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Count inflation as an expense?
Old 02-08-2015, 03:13 PM   #1
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Count inflation as an expense?

When using Quicken, should I count inflation as an expense? For example, expenses list:

-Utilities $130 (per mo)
-Medical bills (varies)
-Inflation (I multiply total liquid assets by estimated inflation rate) ... This comes to a whopping $500 per month! )

For example, 300K in total assets x .02 (2%) = $6000/yr divided by 12

Figuring inflation is eating up my principal, it should be counted as an "expense" along with home expenses, utilities, etc. Or is this an error
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Old 02-08-2015, 03:22 PM   #2
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Your post is confusing. Inflation is handled outside of expenses. For what reason are you entering inflation estimates into Quicken? Are you trying to estimate "your number"? Firecalc allows you to estimate inflation in one of the tabs to guage PF success. Is this what you're looking for, PF succes rate?
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Old 02-08-2015, 03:46 PM   #3
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Originally Posted by Options View Post
Your post is confusing. Inflation is handled outside of expenses. For what reason are you entering inflation estimates into Quicken? Are you trying to estimate "your number"? Firecalc allows you to estimate inflation in one of the tabs to guage PF success. Is this what you're looking for, PF succes rate?
I'm looking for how much I can spend per year so that my PF value is the same or greater than it was in the beginning of the year (I have a fixed income plus investments)
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Old 02-08-2015, 03:53 PM   #4
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Honestly I think it would be better to use a spreadsheet to do this, especially due to the compounding effect.
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Old 02-08-2015, 04:24 PM   #5
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I figure a separate inflation rate for each of my expenses, because they demonstrate different inflationary influences. I started with a spreadsheet, and later wrote a JavaScript app:


Income/Expense Analyzer


Works in Firefox, IE11...
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Old 02-08-2015, 04:51 PM   #6
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I've always considered inflation more of a reduction of principal instead of an expense. The main thing IMO is that you have a way of factoring it in, and you certainly are doing that.
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Old 02-08-2015, 04:57 PM   #7
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I consider inflation as an 'adjustment' to 'real return' when estimating portfolio impacts to expenses (which include taxes).


If return on investment (after expense ratios,etc) is say 5%, I also estimate that inflation will be say 3%, therefore 'real' return will only be 2%.


I bracket estimated impacts over different time frames with different returns and inflation.
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Old 02-08-2015, 05:09 PM   #8
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Originally Posted by jqrz View Post
When using Quicken, should I count inflation as an expense?
This depends on why you are tracking your expenses.
Different people will do different calculations because they are asking different questions.
Maybe if you write out your reason for tracking expenses, the answer will be clear.

For example, we track expenses so we can see whether this year's spending generally reflects our priorities. "Gee, we're spending more on meals in restaurants then we give to charity" might be an observation that would lead us to change our spending. I don't think that calling the "loss of purchasing power on my assets" (which seems to be what you're entering) an "expense" really helps with that discussion. Maybe you would see a use.

And, we track expenses so we can make big decisions. "Can I afford to retire?" is a big question. Knowing expenses in enough detail to think about what might go up or down after retirement, and where we should allow for the rare but large expense, and how much we're spending on discretionary that could be cut if needed, can help us decide how much retirement income we'll need.
Again, the loss of purchasing power on our assets doesn't seem to be an important factor there. It's on the other side of the ledger - determining how much income we will have available.

But, maybe you want to do a full reconciliation of beginning of year assets, plus income, minus expenses, equals ending assets. Maybe you want to do an constant-dollar adjustment on the ending assets. If so, somewhere on your worksheet you need an charge for lost purchasing power. Now you need that number. In my case, I calculate the number, but it's in a worksheet outside Quicken. Maybe you're doing more with Quicken than I am, so it makes sense for you to enter it there.
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Old 02-08-2015, 05:51 PM   #9
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Just some thoughts not based on sound accounting principles.

Why multiply by total liquid assets? If they earn no income, and their value is not pegged to something that goes up with inflation, i.e. stocks do over time. It seems like inflation is included.

Multiplying this years spending to determine what next years might seem reasonable, but then it would be in each category. You could do total only, but some things might go up with inflation and others don't i.e. if you have a mortgage, or car payment it does not increase with inflation.

Your expenses for a year already have inflation built in. You either paid more for a good or service this year than last. You may or may not pay more next year.

If you built a spread sheet to model your assumption, would you increase expenses each year by inflation, decrease available funds by inflation, and then subtract expenses from available funds?
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Old 02-08-2015, 06:07 PM   #10
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You can use Quicken's Lifetime Planner assuming you have Quicken Delux. There is a place in it for you to put inflation as a percent. You can then click on each bar in the generated bar chart and see how much you would spend in each category in any year. You can display the bar chart with or without the effects of inflation. The Lifetime Planner is based on a simple inflation factor so it does not show a range of outcomes like FIRECalc.
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Old 02-08-2015, 06:12 PM   #11
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when I first read this I just thought now backwards it was. But thinking further... some planners like the Fidelity Retirement Income Planner (RIP) does allow you to see what the results are in present day dollars or future dollars. Other than the obvious errors in guessing investment returns and the inflation rate... I think doing it using today's dollars (OP method) is that in 10 years you're looking at 10 year old dollars. doing it using future dollars now... you have to remember that they don't buy as much.

Nice way to see how inflation eats at your savings if not well invested
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Old 02-08-2015, 06:36 PM   #12
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Quote:
Originally Posted by jqrz View Post
When using Quicken, should I count inflation as an expense? For example, expenses list:

-Utilities $130 (per mo)
-Medical bills (varies)
-Inflation (I multiply total liquid assets by estimated inflation rate) ... This comes to a whopping $500 per month! )

For example, 300K in total assets x .02 (2%) = $6000/yr divided by 12

Figuring inflation is eating up my principal, it should be counted as an "expense" along with home expenses, utilities, etc. Or is this an error
If you are talking about within Quicken Lifetime Planner, the answer is NO. QLP has a separate inflation assumption for your living expenses. If you list other expenses individually as special expenses, then they can each have a separate inflation assumption if you wish.

Then in the Lifetime Planner results, you can look at your retirement assets projection on a real basis (today's value) or on a nominal basis (future value).
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Old 02-08-2015, 06:49 PM   #13
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You won't know what the inflation number was until the end of the period in which it occurred, plus some reporting delay. And that will just be some vague average that doesn't really apply to everybody and everything.


Each year I increase our total budget by the CPI inflation number used for Social Security. I then allocate the additional inflation money to budget categories that ran tight during the past year or will definitely require increases for the coming year.


If you want to know how you did versus inflation, I'd wait until that number comes out and see if your portfolio gains exceeded that gain after your expenses were taken out.


Anything beyond looking ahead for a year I think you'll need a spreadsheet to handle the compounding, as others have already noted.
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