Inflation question

[BigE]

I have become a big fan of firecalc thanks to this forum. When using firecalc I usually use the default CPI but have also played around with changing the inflation percentage. Similar to other posters, I'm shocked at the difference a small change in inflation creates. So first question: What percentage do most use for this?
Second question: If a retirees house is paid for and they generally use common sense frugal behavior (buy used cars and use coupons, etc), does inflation have less of an impact during retirement years? I guess there are no retirees on the forum that have been retired during a period of high inflation, but I am curious as to any thoughts on this. Thanks

 

[GrayHare]

If your house is paid off, higher inflation has more negative impact than if you have a mortgage. With a fixed-rate mortgage, you repay via inflated (devalued) dollars, which means the lender is absorbing inflation's bite instead of you.

 

[rodi]

BigE - I've talked to my mother in law about this. She has observed that even inflation adjusted income (SS, pension) do not keep up. Her example is that the COLA associated with SS rarely cover the increase in medicare premiums. (She and FIL were low wage earners.... but fortunately, still managed to save a lot.)

Housing is just one part of the inflation pie. Coupons will help you with food, but not gas for your car. Your house may be paid for - but home heating costs still remain. And depending on where you live - property taxes can escalate pretty high on that paid for house.

 

[Animorph]

If your house is paid off, higher inflation has more negative impact than if you have a mortgage. With a fixed-rate mortgage, you repay via inflated (devalued) dollars, which means the lender is absorbing inflation's bite instead of you.

+1. Inflation is good if you're a fixed-rate borrower. And don't buy anything...

I think CPI is your best bet with FIRECalc. That keeps the inflation and market gains properly historically matched. Using a fixed number will minimize the problems of the 60's and 70's, probably making them easier to survive. Setting inflation separately from market growth can also inflate or deflate your portfolio, also depending on spending that is or is not dependent on inflation. Typically it is good to select a real rate of return and an inflation rate. Then for market growth use the sum of the two.

 

[imoldernu]

We have been through several inflation periods, first time just after WW2, then around 1974 and finally between 1979 and 1983. I think they were different from what we may see in the future. On a personal basis, the 1974 through 1984 inflationary period was matched by personal promotions with substantial salary increases, which took much of the bite out of price increases. We also took advantage of increased home prices when we sold as we moved.
In 1983, we were giving some thought to buying a dream home in the mountains, for vacations and possible retirement. We found the home, and at the right price. It went as far as drawing up the contract, and died when, on the day of signing, the bank raised the mortgage rate from 11.1% to 12.6%... (thank goodness).
At this point, 24 years into retirement, we don't see much in price changes that will affect us greatly. We already have the last cars we'll ever own, and travel less than 7500 miles per year, our homes are paid for, and we're settled enough to be content with the belongings we already have. This year or next, we'll drop our Florida snowbird home and associated expenses. Healthcare is pretty well fixed, so the only major inflation factors will be food, energy, and TV/ internet (our only entertainment costs).

This was not the case during our first 10 - 15 years of retirement, as we were much busier with life in those years.

 

[BigE]

Thanks for the input. I guess in my simple way of thinking, most persons in retirement are not in such a high consumption mode and I would think could also more easily modify consumption. House paid off, college for kids paid for...keep driving the same old clunker for shorter distances, etc.

 

[youbet]

Thanks for the input. I guess in my simple way of thinking, most persons in retirement are not in such a high consumption mode and I would think could also more easily modify consumption. House paid off, college for kids paid for...keep driving the same old clunker for shorter distances, etc.

You have to plan for yourselves.

Almost 7 yrs into FIRE, and in a period of low inflation, we find we need noticeably more bux to do the same things now than in 2006. We got a break during the recession when dining out and some other things actually got cheaper. But prices for restaurants, entertainment, groceries, energy, real estate taxes, etc., are all on the move again.

I'd test your plan with historical CPI in FireCalc. Don't make the mistake of talking yourself out of the impact of inflation.

 

[Animorph]

Thanks for the input. I guess in my simple way of thinking, most persons in retirement are not in such a high consumption mode and I would think could also more easily modify consumption. House paid off, college for kids paid for...keep driving the same old clunker for shorter distances, etc.

You may not buy as much absolute stuff, but all of your expenses are still "consumption". Only a few expenses are not subject to inflation (mortgage P&I comes to mind).

 

[Tyro]

I have become a big fan of firecalc thanks to this forum. When using firecalc I usually use the default CPI but have also played around with changing the inflation percentage. Similar to other posters, I'm shocked at the difference a small change in inflation creates. So first question: What percentage do most use for this?

I've been using 3.25% - 4%, based on Decade Inflation Chart

FWIW, SmartMoney Retirement Planner - SmartMoney.com allows you to adjust/use different inflation rates for different expense categories (Housing, Transport, Medical, Essentials, Discretionary). By breaking down expenses, it's possible to assign a weighted average for use in FireCalc.

Thanks for the input. I guess in my simple way of thinking, most persons in retirement are not in such a high consumption mode and I would think could also more easily modify consumption.

Also, some theories state consumption/expenses tend to be higher in early retirement than in later years.

Tyro

 

[ejman]

In retirement there is great freedom to implement one's own version of "chained CPI". One is free to move pretty much anywhere and dial in one's preference for things such as weather, taxes, rural vs city etc etc. Likewise, it's easy to substitute and improvise. Produce goes thru the roof - we grow our own. Gas prices spike? I no longer have to commute to a job so instead of driving to town every day, once a week will do. If I'm really serious about it, move to an area of town within walking distance of grocery stores etc. Gas prices no longer a factor. To me the essence of ER is that I pretty much have maximum freedom (as is possible in this world anyway) to change my environment to suit my needs. And that includes dealing with inflation.