Inflation risks ?

[IMATERP]

In reviewing my action plan for semi-retirement, I fall into the category of "having a fear of not having enough." What that means, I'm not really sure - but when I have the conversation with my Parents (who are well to do, financially,) I typically blurt out that the only real risk to all of us is Inflation!

Inflation is one of those mysterious, uncontrollable factors that people who plan must take into consideration. I wonder how many people (on this site) have tried to calculate their FIRCALC using 5% or higher ? I am certain that the results wouldn't be pretty.

Anyway, I'd love to hear others thoughts on how they view the prospects of higher inflation with greater debt in conjunction with trying to spur growth in the economy.

Michael

 

[Whisper66]

Inflation is certainly a big factor. I've run firecalc and I-orp with up to 5% inflation but doesn't concern me too much. Inflation is just one factor. With higher inflation, I expect my investments will grow faster as well. If they don't, I can cut my expenses to make up for any shortfall that I need to address. Bottom line is it's good to consider inflation as well as all you variables. Just make sure you don't assume the worst of every input variable...that will drive you to never retire.

 

[bradaz2488]

Yep, Inflation & Healthcare cost are two biggest risks in our ER plan and no one has any control over these things. I assume 2.5% inflation for expenses and 7.5% for healthcare. It averages out to ~3.5% inflation rate for our 44 year ER plan. We mitigate the risk by assuming no SS or Medicare. Currently without SS/Med we run out of money at age 95 with a average inflation rate of 4.5%. If I account for SS (75% payout) then we run out of money (age 95) at 5.5% inflation. I feel pretty comfortable with this strategy, but there are no guarantees in life. We will make adjustments to spending (up/down) each year going forward to keeps us on in-line with our ER plan. I'm sure we will leave money on the table when we exit this rock, but the fear of running out of money when you are retired in your 50's is a "real" concern. Maybe when I'm 75 it will not bother me so much .....

 

[Whisper66]

One other thing that may help the discussion. I use one of the ratcheting techniques discussed by this group to set our yearly allowable maximum spend. What this means is that each year I rerun our Firecalc / I-ORP calcs to determine the maximum allowable spend our assets could support as if we just retired that year. That allows us to adjust our spending to allow for things like changing inflation, changing market returns, changing health situation,etc.... that may impact us. When the market is doing well, our max allowable spend rises. If the market is poor, it will fall. If we don't spend all the maximum allowed (typical for us), this is accounted for in the next year's calc and gives us a little more to play with. Examples of ratcheting techniques are:

I-ORP "3-Peat" - see white paper at bottom of this page... https://www.i-orp.com/

Boggleheads Variable Withdrawal method - https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

 

[brett]

Prior to early retirement I was concerned about two things. The first was inflation. The second was sequence of returns.

Our investment goal since retiring four years ago was to have a balanced portfolio that exceeded inflation by a few points. Part of that goal was to have an asset portfolio that could easily and quickly be adjusted to meet changing markets and a changing lifestyle. This includes balance between equity and fixed.

The more I read about sequence of returns the more I understood how important it was to a longer term retirement. Clearly, higher than average long term returns in the first few years of retirement, even if the long term average is the same, can make a substantial difference. This has been our fortunate experience however it is purely to luck versus any insight into future market conditions. If I was doing the planning again I believe that I would include a cushion in our calculations for sequence of returns. For at least the first four or five years. Then I would plan to re-calibrate.

 

[Luck_Club]

Inflation isn't as much concern as the Baby boom generation(BB). Here are the issues as I see them:
1) BB have tons of stocks and multiple houses. In my case between my wife and I we have 8 BB+ relatives (divorces) plus ourselves and siblings with a total of 21 houses that pass down to only 7 grand kids. my wife and I plus are siblings are just under 50 our parents are 70's, and the grand kids range between 18 down to about 10.

2) Younger BB are playing catch up right now driving PE's higher.

3) BB with stock assets will most likely be a net seller of stocks for the next 30 years.

With those two macro economic factors how will they impact the asset prices of the two commodities? My bet is rents, real estate and PE ratios will all be declining.

 

[l8_apex]

Inflation is certainly something to think about. However, one needs to look at one's own expenses and income to see which things might be impacted and which might not.

Since I've got multiple 30 year fixed mortgages (my residence and my rentals) - those costs won't change. Sure, taxes will go up, but in all likelihood rental rates will as well.

So I'd just put the question this way - if you're concerned about inflation - what items specifically are you concerned about? Will your investments rise with inflation and thus offset those costs in your budget?

I have some notes payable that are fixed rate, so they won't be so great if we get a lot of inflation. As hard as it is to believe, it seems there are some deflationary pressures floating around too - prices of milk, eggs, beef at least in my area. But the Fed is on the record as thinking that 2% inflation is their goal...

 

[OldShooter]

Ten or twelve years ago we bought a bunch of TIPS as inflation insurance, not as an investment. As things turned out they have been spectacular investments as well. YMMV on that, but if you can afford enough TIPS to cover a frugal draw then whatever the rest of the portfolio yields is just gravy.

 

[Totoro]

Inflation is the portfolio killer. That, and taxes.

I work with real returns mostly. As long as inflation stays manageable (below say 7%), in the long run it doesn't matter that much.

It will hurt ALOT though going in. Stock and bond returns could go as much as -30%, then the long term trend takes over. If inflation reverses, viola .. you get that 30% back.

Personally I believe that chances are quite high we stay in the 1% - 4% range (USD/GBP/EUR/CAD), simply because that is what central banks want from a stability perspective.

 

[bigcmagor]

Methinks inflation underpinnings are getting warmed up. We have 13 positions open at work, some of which have been for longer than 6 months. We anticipate pushing up wages to fill these positions and that means raising all salaries to be fair to existing employees. Obviously, we will be raising prices on our products to pass this additional expense along. I don't think our business is an anomaly.

 

[UnrealizedPotential]

All I know is I need at least 30% in stocks to keep up with inflation. I don't worry about anything else.

 

[H2ODude]

Methinks inflation underpinnings are getting warmed up. We have 13 positions open at work, some of which have been for longer than 6 months. We anticipate pushing up wages to fill these positions and that means raising all salaries to be fair to existing employees. Obviously, we will be raising prices on our products to pass this additional expense along. I don't think our business is an anomaly.

Already out but DW and I have noticed more help wanted signs at restaurants and other retail places.

 

[scrabbler1]

Health care costs are a bigger worry for me than overall inflation. When I got sick in 2015 and spent 12 days in the hospital (and was diagnosed with diabetes), that has boosted the risk of further costs related to my being less healthy than before. In 2016, my health care costs dropped compared to 2015 but I still had some added costs due to another ailment related to my diabetes. Will those relatively minor things occur from year to year?


Looking at my 8 years of expenses since I ERed in late 2008, I see they have risen and fallen from year to year but on the whole have risen somewhat. But some expenses have inverse relationships to each other. Income taxes and medical expenses have moved in opposite directions - in 2015, when my medical expenses spiked, my income taxes dropped some to offset part of the increase.


Like Bradass2488 and others, I assign separate inflation rates to different categories of expenses. I assign 10% to medical and 3% to everything else. My income taxes don't rise with inflation, in part because the income tax brackets are indexed to inflation. Unexpected income spikes, such as those from the more erratic cap gain distributions, can spike my income taxes. I treat the ACA premium subsidy as a negative HI premium amount, so that smooths out both categories.


Also, my longer-term ER budget goes out to age 65, not beyond it, because my important ER years are those leading up to the time when I gain unfettered access to all of my reinforcements such as SS, my tIRA, and my frozen company pension. I use Fidelity's RIP program (I am Fido client) to view my long-term picture which only improves a lot after age 65. Even after age ~60, when I can begin accessing my tIRA, things only get better. I am only 5 years away from that.

 

[OldShooter]

... Personally I believe that chances are quite high we stay in the 1% - 4% range (USD/GBP/EUR/CAD), simply because that is what central banks want from a stability perspective.

Probably right, but remember Taleb's turkey: Nassim Taleb's Black Swan Thanksgiving Turkey - Business Insider

The risk I worry about is a decline in the dollars standing as the world's reserve currency. Granted, there are no competitors right now, but in 5-10 years the yuan and the Euro could find their way into a basket of currencies that also includes the dollar. That will result in a significant decline in the value of the dollar. After all, with debt well in excess of GDP, it is only the reserve currency status that is holding the dollar up.

With a dollar decline we will have severe inflation that the fed and other central banks can do nothing about. The cost of imports (clothes, electronic devices) will rise, as will oil, food, and other items whose markets are international. How much? I could certainly see 20% or more.

So that's why we hold a bunch of TIPS as insurance. I also insure my house against fire, though I hope we never have a fire.

 

[audreyh1]

All I know is I need at least 30% in stocks to keep up with inflation. I don't worry about anything else.

Yeah, pretty much, although I keep my equities allocation higher due to better long-term survival characteristics.

 

[97guns]

I sleep well at night with RE and Gold, RE for the income and Gold to protect my retirement, both do well in inflationary scenarios

 

[Totoro]

With a dollar decline we will have severe inflation that the fed and other central banks can do nothing about.

Not necessarily. The USD went up pretty strong (+15% - +30%) vs. several currencies in less than a year (Jul 2014 - Mar 2015), and we didn't see strong deflation.

Or conversely, the EUR took a dive yet the eurozone didn't see inflation in that same period. I think it's mostly because the internal markets are so big and most inflation indexes leave out energy commodities, but I'm no expert.

I agree with you in the black swan department, things may get out of control just like one could get hit by a truck tomorrow. Contingencies matter.

 

[OldShooter]

Not necessarily. The USD went up pretty strong (+15% - +30%) vs. several currencies in less than a year (Jul 2014 - Mar 2015), and we didn't see strong deflation.

Of course. Sellers are not going to cut prices with speed or enthusiasm. The recent strength of the dollar against the Euro has not, AFIK, caused the price of French wines to come down in the US either. The markets take time to react to things like this, but raising prices will come more quickly than lowering prices.

Or conversely, the EUR took a dive yet the eurozone didn't see inflation in that same period. I think it's mostly because the internal markets are so big and most inflation indexes leave out energy commodities, but I'm no expert. ...

Indexes are abstractions. The real world is what do oil-based products cost? Ditto the "core inflation rate" in the US is kind of phony. & actually I have seen stories about prices on products imported into the UK being raised because of the Brexit decline in the pound. (https://www.theguardian.com/busines...e-for-further-brexit-price-rises-surveys-show)

None of these are instant effects because they are subject to market frictions and strategies, but in the end water finds its level as do unmanipulated exchange rates.

I am not an expert either but years ago I benefited from taking a week-long small-group and very intense immersion course on international finance taught by Mike Porter of Harvard. (https://en.wikipedia.org/wiki/Michael_Porter) I learned a lot. It has shaped my investing ever since.

 

[W2R]

Anyway, I'd love to hear others thoughts on how they view the prospects of higher inflation with greater debt in conjunction with trying to spur growth in the economy.

We haven't had much inflation for decades, so I think it's important that we do not forget that inflation can happen, and that we consider it when devising a financial plan for retirement.

Beyond that, I don't really have much confidence in cause-and-effect or timing of inflation.