Inflation and Magic Number

[Brian]

How do you account for inflation when setting your magic number?

The amount I would expect to spend if I retire today will be less than what I would expect to spend next year if I hold everything constant except inflation.

The rule of thumb seems to be calculate what you expect to need/spend and you should have investments of 25 times that to limit your withdrawal to 4%. So if I'm currently expecting to spend $100K today, I should have $2.5M in investments.

If I wait a year and expect to spend $104K ($100K + 4% inflation), then I should have $2.6M in investments.

Does the 4% withdrawal rule take into consideration inflation so that next year my spending could increase to $100K + inflation?

 

[HFWR]

Does the 4% withdrawal rule take into consideration inflation so that next year my spending could increase to $100K + inflation?

Yes, though there's been a fair amount of discussion around here about whether that's valid...

 

[jebmke]

I always do my analysis in constant dollars.

 

[imoldernu]

Leaving this here as a bookmark. It spoke to me.

Covers inflation in historical perspective. Long read.

 

[nun]

Yes the 4% SWR includes inflation. But a big issue in deciding "your number" I'd your actual spending. If I was to use 80% replacement income to calculate my number I'd need to save multiple millions. My actual number is one million as I'm frugal.

 

[Brian]

Thanks for the responses. I always thought 4% sounded low. But now it makes more sense to me. In my own spreadsheets I looked at the return on my investment and inflation as two separate issues.

 

[panacea]

Another way to look at it... if you can average 7% on your investments and inflation averages 3%, you can afford to draw 4% from your portfolio forever.

 

[devans0]

The 4% rule to compute in current dollars is what i use most, I also like to use the rule of 72 to get my head around future numbers.

In 24 years, inflation at 3%, will drive up costs to double the dollar price to buy an item. 72/3 = 24. Or from the other side, my non-cola pension buy half half of what it does, in that same twenty four years.