Inflation and salary, am I doing the math right here?

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berg
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Joined: Mon Mar 18, 2013 8:43 pm

Inflation and salary, am I doing the math right here?

Post by berg »

For our planning, I'm trying to estimate my wife's future salary will look like against inflation and what her pension will end up looking like. Am I doing the math right?

For round numbers, in 2021 dollars, my wife's salary is $100k. She has 23 more years of teaching to collect her full (80%) teacher's pension. She has maxed her levels for all intents and purposes and her raises now are simply tied to her school district's contract. In her 15 or so years teaching, the ranges have been 0.5% to 3.5%. More years less than 2% than not. Since we use today's dollars for all our planning, we used to just take her salary at 80% as future income. But the more I thought about it, the more I thought this might be flawed.

So if we assume she will average 1% increases the rest of her career, that gets her to $124k (in 2043 dollars). However, if inflation averages 3%, she would have needed to be at $193k to maintain her purchasing power, at 2% average inflation $156k. If I'm doing the math right, she ends up with 64-79% of her original purchasing power depending on how much she lags inflation. So in the 3% scenario, her $100k today would be about $64k when she retires. If we then take her 80% pension, in today's dollars it is $51k. As you can imagine, this is a big difference from simply taking 80% of $100k. That $29k of extra income to cover is like saving another $950k in our portfolio!

I have a feeling you all will tell me I'm overthinking it 24 years out, but from a planning perspective when it comes to funding our kids college or targets for early retirement that feels like a might big unknown. I guess maybe model both and see what happens in time, right? We just love planning this stuff out and love the idea of having target numbers for FI in mind and this threw us for a loop recently when we were talking numbers.

Thanks!!
MrJedi
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Re: Inflation and salary, am I doing the math right here?

Post by MrJedi »

Is there a reason you don't think her salary will keep up with inflation? 0.5-3.5% each year seems pretty close to par in the past 15 years.
DoubleComma
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Re: Inflation and salary, am I doing the math right here?

Post by DoubleComma »

Yep, you’re overthinking.

For starters your prediction that her income won’t keep up with inflation hasn’t proved true so far. Second teacher pensions in CA at least have COL adjustments for inflation during retirement.

It’s more likely your wife won’t teach for 24 more years. Some do, many more exit earlier because the can often access the pension at 50 or 55 years old and they are just tired of the classroom by then.

If I was doing your math I would say she gets 65% of today’s dollars and inflation will be a non factor…then be happy if she sticks it out and gets more.

By the way my wife is a teacher as is my sister in law. My Mom, Aunt x 2 and uncle are all retire teachers. Only one made it past 60 y/o when the retired.

As for college planning, just start saving as much as you can/want to contribute. You can’t plan for every eventuality.
Topic Author
berg
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Re: Inflation and salary, am I doing the math right here?

Post by berg »

MrJedi wrote: Tue Oct 12, 2021 9:21 pm Is there a reason you don't think her salary will keep up with inflation? 0.5-3.5% each year seems pretty close to par in the past 15 years.
Good question. 3.5% was only once. Most years were more in the 1-2% range, but then some years lower. I guess we were just trying to be conservative in planning, especially if we are thinking of an FI number.

Probably losing 2% to inflation annually for 23 years is unlikely. But maybe losing 1% is unlikely, but not totally crazy. I guess I'd bet it doesn't completely keep up, but maybe not as extreme as we have laid out. Even losing 1% per year is a difference of $16k or about $500k in a 3% withdrawal portfolio. But even as I type that, my brain says well if you want to FIRE, hit the higher number or revisit when you are close. :D It just helps us to have targets in mind!
MrJedi
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Re: Inflation and salary, am I doing the math right here?

Post by MrJedi »

I checked a few inflation calculators and it seems the average inflation from 2005 to 2020 was about 1.8-1.9%. So I do not think you are too far off.
DoubleComma
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Re: Inflation and salary, am I doing the math right here?

Post by DoubleComma »

MrJedi wrote: Tue Oct 12, 2021 9:50 pm I checked a few inflation calculators and it seems the average inflation from 2005 to 2020 was about 1.8-1.9%. So I do not think you are too far off.
I don’t think the debate is what inflation has been, it’s will his wife’s salary as a teacher keep up with inflation?

I say it will and it has.
MrJedi
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Re: Inflation and salary, am I doing the math right here?

Post by MrJedi »

DoubleComma wrote: Tue Oct 12, 2021 9:52 pm
MrJedi wrote: Tue Oct 12, 2021 9:50 pm I checked a few inflation calculators and it seems the average inflation from 2005 to 2020 was about 1.8-1.9%. So I do not think you are too far off.
I don’t think the debate is what inflation has been, it’s will his wife’s salary as a teacher keep up with inflation?

I say it will and it has.
I agree. Just pointing out that the fear of wages not keeping up with inflation is unsubstantiated with the given information so far which includes 15 years of data.
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mhc
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Re: Inflation and salary, am I doing the math right here?

Post by mhc »

There is nothing wrong with planning out the next decades. I just believe that one should spend less time on things that are further out in time.

Make your plan and clearly spell out your assumptions. Track if your assumptions hold true over time. Make adjustments along the way as you gain new information. This will help you improve your methodology over time, or you will learn that there are just too many unknowns to make accurate predictions that extend decades.

I would assume that salaries should keep up with or exceed inflation, unless one is in a dying industry.
dbr
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Re: Inflation and salary, am I doing the math right here?

Post by dbr »

I know that when our local school board reports on annual cost increases the report always cites the increases needed to maintain inflation increased salaries for teachers. It would seem that historically the practice has been to pace inflation. What the future risk is, one can't say.
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