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Modeling and planning
Old 06-11-2010, 04:39 PM   #1
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Modeling and planning

I've got a long term plan to allow us to retire in about 7 years. I've got hard data on several years expenses from Quicken and that sort of thing that I use to forecast expenses in retirement. Now, I'm fully aware that extrapolating 10+ years into the future is likely to produce huge errors but I think having some estimate is better than none.

I've had this model for several years, not necessarily targeting a particular retirement date, just to track and forecast expenses. I have modeled some expenses based on the price of oil (airline tickets for travel, utilities) and others using a general inflation model.

It occurs to me that a much higher proportion of our expenses in retirement will be affected by the oil price, mostly because of travel and utilities because where we will live the electric rates fluctuate widely with oil prices. Many retirees must be in a similar boat. Does anyone incorporate things like this in their projections? Do you try to hedge the price of oil by owning certain kinds of stocks?
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Old 06-11-2010, 04:49 PM   #2
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No, I just add a half percent to the usual average inflation factors and plod right along. In other words, instead of around 3%-3.5%, I used 3.5%-4%.

It is always best to allow a little "cushion" in your estimates. You can't control ALL of the factors that could conceivably go into such a model (and there are many others besides oil price inflation! Medical insurance costs come to mind as a big unknown to me right now), but with some cushion you really don't have to. Besides, there will be plenty of chance to tweak during the ten years between now and your ER date.
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Old 06-11-2010, 04:58 PM   #3
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Like W2R I don't presume to know what will happen down the road so incorporate a cushion. I also use an inflation rate of 3.5%, a SWR of 3.5% and pad my expenses by about 20% when projecting out into the future. Like you I'm roughly 7-8 years out from FIRE.

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Old 06-11-2010, 05:00 PM   #4
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No, I just add a half percent to the usual average inflation factors and plod right along. In other words, instead of around 3%-3.5%, I used 3.5%-4%.

It is always best to allow a little "cushion" in your estimates. You can't control ALL of the factors that could conceivably go into such a model (and there are many others besides oil price inflation! Medical insurance costs come to mind as a big unknown to me right now), but with some cushion you really don't have to. Besides, there will be plenty of chance to tweak during the ten years between now and your ER date.
Yeah, I guess I don't expect to be precise. I was just wondering if others have considered and solved this problem. Surely the RVers must be very sensitive to oil prices. Seems to me that if I have stock in a company involved in the right stage of the oil or gas business I should be able to hedge this. We've done a similar thing for our natural gas utility. We own enough stock that the dividend almost pays the bill.

I do have a separate projection for health care. We get health care as part of our retirement programs at the rate it is available to employees of our state. So, while it is still going to be unpredictable we will at least have the negotiations for current state employees working in our favor. That could all change but I think it is unlikely.
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Old 06-11-2010, 07:21 PM   #5
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Yeah, I guess I don't expect to be precise. I was just wondering if others have considered and solved this problem. Surely the RVers must be very sensitive to oil prices. Seems to me that if I have stock in a company involved in the right stage of the oil or gas business I should be able to hedge this. We've done a similar thing for our natural gas utility. We own enough stock that the dividend almost pays the bill.

I do have a separate projection for health care. We get health care as part of our retirement programs at the rate it is available to employees of our state. So, while it is still going to be unpredictable we will at least have the negotiations for current state employees working in our favor. That could all change but I think it is unlikely.
I think you are trying to make this too complicated and exposing yourself to risks you don't need to take. It looks like you have the biggest bugaboo (for most of us) at least partially covered - health care. RVing is something that you can control. If gas prices get out of hand you can cut back on the distances traveled.

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Old 06-12-2010, 08:32 AM   #6
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I'm too lazy to track every little expense, but the major expenses have been relatively flat/stable since 2005.
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Old 06-12-2010, 09:15 AM   #7
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I think you are trying to make this too complicated and exposing yourself to risks you don't need to take. It looks like you have the biggest bugaboo (for most of us) at least partially covered - health care. RVing is something that you can control. If gas prices get out of hand you can cut back on the distances traveled.

Thanks. I realize I've turned this into an academic exercise as much as anything. But after some of the things I've read on here I'm surprised someone has not done something similar.
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Old 06-12-2010, 12:19 PM   #8
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Thanks. I realize I've turned this into an academic exercise as much as anything. But after some of the things I've read on here I'm surprised someone has not done something similar.
I'm sure some have. I just don't see the need, and like I said there is risk involved.

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Old 06-12-2010, 12:19 PM   #9
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Estimating for something you have no idea of cost is kind of a moot process.
Instead while you have control of it set goals a bit high for savings
and exceed it. My last 10 years before retiring the first time I would not take vacation until I was 50K in savings more than the last time I took vacation.
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Old 06-12-2010, 01:32 PM   #10
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There is good reason to be concerned about inflation in general: Kiplinger
and to have an expectation that retirees will face a personal rate of inflation which is higher than inflation in general (as measured by CPI or similar): Seniors Lose 24% of Buying Power Since 2000

Like W2R I assume that my personal rate of increase in expenses will slightly outpace CPI and like DblDoc I have padded my expenses by assuming that my spending in retirement will be about 20% higher than now. I have made no attempt to overanalyse line item increases.

I also have three other safeguards (i) I will still be supporting two young children when I retire. I have made no allowance for the fact that at some point they will cease to rely on me for financial support (ii) we have a lot of luxuries in our budget so there is plenty of room to cut without reducing ourselves to a beans and rice diet and (iii) we will have a paid off home and could realise some or all of that value should the need arise - none of these are part of the plan, but if the need arises there is a fall back.
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Old 06-12-2010, 02:47 PM   #11
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The only adjustment I make is for medical costs. These are a significant percentage of total spend and are on a trend line to inflate above the average. I normally use an average inflation rate of around 3% for non-medical and 7% for medical.
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