it were a figment of the imagination. You're kidding yourself if you think a couple of decades of inflation won't significantly erode that purchasing power without big adjustments in lifestyle.
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Re: Amount needed to retire - inflation adjusted

Post by KlangFool »

02nz wrote: Mon Jun 22, 2020 4:20 pm
You're kidding yourself if you think a couple of decades of inflation won't significantly erode that purchasing power without big adjustments in lifestyle.
02nz,

And, if the person could handle the big adjustment in lifestyle, where is the problem? This is not a survival level of expense. If a household could not survive with 50K to 60K of annual expense aka the same as the median household income, most US households would not survive at all.

KlangFool
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Re: Amount needed to retire - inflation adjusted

Post by KlangFool »

Folks,

It is very simple but hard.

In order for someone to retire early, the person has to be Live Below Your Mean (LBYM). It means that the person could control his/her expenses and save money. Conversely, a person that could control his/her expense is more likely to be less affected by inflation. He/she would not be behaving the same way as the normal person in terms of consumption. Or else, they would save less than 5% of their gross income and never retire early.

KlangFool
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Re: Amount needed to retire - inflation adjusted

Post by sailaway »

KlangFool wrote: Mon Jun 22, 2020 4:32 pm Folks,

It is very simple but hard.

In order for someone to retire early, the person has to be Live Below Your Mean (LBYM). It means that the person could control his/her expenses and save money. Conversely, a person that could control his/her expense is more likely to be less affected by inflation. He/she would not be behaving the same way as the normal person in terms of consumption. Or else, they would save less than 5% of their gross income and never retire early.

KlangFool
I have also kept expenses the same for quite some time, enough that I was surprised to see the 10 year inflation.

However, that was due to lifestyle changes that we chose that no one would want to be forced into, not even us. It made sense for us to sell the second car due to our specific situation, but for many people that would be a lifestyle sacrifice to make if they were running short, not at all part of the plan. My parents can't even conceive of going down to one car, especially now that they are transportation for an older relative. I certainly wouldn't want to see them do it for financial reasons!

A good long term plan acknowledges inflation.

A good long term plan also checks in with lifestyle on a regular basis.

A bad long term plan pretends like either of these are set in stone and immune from changes.
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Portfolio7
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Re: Amount needed to retire - inflation adjusted

Post by Portfolio7 »

smitcat wrote: Mon Jun 22, 2020 12:49 pm
Portfolio7 wrote: Mon Jun 22, 2020 12:39 pm
321jer wrote: Mon Jun 22, 2020 12:37 am *Bottom Line Question - what is your nest egg goal and how did you arrive at that number?*
My goal is $3.5M NW, of which $3M are investments in retirement funds.
"My goal is $3.5M NW, of which $3M are investments in retirement funds."
"Those numbers include inflation. I uplift expenses for inflation, and match that to inflation in my returns assumption."
So those goals are with inflation adjustments then? How far into the future are the goals? What % inflation do you use?
To keep it simple, those numbers are geared around 8 years from now, and inflation is assumed at 2% (which means that historical returns include a bit extra for inflation greater than what I am assuming in my own analysis for the future.)

The $3.5M statement is more about magnitude than a real attempt at precision. This is really key... often we talk about a 'number', because it is a simple way to convey a lot of information, but there are still far too many variables (for us, at least) to nail down future spending or income.

What is far more important is the potential range of outcomes, and what we do in a worst case scenario, a better case, and a likely case (and it's worthwhile to look at a better than expected case also.) In a worst case scenario we'd still have solid income - even if we had to walk away from the mortgage.

Our project this decade is to pay off as much debt as possible, and we're ahead of schedule, so it seems likely we'll have less debt than I planned for. I doubt we will fully pay off the mortgage, but it's looking far more achievable than it did 5 years ago. The future is always in motion.
"An investment in knowledge pays the best interest" - Benjamin Franklin
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bobcat2
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Re: Amount needed to retire - inflation adjusted

Post by bobcat2 »

Use the Funded Ratio to drive your retirement investment plan.

Link - https://www.bogleheads.org/forum/viewt ... 0&t=219878

and https://blbarnitz4.wordpress.com/2017/0 ... ded-ratio/

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
Grt2bOutdoors
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Re: Amount needed to retire - inflation adjusted

Post by Grt2bOutdoors »

jebmke wrote: Mon Jun 22, 2020 7:31 am I a retired now but we never had a number target. We had savings rules based on categories of income and simply stuck to that strategy for 30+ years.
Not retired but we saved what we could (within reason) after paying necessities and some discretionary things/experiences at times. What we have at retirement is what we have. What we do control is expenses and allocation. We don’t know how our longevity will be so all this 25 year+ planning great if you retire in late 50’s early 60’s, otherwise you either consider spending more or something else.

You might want to listen to a great podcast The Long View - Morningstar, last week they had Jonathan Guyton on their and he talks about retirement spending. I thought it was informative.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Cousin Eddie
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Re: Amount needed to retire - inflation adjusted

Post by Cousin Eddie »

Grt2bOutdoors wrote: Mon Jun 22, 2020 5:17 pm
jebmke wrote: Mon Jun 22, 2020 7:31 am I a retired now but we never had a number target. We had savings rules based on categories of income and simply stuck to that strategy for 30+ years.
Not retired but we saved what we could (within reason) after paying necessities and some discretionary things/experiences at times. What we have at retirement is what we have. What we do control is expenses and allocation. We don’t know how our longevity will be so all this 25 year+ planning great if you retire in late 50’s early 60’s, otherwise you either consider spending more or something else.

You might want to listen to a great podcast The Long View - Morningstar, last week they had Jonathan Guyton on their and he talks about retirement spending. I thought it was informative.
Thanks for the link, that was very informative!
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WoodSpinner
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Re: Amount needed to retire - inflation adjusted

Post by WoodSpinner »

bobcat2 wrote: Mon Jun 22, 2020 4:58 pm Use the Funded Ratio to drive your retirement investment plan.

Link - https://www.bogleheads.org/forum/viewt ... 0&t=219878

and https://blbarnitz4.wordpress.com/2017/0 ... ded-ratio/

BobK
BobK,

Wondering if you could comment on my analysis of the Funded Ratio in this post, viewtopic.php?t=295907&start=50.

You no longer can purchase an Immediate annuity with a COLA adjustment. Based on this, I proposed an alternate metric which is a variation of this metric which I am calling the Retirement Readiness Ratio (RRR).

Proposed Metric:
Retirement Readiness Ratio = Current Portfolio Value/PV(DiscountRate, (Income-(Expenses+Taxes))

Essentially this is a ratio of the Current Portfolio Value to the currently valued Cashflow needs throughout Retirement. I see this as one of many signpost metrics I can use before or during retirement to gauge my readiness and provide some insights around the question of how much risk do I need to take.

In my mind it is a much better metric than some of the other frequently discussed metrics e.g. 25x times expenses since it accounts for the Income as well as Expense and isn't tied to an assumed Retirement duration (e.g. 30 years).
TLDR;
I am slowly coming to the conclusion that the RR Ratio is really not all that useful and simply using the expected Withdrawal Rate is a better signpost for the viability of the Retirement Plan.

OTOH some of this analysis could help you calculate the expected Withdrawal Ratio for your Retirement Plan -- which can be a bit tricky when you factor in lumpy expenses and changes to Income Streams.
Withdrawal Ratio = (PV of Cashflow/Number of Years with Negative Cashflow)/Portfolio Value
Thoughts?
Topic Author
321jer
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Re: Amount needed to retire - inflation adjusted

Post by 321jer »

[/quote]That is already part of the way safe withdrawal rates have been estimated.
[/quote]

This makes sense. Thanks for the link I knew about the Trinity Study but hadn't noticed "Table 3".
Topic Author
321jer
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Re: Amount needed to retire - inflation adjusted

Post by 321jer »

snackdog wrote: Mon Jun 22, 2020 5:13 am 3-5% of whatever I have when I retire...
Keeping it simple. I like it.
Topic Author
321jer
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Re: Amount needed to retire - inflation adjusted

Post by 321jer »

smitcat wrote: Mon Jun 22, 2020 7:14 am
321jer wrote: Mon Jun 22, 2020 12:37 am *Bottom Line Question - what is your nest egg goal and how did you arrive at that number?*

I'm hoping to get as many responses as possible to see the spectrum of ideas and opinions. Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement.

What is your savings goal? The oft cited recommendation is 25 X's yearly spent and you can spend aprox 4%. Do you shoot for $1,250,000 or do you adjust for inflation?

Assuming 3% inflation, if retirement is 20 years away one would need almost double that (rule of 72; $100,000/year or $2,500,000 nest egg) to maintain your spending power.

How about including inflation for 30 years of retirement? Just to make math easy, double it again 5,000,000.

Is aiming for that 25 X's yearly spend just assuming that the growth in value of my investments will cover inflation and I don't need to inflate my nest egg over $1.25 mil?

Anyway what are you setting as your goal and how did you arrive at that number?
"Assume you are debt free, and spending $50,000 for yearly expenses, and hope to keep your same quality of life after retirement."
Easier and better to work in present dollars - $50k remains your goal for planning today.

"What is your savings goal? The oft cited recommendation is 25 X's yearly spent and you can spend aprox 4%. Do you shoot for $1,250,000 or do you adjust for inflation?"
That general rule of thumb already takes into consideration inflation.

"Is aiming for that 25 X's yearly spend just assuming that the growth in value of my investments will cover inflation and I don't need to inflate my nest egg over $1.25 mil?"
Exactly - yes.

"Anyway what are you setting as your goal and how did you arrive at that number?"
We had 3 personal goal numbers
1st - amount that we required for all essential (but not spartan) living expenses
2nd - additional amount we needed to do planned non essential spending
3rd - additional amount we wanted to give away to heirs and charity
1st number was arrived at by viewing our last 10 years of actual expenses.
Thanks for the direct answers. That's a great way to break it down.
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CyclingDuo
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Re: Amount needed to retire - inflation adjusted

Post by CyclingDuo »

sailaway wrote: Mon Jun 22, 2020 4:41 pm
KlangFool wrote: Mon Jun 22, 2020 4:32 pm Folks,

It is very simple but hard.

In order for someone to retire early, the person has to be Live Below Your Mean (LBYM). It means that the person could control his/her expenses and save money. Conversely, a person that could control his/her expense is more likely to be less affected by inflation. He/she would not be behaving the same way as the normal person in terms of consumption. Or else, they would save less than 5% of their gross income and never retire early.

KlangFool
I have also kept expenses the same for quite some time, enough that I was surprised to see the 10 year inflation.

However, that was due to lifestyle changes that we chose that no one would want to be forced into, not even us. It made sense for us to sell the second car due to our specific situation, but for many people that would be a lifestyle sacrifice to make if they were running short, not at all part of the plan. My parents can't even conceive of going down to one car, especially now that they are transportation for an older relative. I certainly wouldn't want to see them do it for financial reasons!

A good long term plan acknowledges inflation.

A good long term plan also checks in with lifestyle on a regular basis.

A bad long term plan pretends like either of these are set in stone and immune from changes.
Agree.

We also are thinking into our planning the phases known as the go-go years, the slow-go years, and the no-go years.

Interesting article on the first 5 years of retirement and why they are so critical (they will be part of our go-go years):

https://www.marketwatch.com/story/why-y ... yptr=yahoo

Obviously, retirees are like snowflakes: no two are alike. Yet the study says most tend to have one important thing in common: They usually spend more in their first five years of retirement than at other times, and then it begins to decline. For example, if you’ve dreamed of traveling the world, checking things off from your bucket list and so forth, you’re more likely to do so in the early stages of your golden years than the latter ones, when you may be slowing down.

And it’s not just splurging in Italy or taking the grandchildren to Disney World. The CFPB cites an external study by the Employee Benefit Research Institute, which notes that retirees also tend to buy fewer clothes, fewer home furnishings and other things as time goes by.

(skip)

Finally, remember how I said there’s something else you need to know about why spending declines after a few years? Many people, forced into a corner financially, have no other choice. The CFPB found that retirees who couldn’t maintain their standard of living wound up slashing spending by 28% over their first five years in retirement. Of that number, 17% cut spending by more than half.

This is sobering data. Nobody wants to cut their spending—their lifestyle—by half. But if retirement is still on the horizon for you, consider taking steps now to bolster your situation—before you’re forced to later.


The sobering statistic from the CFPB's research showed this:

Nearly half of all retirees did not have the ability to maintain the same spending level for five years after retiring.

Here is the direct link to the CONSUMER FINANCIAL PROTECTION BUREAU's pdf study:

Retirement Security and Financial Decision-making: Research Brief

Office of Financial Protection for Older Americans

https://files.consumerfinance.gov/f/doc ... -brief.pdf

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
redmaw
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Re: Amount needed to retire - inflation adjusted

Post by redmaw »

KlangFool wrote: Mon Jun 22, 2020 10:44 am
smitcat wrote: Mon Jun 22, 2020 10:10 am

"3) My expense stays about the same at 50K to 60K level for the last 10+ years. So, inflation does not affect me."
You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.
The car that you just had a problem with will be more costly to repair or replace and that will continue to go up.

So perhaps your expenses are adjusted in a consumption manner but inflation has affected the costs of many items we all consume.
smitcat,

If inflation does not affect my overall annual expense, how does it affect the costs of many items matter to me? It does not.

<<You are adjusting something - food, car insurance, home insurance, gasoline,utilities, etc have gone up and will continue to go up.>>

And, as long as I can substitute the items and reduce consumption, why would that matter to me? I had controlled my expense at the 50K to 60K for the last 10+ years. It is not a theoretical statement.

KlangFool
A quick google search shows inflation from 2010 to 2020 is 1.18 (that is $1 in 2010 is worth $1.18 in 2020). 18% increase (1.64% per year). Your expense band is a 20% range... its not hard to imagine that covering the rather minor inflation in the last 10 years. That doesn't mean inflation doesn't effect you, it just hadn't been large enough to matter much yet. The same rate over a 30 year period gets you to 60% higher, and a more normal rate in the 2-3% range would be even more. So 50k in 2010 become 60k in 2020 no big deal. But it becomes 100k in 2050, thats a bit harder to hide or ignore (or more like 200k with more normal inflation).

You do make some good points though that inflation is somewhat personal. Health care and higher education have been tracking much higher than average inflation for a long time. If you are healthy, and aren't paying for college those items won't matter to you. I bet that healthcare one is going to bite just about everyone before they are done though.
Topic Author
321jer
Posts: 14
Joined: Fri Jun 17, 2016 9:18 pm

Re: Amount needed to retire - inflation adjusted

Post by 321jer »

Nowizard wrote: Mon Jun 22, 2020 7:44 am We achieved our goal in a simple manner. As with all things investing, we knew there would be periods of positive and negative returns and focused on two things under our control: 1. Regular investing; 2. Saving as much as possible while also considering a balanced life and not attempting to squeeze every, potential, compounded dollar from avoiding that McDonald's cheeseburger.
As for now (Retired), we are stable financially and compare asset totals at the first of the year and end of the year with the ideal goal of maintaining principle (and principal) after expenditures. That may happen some years but not others since we do not determine market returns and may have one-time, significantly increased expenditures such as purchasing two new automobiles this year. We add an inflation amount to the asset total at the beginning of the year to determine the ideal goal at the end of the year. What I have found is that the average inflation rate over the past 18-20 years is 2.36%, so we figure 2.5-3.0% as a goal. We are, for example, at a point where if our assets remain the same at the end of this year as now, we will meet our goal. Though flat for 2020, 2019 was a good year, and provided a significant cushion for this year. Others may arrive at their figures in a more analytical sense using spread sheets, algorithms, etc., but we are just focused on the pragmatics since our asset allocations are not likely to change over time.

Tim
To clarify if you are planning on spending 4% in one year, and are assuming 3% inflation and you start with $1 million the math would look like this

Start - $1,000,000 + 3% = 1,030,000
End - 1,030,000 - 4% = 988,800

And if you were somewhere around that number you'd be satisfied?

Thanks this would make it simple. Just want to make sure I'm understanding your thinking process
IcedTea
Posts: 59
Joined: Thu Mar 12, 2020 4:12 am

Re: Amount needed to retire - inflation adjusted

Post by IcedTea »

Last evening I started listening to a podcast by the Rational Reminder called "complete guide to retirement".

Here it is:
https://podcasts.google.com/?feed=aHR0c ... QyY2EwNTQ2

One of the first points is that most people over estimate how much money they really need in retirement.
Zillions
Posts: 103
Joined: Sun May 24, 2020 12:58 am

Re: Amount needed to retire - inflation adjusted

Post by Zillions »

We have a special needs child so that influences our numbers differently. We need to leave him a nest egg that lasts him for 40 years after we're gone (if we assume he haa a life expectancy of 80 - longevity on both sides if the family - although I have health complications that might bump me off much sooner).

Our number is 5 million + a paid for home he inherits and covers our retirements for 20 years (assuming we live to be 85 years each) and then another 40 years for him, after we're gone. We're very frugal and have managed to usually stay on budget, so I am hoping to spend about 50000 / yr on ourselves for 20 years, and leave him a nest egg of 4 million + a house. But, with his special needs and potential health issues along with any trustee & lawyer fees (he may not be able to manage his own affairs), I am very worried that 4 million may not be enough for us and for him.
Topic Author
321jer
Posts: 14
Joined: Fri Jun 17, 2016 9:18 pm

Re: Amount needed to retire - inflation adjusted

Post by 321jer »

bobcat2 wrote: Mon Jun 22, 2020 4:58 pm Use the Funded Ratio to drive your retirement investment plan.

Link - https://www.bogleheads.org/forum/viewt ... 0&t=219878

and https://blbarnitz4.wordpress.com/2017/0 ... ded-ratio/

BobK
Thanks for the link. I'll will read those
Topic Author
321jer
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Joined: Fri Jun 17, 2016 9:18 pm

Re: Amount needed to retire - inflation adjusted

Post by 321jer »

Zillions wrote: Fri Jun 26, 2020 2:41 am We have a special needs child so that influences our numbers differently. We need to leave him a nest egg that lasts him for 40 years after we're gone (if we assume he haa a life expectancy of 80 - longevity on both sides if the family - although I have health complications that might bump me off much sooner).

Our number is 5 million + a paid for home he inherits and covers our retirements for 20 years (assuming we live to be 85 years each) and then another 40 years for him, after we're gone. We're very frugal and have managed to usually stay on budget, so I am hoping to spend about 50000 / yr on ourselves for 20 years, and leave him a nest egg of 4 million + a house. But, with his special needs and potential health issues along with any trustee & lawyer fees (he may not be able to manage his own affairs), I am very worried that 4 million may not be enough for us and for him.


Thank you for sharing. Situations like yours take all the generalities and throw them out the window, and make saving and planning so much more critical.

Thank God that he has parents like you that will work and love and sacrifice for him. I hope it lasts too.
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Horton
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Re: Amount needed to retire - inflation adjusted

Post by Horton »

WoodSpinner wrote: Mon Jun 22, 2020 8:43 pm
bobcat2 wrote: Mon Jun 22, 2020 4:58 pm Use the Funded Ratio to drive your retirement investment plan.

Link - https://www.bogleheads.org/forum/viewt ... 0&t=219878

and https://blbarnitz4.wordpress.com/2017/0 ... ded-ratio/

BobK
BobK,

Wondering if you could comment on my analysis of the Funded Ratio in this post, viewtopic.php?t=295907&start=50.

You no longer can purchase an Immediate annuity with a COLA adjustment. Based on this, I proposed an alternate metric which is a variation of this metric which I am calling the Retirement Readiness Ratio (RRR).

Proposed Metric:
Retirement Readiness Ratio = Current Portfolio Value/PV(DiscountRate, (Income-(Expenses+Taxes))

Essentially this is a ratio of the Current Portfolio Value to the currently valued Cashflow needs throughout Retirement. I see this as one of many signpost metrics I can use before or during retirement to gauge my readiness and provide some insights around the question of how much risk do I need to take.

In my mind it is a much better metric than some of the other frequently discussed metrics e.g. 25x times expenses since it accounts for the Income as well as Expense and isn't tied to an assumed Retirement duration (e.g. 30 years).
TLDR;
I am slowly coming to the conclusion that the RR Ratio is really not all that useful and simply using the expected Withdrawal Rate is a better signpost for the viability of the Retirement Plan.

OTOH some of this analysis could help you calculate the expected Withdrawal Ratio for your Retirement Plan -- which can be a bit tricky when you factor in lumpy expenses and changes to Income Streams.
Withdrawal Ratio = (PV of Cashflow/Number of Years with Negative Cashflow)/Portfolio Value
Thoughts?
There are a variety of ways to determine your funded ratio. Using immediate or deferred annuity quotes is an easy way to determine your liability and provides some comfort in knowing that you could “settle” your liability with an insurer in desired.

That said, you could also derive the liability as a present value of cash flows using a risk free rate, yield curve, or any other reasonable expected return. The more risk involved in the discount rate, the more volatile that the funded ratio will become.

I personally use an investment grade corporate bond yield curve to derive my funded ratio because it’s similar to what is used for annuity pricing, because it includes some level of risk (like my portfolio which includes equities), and is an observable/objective input (as opposed to equity expected returns).
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