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cost of living increase question
Old 05-30-2005, 07:14 AM   #1
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cost of living increase question

If you require net 24k per annum to pay your bills in retirement what factor do you use to plan for increases in living costs each year? Do you use the CPI, the inflation rate, or look at your own incremental increases over the past 5 years and extrapolate from there.

Also , in the example above assuming "costs" go up by 5% per year is it reasonable to just work at your leisure at something you enjoy and just make-up $1,200 per yr ($100/ month) and not have to worry about it effecting your swr numbers/ assumptions. For me it would be a walk in the park mentally and emotionally to just get the extra $100 bucks for a cuple of hours work per month....any thoughts ?
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Re: cost of living increase question
Old 05-30-2005, 08:04 AM   #2
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Re: cost of living increase question

Quote:
Do you use the CPI, the inflation rate, or look at your own incremental increases over the past 5 years and extrapolate from there
I think many of us will agree the CPI is a flawed measure. For example, I think housing accounts for 2% of the CPI but people in many areas have been priced out of the housing market, i.e. huge increase in living costs & property tax increases but the CPI would suggest otherwise. I would observe your personal increases over the past 5 years. I think that would be the most accurate measure for you.
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Re: cost of living increase question
Old 05-30-2005, 08:54 AM   #3
 
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Re: cost of living increase question

I wonder if there's a web site with a custom inflation calculator. That is, you enter percentages for how much you spend on housing, groceries, gas, heating fuel, travel, health insurance, etc., and it tells you what the rate of inflation is for you.

Here's a somewhat outdated article on this topic.
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Re: cost of living increase question
Old 05-30-2005, 01:07 PM   #4
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Re: cost of living increase question

Theres this
http://www.allegacyfcu.org/calculato...ationrate.html

Which uses cpi related numbers with your own allocations.
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Re: cost of living increase question
Old 05-30-2005, 01:21 PM   #5
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Re: cost of living increase question

That calculator also suffers from the flaw of things not included, like housing costs (vs rents). It is also not regionalized.

I put in my numbers and it says my personal inflation rate is about on par with cpi.

Hmm...gas is up from about $1.80 to $2.20-2.40; a lot of food costs have gone up by 40-50% or more in the last couple of years; my home has gone from a value of $175k 4 years ago to $250k 2 years ago and ~$400k this year.

Yeah, that smacks of 3%...

I'm also going to re-raise the note of 'invisible inflation' since we have a lot of new members.

I note that a lot of beer comes in 11.2oz bottles instead of 12. A bunch of food products that came in 8, 12 or 16oz containers now comes in 6, 10 and 14 oz. In particular the canned dog food I used to buy went from a 16 to a 14 to a 13 in 2 years. Price remained about the same though. Mcdonalds efforts to continuously shrink their food; last time I had an egg mcmuffin was probably 10 years ago...I ordered one at a drive through about 2 years ago and couldnt believe how tiny it had become. The BBQ joint I drop by every now and then started charging 50c for extra sauce on the side. All the 'food court' shops at the local mall turned their drink machines back around and pour for you now, and charge for refills. The fish and chip place I go to once a month changed the type of fish their serving from a wide, thick filet to a long thin skinny one that by my eye is at least a third lighter. A lot of restaurants we go to every now and then for a particular 'signature dish' have very obviously been reducing portion size steadily over the last few years.

And of course as we've noted here and there, service of any kind has gone to hell in a handbasket as companies have reduced headcount, dropped training, and reduced wages they're willing to pay for 'service' people.

None of which is accounted for in CPI style calculations that look predominately at 'units' rather than true volumes.

In the meanwhile my fish and chips dinner had to be upped from 1 piece of fish to 2 ($1.10 extra) or I'd still be hungry, and I have to pay an extra 50c for my second soda. So from 3.89 to 5.49...slightly more than 3%...

Besides real or measured inflation at the point of purchase and unmeasured inflation or improperly measured inflation, you're experiencing the death of a thousand cuts in products and services.
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Re: cost of living increase question
Old 05-30-2005, 05:23 PM   #6
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Re: cost of living increase question

I would suggest you go straight to the fed's pages on CPI if you want to understand your own personal inflation rate and why it may be higher (or lower) than CPI. I posted the web site information a few months ago and it went mostly unnoticed but you can find it at:

CPI calculators:
http://early-retirement.org/forums/i...p?topic=1936.0

The government CPI web site if full of good information and personal inflation rate calculators. Since the federal CPI is a nationwide average, about half of us are guaranteed to experience higher than CPI inflation. The calculators online allow you to look at localized CPI and to alter the basket of goods breakdown to match your own spending.

There is also quite a bit of information about hedonic adjustments and how they affect the CPI. A lot of people spend a lot of time worrying about this, but after reading the details of hedonic adjustments, I think the concern is way overblown. This is a minor tweak to CPI.

Hedonic Adjustments: http://early-retirement.org/forums/i...p?topic=1949.0

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Re: cost of living increase question
Old 05-30-2005, 06:45 PM   #7
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Re: cost of living increase question

The CPI tends to underestimate the cost of living because of its omissions of several key items such as college expenses, changes in U.S. currency, the costs of borrowing money, sales and income taxes. Since government expenditure represents over 32% of the GDP, the cost of government should be included as part of the inflation calculation. Should the increases in money supply to gage inflation, the government may have to increase social security payments but collect less tax revenue. Thus, CPI as an inflation indicator will stay.
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Re: cost of living increase question
Old 05-30-2005, 07:07 PM   #8
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Re: cost of living increase question

Quote:
Originally Posted by - SG

There is also quite a bit of information about hedonic adjustments and how they affect the CPI. A lot of people spend a lot of time worrying about this, but after reading the details of hedonic adjustments, I think the concern is way overblown.
Pay no attention to the man behind the curtain. We're from the government, we're here to help you...

Quote:
This is a minor tweak to CPI.
Then why have them at all and have this lightning rod of criticism to deal with?
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Re: cost of living increase question
Old 05-30-2005, 08:05 PM   #9
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Re: cost of living increase question

Quote:
Originally Posted by ferco

Also , in the example above assuming "costs" go up by 5% per year is it reasonable to just work at your leisure at something you enjoy and just make-up $1,200 per yr ($100/ month) and not have to worry about it effecting your swr numbers/ assumptions. For me it would be a walk in the park mentally and emotionally to just get the extra $100 bucks for a cuple of hours work per month....any thoughts ?
Ferco,
I am a big advocate of using a little part-time work here and there, or some sort of part-time income generating activity to help even out the bumps in the road going forward when reality under shoots today's expectations. I've always felt earning a few thousand a year can help bridge the numbers and let someone ER sooner, as well as be fun and something to do to get you out of the house and learning something new.

Not everyone here will agree, and we're certainly not talking about slipping back into the ratrace, but folks here are doing everything from pinch-hitting as a pallbearer to helping seat fans at Pirates games to taking people's pets out for doggy play-dates during the workday. My wife has been designing bead jewelry for 4 years and sells it at crafts fairs or school benefits to the local women.

What were you thinking of doing?

ESRBob ('s' for semi-retired")
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Re: cost of living increase question
Old 05-31-2005, 12:08 AM   #10
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Re: cost of living increase question

Quote:
Originally Posted by Grand Banks
Pay no attention to the man behind the curtain.* We're from the government, we're here to help you...
To imply that I have great faith in politicians is to declare ignorance of most of what I've posted here for the last several years. But I would suggest that people who are worried about inflation take a look at the CPI pages I referenced in my original post. Depending on where you live and how you live, CPI may be a terrible indicator of personal inflation and the government site is quite clear about that. They even provide you with enough of the raw data to analyze inflation in your area using your spending profile. If you look at that data, you might find that the CPI-to-personal inflation discrepancy you are experiencing is due primarily to where you live. Or because of some unique aspect of your spending. After they assume a spending profile, most of the rest of the calculation is determined simply by purchasing specific packages of goods in a large number of cities and rural areas. You can look at most of the raw data if you want to.

I don't doubt that politicians are capable of "cheating" the system to underestimate inflation, but if you look at the web site articles, you might discover that estimating inflation for the whole country is a pretty tough problem and that some people are taking the job seriously. An average figure is certain to underestimate personal inflation for approximately half the population.

Quote:
Originally Posted by Grand Banks
Then why have them at all and have this lightning rod of criticism to deal with?
Again, when I read the detailed articles about hedonic adjustments, I found them to be very reasonable attempts to account for the fact that the "basket of goods" used to come up with CPI kept changing due to technology advances. It should be noted that hedonic adjustments do not all reduce CPI. Some of them tend to increase it. But the adjustments are applied to only a small fraction of the basket of goods.

Here's the reason hedonic adjustment calculations don't worry me that much: Where you live and your specific spending profile will have much greater impact on personal inflation than hedonic adjustments has on CPI.

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Re: cost of living increase question
Old 05-31-2005, 03:02 AM   #11
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Re: cost of living increase question

I find it interesting that if the CPI were calculated the way it was in the 1980s, it would be about 3% higher than it is today.



They rang the alarm and fought inflation at 6% during the 80s, when they could have just solved the problem by changing the way inflation was calculated, like they do today.* Progress.
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Re: cost of living increase question
Old 05-31-2005, 11:52 AM   #12
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Re: cost of living increase question

SG - agree that the whole thing is too complicated to measure accurately for anyone. Is it any wonder then I cringe when someone posts something that says "This is CPI indexed so I dont have to worry about inflation". Half the time they're wrong if the measured CPI is incorrect for them or their area. The other half of the time they're wrong if CPI isnt accurate, period.

As far as hedonics of any kind in any measure...as I mentioned before one of the hedonic adjustments has to do with an aspect of my old job. The particular adjustment says that computers are really less expensive than they used to be because they're better/faster. I've read their white paper. Its bull****. If you have a computer in your 'basket', you still have to buy it. Whether you get some intrinsic benefit that makes it more valuable because its 'better' is a fools errand to determine. To imply that it costs less just ticks me off. It doesnt. You still have to pay for it, it still takes the full amount of money out of your budget, you still have to sacrifice some other part of your spending to accommodate the higher cost. Whether its a car, a computer or a hunk of meat.

I'm not sure what disturbs me more: that they think their inadequate efforts do in fact produce a valid result or if they're aware that their efforts are inadequate but lets leave them in there anyhow?

In light of that, I wish they'd simply leave it to apples and oranges, without trying to set a quality level on the apple. I'm so sorry I just said that.

As far as the amount...my experience has been that when someone throws in a 'little' of something controversial/problematic, its because they intend to do it a lot more.

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Re: cost of living increase question
Old 05-31-2005, 12:05 PM   #13
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Re: cost of living increase question

My son also has an opinion on this. His first time at the keyboard, so pardon his brusqueness...

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I'm most impressed that he got a couple of special characters in there, changed the font size twice, launched a web site within word and almost shut the computer down...
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Re: cost of living increase question
Old 05-31-2005, 12:21 PM   #14
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Re: cost of living increase question

Quote:
Originally Posted by Grand Banks
SG - agree that the whole thing is too complicated to measure accurately for anyone.* Is it any wonder then I cringe when someone posts something that says "This is CPI indexed so I dont have to worry about inflation".* . . .
That really is the key issue. Whether CPI reflects an "accurate" average US inflation rate or not, individuals would be wise to try to understand how adequately it reflects their own situation. There is a very good chance that CPI does not do a very good job of reflecting your personnal inflation rate.

Understanding the contributions for the discrepancy between your own personnal inflation rate and CPI can also be helpful.
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Re: cost of living increase question
Old 05-31-2005, 03:43 PM   #15
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Re: cost of living increase question

On a lighter note,

who the heck is th ?

and who is he impersonating now?
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Re: cost of living increase question
Old 05-31-2005, 09:10 PM   #16
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Re: cost of living increase question

th is TH when he's feeling low key and mellow.
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Re: cost of living increase question
Old 05-31-2005, 09:58 PM   #17
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Re: cost of living increase question

Quote:
Originally Posted by th

Besides real or measured inflation at the point of purchase and unmeasured inflation or improperly measured inflation, you're experiencing the death of a thousand cuts in products and services.
* Nicely put on the"invisible inflation" factor..... * *and while you can downsize -- buy a cheaper brand, or not go out to eat, there comes a point where it isn't practical, or just plain impossible.

* * *
* *
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Re: cost of living increase question
Old 06-01-2005, 03:54 AM   #18
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Re: cost of living increase question

Quote:
Theres this
http://www.allegacyfcu.org/calculato...ationrate.html

Which uses cpi related numbers with your own allocations.
I put all numbers to 0 except for medical, and it turned in a 4% inflation rate for medical care. This is completely unrealistic.
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Re: cost of living increase question
Old 06-01-2005, 05:44 AM   #19
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Re: cost of living increase question

Quote:
Originally Posted by Michael
I put all numbers to 0 except for medical, and it turned in a 4% inflation rate for medical care.* This is completely unrealistic.
Only based upon history.

JG
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Re: cost of living increase question
Old 06-01-2005, 06:05 AM   #20
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Re: cost of living increase question

Quote:
Originally Posted by VoyT
* Nicely put on the"invisible inflation" factor..... * *and while you can downsize -- buy a cheaper brand, or not go out to eat, there comes a point where it isn't practical, or just plain impossible.

* * *
* *
Not for us. We are old enough (or at least I am) so that we can cut back and downsize continuously until my demise. I don't see an end to it, other than my end in which case the problem goes away.

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