1980's Inflation, Ouch!

[pjm-7]

I was cleaning out some old boxes this morning and came across some financial planning, investing information that I had stored away. The shocker was a Retirement Income Work Sheet that was put out by Franklin Mutual Funds in 1986.

There was a Inflation Table (I will condense).

Age Year of Retirement Inflation
Now at age 65 Factor
60 1991 1.34
55 1996 1.79
50 2001 2.40
40 2011 4.29
35 2016 5.74
30 2021 7.69
25 2026 10.29

A. How much income will you need each month if you were to retire today?
B. Enter the inflation factor from the table for your year of retirement.
C. Multiply A by B. Assuming an average 6% rate of inflation, this monthly income, at retirement, will be approximately the same as what you would need if you were to retire today.

I know my budget back in the mid-1980's was about $2000/month. Using the factor above for 2016 of 5.74 results in a monthly budget of $11,480 ($2000 x 5.74). Holy Smokes!!!! I ER'd last year and my "basic" budget is still about $2000/month (annual budget is a bit more for one-time projects, etc.)

If people ever wonder if the financial industry wants you to "over save" (or buy way more life insurance than you would ever need) here is proof of some scare tactics.

[karluk]

Quote:

Originally Posted by pjm-7 If people ever wonder if the financial industry wants you to "over save" (or buy way more life insurance than you would ever need) here is proof of some scare tactics.

This looks more like recency bias to me than blatant scare tactics. In 1986 it hadn't been too long ago that the country had come out of a prolonged period of double digit inflation. The projections are simply assuming a 6% average inflation rate into the future. That probably was perceived as a realistic projection back then, since inflation had been much higher than 6% in the recent past. Nowadays it looks like an unrealistic assumption, but not back then.

[walkinwood]

Makes you wonder what assumptions we are making now that will be proven wrong in the future.

[haha]

Quote:

Originally Posted by walkinwood Makes you wonder what assumptions we are making now that will be proven wrong in the future.

Many, I am sure. Trouble is that over saving is a lot less dangerous than under saving, which is likely what is being done now.

I cannot understand the worldwide low inflation rates, and given everything that nations are being asked to spend public money on it is very hard to visualize how this might all work out.

Ha

[Amethyst]

Well into the 90's, we were getting 8% interest on 5-year tax-deferred annuity contracts. Back then, nobody foresaw that 1% return per year would some day be regarded as normal!

Amethyst

Quote:

Originally Posted by karluk This looks more like recency bias to me than blatant scare tactics. In 1986 it hadn't been too long ago that the country had come out of a prolonged period of double digit inflation. The projections are simply assuming a 6% average inflation rate into the future. That probably was perceived as a realistic projection back then, since inflation had been much higher than 6% in the recent past. Nowadays it looks like an unrealistic assumption, but not back then.

[meierlde]

Quote:

Originally Posted by haha Many, I am sure. Trouble is that over saving is a lot less dangerous than under saving, which is likely e=what is being done now. I cannot understand the worldwide low inflation rates, and given everything that nations are being asked to spend public money on it is very hard to visualize how this might all work out. Ha

The Great Wave which is a history of inflation going back to the time just after the discovery of America and the huge infux of gold to Europe, proposes that the population growth rate is linked to inflation as a faster growth rate creates a more demand for food and fuel than a lower growth rate. With that theory then the low inflation makes sense as much of the world is moving to very low population growth.

[utrecht]

I distinctly remember my parents buying their first house in 1981 and their mortgage interest rate was 16%. Things have changed just a bit since then.

[sherrywilliam]

Quote:

Originally Posted by utrecht I distinctly remember my parents buying their first house in 1981 and their mortgage interest rate was 16%. Things have changed just a bit since then.

Ours was 14 percent 1980. But we were pretty young and stupid and only cared about the monthly payout. We did have enough sense to refinance about 6 or 7 years later when interest rates dropped though

[user5027]

All things are relative. In 1981 I graduated college and was socking my pay checks in a money market fund at Delaware Cash Reserve. Yield was over 18%.

[audreyh1]

I think my first mortgage was 12%. That was in the 80s.

[scrabbler1]

In early 1989 my first mortgage (on a co-op which is always higher) had an interest rate (5-year ARM) of 10.75%. MM Savings accounts still paid around 7.5% but by the end of 1989 that had fallen to about 2%. By 1992 I did a refi on the co-op loan and got a 1-year ARM at 6%!

[Rick_Head]

Quote:

Originally Posted by utrecht I distinctly remember my parents buying their first house in 1981 and their mortgage interest rate was 16%. Things have changed just a bit since then.

Here, north of 49, mortgage interest rates are fixed for a set period, usually <= 5 years. Mine renewed in 80, only change was the digits reversed from 12% to 21%. DM lent us the money to pay it off (one year interest free) as an Xmas present. DW was working then, we had paid a large number down and repaid DM $25K in that year. My salary at the time was ~$30K and DW made ~$20K. 50% saving rate before tax. It hurt but boy was it worth it.

Quote:

Originally Posted by audreyh1 I think my first mortgage was 12%. That was in the 80s.

My 1st mortgage rate was 12% in 1975. Been mortgage free since 1980.

[aja8888]

My mortgage history:

1973 - 8%
1976 - 8.25%
1981 - 18.5 % (California)
1985 - 10 1/4%
1994 - 8.25%
2006 - 6%
2014 - 0%

[Sunset]

Quote:

Originally Posted by sherrywilliam Ours was 14 percent 1980. But we were pretty young and stupid and only cared about the monthly payout. We did have enough sense to refinance about 6 or 7 years later when interest rates dropped though

+1
Same here except for me 14% was a DEAL and only because it was from the family.
I refi'd as quick as I could 5 yrs later and paid it down super fast

[Jester]

I was invested in same fund, Delaware Cash Reserve, and remember getting as high as 18% like in 1981.

[Palmtree]

I remember back in the 80's regular bank checking accounts were paying such high interest that people were swiping magnets across the numbers on their checks so they could not be read and took longer to process. Don't know if it really worked or not. Back then I was paying around 14% interest on my first house. Old timers were telling me about getting home loans way back when for around 3-4%. I thought I would never ever see rates that low in my lifetime. Fast forward and not only did I see them, they stuck around for a decade or so.

Quote:

Originally Posted by walkinwood Makes you wonder what assumptions we are making now that will be proven wrong in the future.

I know that I don't know. I just don't know what I don't know!