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Re: Official ER Forum January Inflation Report
Old 01-18-2007, 04:24 PM   #41
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Re: Official ER Forum January Inflation Report

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Originally Posted by ESRBob
SG -- now I am worried. I actually do fit your definition, as our expenses are so predictable, year after year-- they are always a couple percent more than the past (for 6 years now), which I guess means we are squeezing ourselves by about 1% a year in real terms. In fairness, I do commit the trick of not counting the car purchases -- since I keep them 9 or 10 years and add an amortization factor into our budget I give myself the fig leaf of saying I don't spend any more for a car in the year I buy it than I do any other year I own it. Same with the year we painted the house.

My hat is off to you though for having a much more interesting life! Several weeks in France sounds like my idea of a heckuvalot better summer than I'm used to. Hopefully when the kids are grown things will get more flexible. Then again, maybe I just like routine.. still plodding along even though I don't have an office to plod into? Hmmm....

Hey, good luck with the new book-- bet you're glad it's over!
I envy you when it comes to planning. If it works for you, it works.

I do find if amazing that your year-to-year spending tracks that accurately. Do you ever discover different grocery items? splurge on entertainment? etc.? or is it that you have incredible discipline and budget your spending by category on a month-to-month basis?
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Re: Official ER Forum January Inflation Report
Old 01-18-2007, 05:10 PM   #42
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Re: Official ER Forum January Inflation Report

If our intent is to have the FIRECalc results be relevant to us, then we should use the same inflation number that Dory did. So I take back this entire thread.

One other comment on using your spending to calculate your inflation: We are using the inflation number to determine our spending. If we then use our spending to determine our inflation number, we've got a problem. If you follow the rules, then your inflation number will be the same for the rest of your life.
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Re: Official ER Forum January Inflation Report
Old 01-18-2007, 05:59 PM   #43
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Re: Official ER Forum January Inflation Report

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Originally Posted by TromboneAl
If our intent is to have the FIRECalc results be relevant to us, then we should use the same inflation number that Dory did. So I take back this entire thread.
You can't do that. the rules don't permit it.

Quote:
One other comment on using your spending to calculate your inflation: We are using the inflation number to determine our spending. If we then use our spending to determine our inflation number, we've got a problem. If you follow the rules, then your inflation number will be the same for the rest of your life.
Bingo, or close. Whatever Dory uses we have to use and that is CPI-U, right? Debate over.
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Re: Official ER Forum January Inflation Report
Old 01-18-2007, 06:47 PM   #44
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Re: Official ER Forum January Inflation Report

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Originally Posted by TromboneAl
If our intent is to have the FIRECalc results be relevant to us, then we should use the same inflation number that Dory did. So I take back this entire thread.
Bye thread! I'll miss you!

I guess I shouldn't point out that Dory's calc lets you use CPI, PPI, or your own inflation rate, eh?
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Re: Official ER Forum January Inflation Report
Old 01-18-2007, 08:03 PM   #45
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Re: Official ER Forum January Inflation Report

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Originally Posted by wab
Bye thread! I'll miss you!

I guess I shouldn't point out that Dory's calc lets you use CPI, PPI, or your own inflation rate, eh?
So if you used Dory's calc to determine if you are ready to retire and you want some comfort that it is correct then once you have retired you need to apply the same WD rules (i.e. same inflation figure) you used in the calculation in the first place. The use of different WD rules voids the warranty.
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Re: Official ER Forum January Inflation Report
Old 01-18-2007, 09:56 PM   #46
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Re: Official ER Forum January Inflation Report

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Originally Posted by TromboneAl
If our intent is to have the FIRECalc results be relevant to us, then we should use the same inflation number that Dory did.
So what you're saying is that if your personal rate of inflation is higher than what you calculated with firecalc, its a good idea to not discover that fact and just keep investing and withdrawing per the firecalc run?

That should work out swell.

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Re: Official ER Forum January Inflation Report
Old 01-18-2007, 10:33 PM   #47
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Re: Official ER Forum January Inflation Report

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Originally Posted by sgeeeee
I envy you when it comes to planning. If it works for you, it works.

I do find if amazing that your year-to-year spending tracks that accurately. Do you ever discover different grocery items? splurge on entertainment? etc.? or is it that you have incredible discipline and budget your spending by category on a month-to-month basis?
Yeah, I am kinda amazed by it, too. We do use the monthly budget, though, as a guidepost. I put the same amount into the checking acct every month, and if the line-of-credit notices start filtering in, we both know its time to pull back a bit. Even if they don't come in, we know a crazier month needs to get followed by a calmer one.

Still, I thought you were the engineer and would have lifestyle and spending down to a very tight science, but it turns out that you're the spontaneous one and artist-bob is the boring old phart! Man, I gotta retire and loosen up or something...
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Re: Official ER Forum January Inflation Report
Old 01-18-2007, 10:54 PM   #48
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Re: Official ER Forum January Inflation Report

Wow - this is fascinating how some people's annual expenses are so predictable and other's are no where near predictable!

Since retiring 7.5 years ago, we've made significant lifestyle shifts about every 2 years, resulting in a drastically different budget or allocation of expenses. This has meant that it's virtually impossible for me to calculate our inflation rate because the basket keeps changing!

But we still somehow live within our means - kind of instinctively knowing how much we can splurge if we are so inclined, etc., etc.

Of course we track our spending in fine detail (thanks to a lot of automatic input and tracking done by Quicken), so we always know how we are doing YTD. I suppose this is really the crux of how we avoid overdoing things.

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Re: Official ER Forum January Inflation Report
Old 01-18-2007, 11:51 PM   #49
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Re: Official ER Forum January Inflation Report

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Originally Posted by ESRBob
. . . Still, I thought you were the engineer and would have lifestyle and spending down to a very tight science, but it turns out that you're the spontaneous one and artist-bob is the boring old phart! Man, I gotta retire and loosen up or something...
It's interesting you mention the engineering vs artist thing. I have a lot of friends who are artists -- ceramacists, sculptors, painters, . . . I've always found their descriptions of how they work to be very similar to engineering. There is a part of the process that is purely creative. You have to think about the problem and envision the end result. The problem of creating a vessel out of clay, an object out of metal, or a picture out of paint & canvas is certainly different than creating an electrical function out of metal and semiconductors, but not as much different as some might think. To observers, it looks like you are doing nothing during the creative part of the process. You are thinking and maybe making some sketches or calculations. If the problem is complex enough, you might even conduct some experiments to see if the overall vision can be put together.

At some point, you have to execute -- put clay on the table, paint on the canvas, components on the board, . . . This requires a completely different mindset from the creative process. It requires more discipline and implementation.

If you're going to achieve any success, you have to be able to do both (creative and execution) and shift gears when the time is appropriate. If your creative vision is incomplete or flawed, so will the final realization. If you have great vision but your execution is flawed, you still fail.

I always enjoyed the creative part of the engineering process and I learned to apply the discipline I had to in order to complete the solution. At first, I looked at my time during the execution phase as committing slow suicide. Eventually, I came to accept that this phase was required to gain a deeper level of satisfaction. And at some point, I actually became efficient at switching gears between the tasks when I needed to.

Financial planning is like the execution phase of engineering to me. It is a necessary evil. I have the mathematical skills to read the most technical financial articles, but I would rather go camping. I managed very large corporate budgets when I was working, but I have no desire to apply this kind of discipline to my own life. Fortunately for me, I don't have to.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 12:20 AM   #50
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Re: Official ER Forum January Inflation Report

I think this thread hit on some interesting points. So, help me connect the dots.

1) Inflation happens, but we have no control over price increases (other than reacting by substitution, etc).

2) Our spending is dominated by lifestyle choices.

3) Within that lifestyle, our spending is dominated by discretionary choices.

In my experience, none of these factors (lifestyle changes, discretionary spending, inflation) are very predictable. And, of course, investment returns aren't very predictable either.

So, basically all ER's are on a Big Adventure. Do what you can to prepare, and when all else fails, ADAPT.

Did I miss anything?
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 12:27 AM   #51
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Re: Official ER Forum January Inflation Report

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. . . Did I miss anything?
Shouldn't you say something about dryer sheets and kayaks?
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 11:18 AM   #52
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Re: Official ER Forum January Inflation Report

Interesting that we spend a lot of time measuring and running simulations only to propose that none of it is measurable or predictable, so its a waste of time

If you added

4) We should make sure our investment philosophy reflects realistic expectations of returns and inflation as we experience them

then we'd have a nice list.

Remember that my key point all along is that people should periodically look at their investments, lifestyle and the effects of inflation and make sure they're making enough money to offset their spending and the rising cost of living.

Should one discover that their spending is rising at a rate faster than their expected withdrawal rate, whether due to the effects of inflation, lifestyle changes or unpredictable events, their investments may need to be adjusted to suit.

I guess because I factor in amortized figures for every capital replacement or situation I can think of, then add a 30% pad to account for the "unknown", my budget never exceeds my expectations. Perhaps people playing it a little too close to the waterline might not be so lucky.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 11:54 AM   #53
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Re: Official ER Forum January Inflation Report

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Interesting that we spend a lot of time measuring and running simulations only to propose that none of it is measurable or predictable, so its a waste of time

If you added

4) We should make sure our investment philosophy reflects realistic expectations of returns and inflation as we experience them
Honestly, I do think it's laughable that we give so much weight to the idea that past is prologue -- that we can extrapolate trends via straight-line approximation. But it's human nature to look for patterns, I guess.

T-Al wants to answer the question "what sort of raise should retirees get this year?" I think it's clear that there is no general answer to that question.

You want to answer the question "what sort of offset should we add to the CPI to aid our investment planning?" I think it's clear that it's *very* hard to figure that out.

Cost of living is not just about prices. Maybe the closer you get to a barebones budget, the more it is.

So, once you hit barebones, can you find the CPI offset? What if, for example, health insurance premiums stay constant, but *your* premiums go up due to increasing age? That's not generally considered inflation, but we are destined to feel the effects.

I do think planning for a rising cost of living is prudent. Personally, I don't know how to predict or plan for a specific magnitude. So, I buy health care stocks to hedge againt rising health care costs. Oil stocks to hedge against energy inflation. And a mix of nominal and CPI-linked bonds since I don't know if the bond market is high or low in its inflation estimates.

What do you do?
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 01:08 PM   #54
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Re: Official ER Forum January Inflation Report

Quote:
I think this thread hit on some interesting points. So, help me connect the dots.

1) Inflation happens, but we have no control over price increases (other than reacting by substitution, etc).

2) Our spending is dominated by lifestyle choices.

3) Within that lifestyle, our spending is dominated by discretionary choices.

In my experience, none of these factors (lifestyle changes, discretionary spending, inflation) are very predictable. And, of course, investment returns aren't very predictable either.

So, basically all ER's are on a Big Adventure. Do what you can to prepare, and when all else fails, ADAPT.
Yes, that's what I intended when I started the thread.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 01:24 PM   #55
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Re: Official ER Forum January Inflation Report

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Yes, that's what I intended when I started the thread.
Sarcasm?

How about a new thread with a methodology? E.g., everybody gives the delta between 2006 spending and 2005 spending (as a percentage). Then you could scatter plot and do a regression.

Then repeat that every year for the next 10 years, and maybe we'd have something we could compare to the CPI.

Then what would we do with that information?
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 01:39 PM   #56
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Re: Official ER Forum January Inflation Report

Not particularly worthy of doing in a broad spectrum, imo.

I suppose if we spent a quarter of the time we're spending crapping on the idea actually trying to find out what goodness is in it, we might have a solution.

This aint that hard. My investments need to make as much as i'm spending. My spending goes up, I either need to make more (higher return, higher risk portfolio), reduce my spending (basket substitute or elimination of non essentials) or make the conscious decision to consume more principal than I had previously considered.

Why I'd want to use a number based on a working person who rents in the city and doesnt pay health care when most of us own a home, live outside the urban area and pay our own health care is the real mystery...

Seems like we're uncovering an interesting piece of data already...that many people see no inflationary effect on their spending, a significant drop in their spending after retiring, and in some fair number of cases a decrease over time in spending, coupled with a proposal that our spending in old to very old age may drop further and at a sharper rate.

So perhaps its plausible that inflation is nothing whatsoever to worry about and we're all taking on far too much risk in our investments to try to overcome something that has no influence on us.

Except for that whole Joe Dominguez thing.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 01:53 PM   #57
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Re: Official ER Forum January Inflation Report

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I suppose if we spent a quarter of the time we're spending crapping on the idea actually trying to find out what goodness is in it, we might have a solution.
I'm with you. Sort of. I love to measure stuff, but let's clarify what we're looking for.

I'd be interested to know absolute spending and percentage change vs prior year by age, family size (and kid(s) age(s)), location, and retired/working status. It'd also be cool to break out several factors: travel, food, health insurance, etc.

Ambitious, but doable. Anything less would be not-so-useful, I think.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 01:55 PM   #58
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Re: Official ER Forum January Inflation Report

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Sarcasm?
Just being silly.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 02:07 PM   #59
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Re: Official ER Forum January Inflation Report

CFB, you and I are in a similar position in terms of having kids. My oldest daughter and your Gabe are two months apart. How did you, in your particular situation, account for the change in spending due to change in familial circumstances when determining your year over year spending % change to get at a personalized CPI? For example, your 2004 expenses didn't include any child-related expenses. 2005 and 2006 did.

For me, I had zero children in 2004, 1 in 2005, and a cumulative total of 2 in 2006. My expenses are obviously going to increase, but how do I allocate the year over year expense delta between the increase in family size and the increase in the price of goods and services?

We also had many extraordinary healthcare expenses in 2006, approaching $8-9k (LASIK surgery, a couple of crowns, a couple of root canals, baby delivery, etc). This year we won't have any of that it seems. Same for one offs like remodeling jobs. I don't plan on remodeling both bathrooms, building a storage building, building a roof over the porch, renovating the fireplace and building a wall of bookshelves and cabinets like I did in 2005 and 2006.

My needs vary so much year to year that it seems virtually impossible to get an apples to apples comparison of year over year personal inflation. And when it comes to figuring it in the future, I'd rather budget my expected needs, and add a simple estimate of inflation (CPI for most stuff, maybe CPI+3 for healthcare and CPI+2 for kids' college costs).

Seriously, CFB, I'm curious how, if at all, you account for changes in spending patterns.
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Re: Official ER Forum January Inflation Report
Old 01-19-2007, 02:21 PM   #60
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Re: Official ER Forum January Inflation Report

I think the problem at hand is that I know what the problem is and am looking for how to measure it - how much is my spending going up due to inflation (and other factors) and how much do I need to worry about that when choosing my investments. Eminently doable and useful, at least to me.

Looks like you want to create a bunch of data and then see what it tells you.

Justin - I guess I'm a weirdo. I know what everything I buy costs and I take note when the prices go up and down. My budget breaks out the non-discretionary costs from the larger discretionary ones you mentioned. One time costs are also separate. Magic baby appearance resulted in another budget category added to the non-discretionary and several presumed large expenses added to the discretionary budget, like preschool costs, private school costs, college, buying my wife another new car when we pass down the 16 year old lexus to gabe, etc.

In short, I can pull up my budget and see what chunk is non-discretionary and what parts of it are rising. Electric, food, tv, internet, etc. I also periodically update my large/capital/periodic purchase plans with newer, usually higher figures to match revised assumptions.

I sort of give up at this point, having been beaten into submission. I just cant for the life of me imagine how people will worry about whether a fund costs .20% or .50%, go on for page after page talking about the need for tips and ibonds to deflect inflation, worry about investment mixes that might return a quarter or half percent more over 20 year periods, and fret about whether 4% or 4.5% is the magic number. Yet when it comes to the actual influence of inflation, lets just slap in the oft disputed number from a govt report, the basis of which is a group that has very little correlation to an early retiree. Good enough.

I think the primary problem is that we have a mixed bag of people among the 10-15 most vocal posters. Some have portfolios large enough that inflation really isnt a threat. Others have a working spouse and inflation therefore is also less interesting. Some are very aggressive investors who have a high equities component and presume the returns from that will offset any inflationary pressure. Others are very conservative investors who place a lot of holdings into CPI adjusted instruments and feel confident that their return is 'real'.

I think one of my biggest issues is that i'm usually thinking in terms of the "true" early retiree who is living solely from a portfolio of investments (of which I was a member, but am no longer) and we have very few of those here.
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