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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 09:27 AM   #81
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Re: Official ER Forum January Inflation Report

CFB,
Although I think I understand what you are trying to accomplish, the emphasis on a "personal inflation rate" seems like the tail trying to wag the dog. Working folks can't set their income according to their personal inflation rate - their income is largely fixed by their employer. They might get a CPI adjustment, they might get better than that, they might get nothing or less than nothing. Then based on their income they adjust their spending accordingly. I don't see why it should be any different in a post retirement world. If my costs are going up at more than CPI then I'll have to cut my spending somehow. If I want to take out more than CPI, than I better start off with a bigger portfolio than one that is considered "safe" by FIRECalc.

I see the CPI adjustment as a budgeting tool. My expenses HAVE to keep in line with CPI or my withdrawal strategy isn't safe - I don't see any way around that.
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 09:38 AM   #82
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by sgeeeee
You mean artists engage in unprotected pocket insertions of their writing utensils? How uncivilized.
Ink stains all over my clothes. Maybe that's a solvable problem.

for the record, I grew up in a family of engineers and graduated from MIT so something good must have rubbed off -- the mental processes are pretty compatible I guess.

On inflation, though, it seems we're trying to unscramble the eggs: much of what your personal inflation or personal budget will be going forward will be driven by your lifestyle choices/changes, not necessarily by core unavoidable inflation on the same goods. I actually think the need/desire to keep up with, if not the Jones any more, then simply our own awareness of better quality, better standard of living, better products and services which, btw, cost more, will drive the variances in our budgets more than inflation will.

Also, since inflation-at-large in the economy (we can agree it exists even if we don't know what the exact number should be or how precisely it applies to us) will go up and down over time, I think long run planning for it can be feasibly done with an average -- I use 3% and hope it's close. What you do in any given year down the road to decide whether you are staying on or off-track is a different story, and frankly, there may not be a lot you can do except cut back spending or earn some spare cash.

While a <4% WR is a nice bulwark against the uncertainty (congrats Wab and anyone else who is pulling this off!), the reality is that most people will ER when they can pull the trigger, and continue to consume at the limits of safety just because the world is full of nice things to spend money on. For them (us) the issues are more poignant. It may not feel like it now, but were we to enter a period of stagflation -- higher than average inflation and lower than average returns-- I'm thinking this whole issue would rapidly become front burner for every retiree, early or not.

As for healthcare, the biggest gorilla in the room, I'd bet on something interesting actually happening in the coming years (5 years or so). If something does happen, my take is that one way or another, people who work and pay taxes will somehow subsidize healthcare for everyone else, including retirees -- something along the lines of a Medicare-for-all plan, or at least Medicare-lite for everyone over 50. Then we could choose to supplement it with private insurance if we liked. If something like this did come along, it would be a big boon to early retirees, and take away one of the biggest unknown/unknowable expenses clouding people's decision to leave their career work and move on to the next chapter in their lives.
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 11:14 AM   #83
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by Cute Fuzzy Bunny
I'm not aware that anything I regularly purchase excepting the costco $1.50 hot dog and a drink has remained the same or gone down in price.
We've been paying the same price for our local Costco's pizza since Sep 2002.

Their dividends have been rising far faster than their pizza prices...
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 11:55 AM   #84
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by ESRBob
I use 3% and hope it's close.
It is kind of sobering to ask "what if our assumptions are wrong?" When I saw that the Joneses were increasing their spending at CPI+3%, that did give me pause.

So, I did a quick calc. What was my annualized rate of spending growth between my poor college student days and today's family-of-3 days?

I came up with roughly 12%/year!

So, I would clearly blow-up my ER if I tried to keep up with the Wabs. And I'd probably blow-up trying to keep up with the Joneses.

After 40 or 50 years of ER, I wonder what sort of lifestyle 3% COLAs will give you....
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 01:31 PM   #85
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Re: Official ER Forum January Inflation Report

Not a very good one.

Perhaps people are reading more into what I said than what was written. I'm fairly convinced that most people read the first sentence or two of a thread when there is some visceral disagreement and then fire off their answer in the absence of what was actually said.

Its pretty simple. Understand your spending and how its changing as you begin and proceed through retirement. Make sure your investments are going to keep up by either changing the spending or changing the investments.

I think its reasonable to presume that if you arent changing what you're buying or who you're buying it from in a drastic manner, any increase/decrease in your basic spending package is due to cost increases/decreases by the suppliers, which sounds an awful lot like cost of living.

If you cant figure out how to measure your spending and spending changes, I guess all these firecalc type calculators that have you plug in your spending figures arent worth much.

If your spending is increasing over time at a rate faster or slower than CPI, the calculator is giving you bad information. You're either taking too much money or not as much as you could and spending more than you think or not as much as you could.

Any which way, its certainly actionable. Change your spending or change your investment mix.

What I dont think is good advice is simply adding CPI to the spending figure you came up with 4 years ago when you retired and then never revised. Should that actually work for you in review, I would suspect its more coincidental than factual.

As far as I can tell, my core costs are increasing at roughly 6% a year when the CPI has been tracking in the 2-3% range. Pretty consistent with the #'s wab pulled up.

Should you have any disagreements with what I just said, do everyone a favor and quote the part you dont agree with, explain what you think i mean and then explain why you dont think its good advice or why you disagree with it.
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 01:40 PM   #86
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Re: Official ER Forum January Inflation Report

For me, the take-home message of this thread is that you shouldn't ignore lifestyle inflation. We all focus a lot on price inflation, but my cost of living has been completely dominated by lifestyle changes.

For most ER's, it's safe to assume that lifestyle inflation will be flat to negative. That's the Bernicke spin on SWR.

But for singles or those with young kids, it may be foolish to assume lifestyle inflation is zero, which is sort of implicit in most SWR calcs.
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 02:01 PM   #87
 
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by Cute Fuzzy Bunny
As far as I can tell, my core costs are increasing at roughly 6% a year when the CPI has been tracking in the 2-3% range. Pretty consistent with the #'s wab pulled up.
I don't disagree with you on this. But, I would call this 'lifestyle inflation' rather just an effect of rising prices. You added a Wife and Child to the mix, while most of us here are now dumping kids, getting rid of college costs etc.
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 03:30 PM   #88
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by wab
But for singles or those with young kids, it may be foolish to assume lifestyle inflation is zero, which is sort of implicit in most SWR calcs.
wab, do you include singles in this statement because they might get married? If not, why?
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 03:41 PM   #89
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Re: Official ER Forum January Inflation Report

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Originally Posted by jdw_fire
wab, do you include singles in this statement because they might get married?
Marriage would certainly have an impact, but so would any relationship (you're 80 and you meet Anna Nicole Smith, for example). And when I was single, my lifestyle had plenty of "flux." Hard to capture that in FIREcalc.
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 03:44 PM   #90
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Re: Official ER Forum January Inflation Report

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I'd bet on something interesting actually happening in the coming years (5 years or so)
given that congress hasn't been able to grapple with social security, what do you think they could/would tackle this much larger problem?
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 03:53 PM   #91
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Re: Official ER Forum January Inflation Report

Because the noise now is coming from the business world. CEOs are figuring out they can do amazing things for their companies' health if they can dump healthcare off their backs and onto the publics'. They dress it up in fairness etc etc but its just trying to keep themselves competitive and their stock prices up.

And then you have democrats increasing their hand on the levers of power, and this is something they'll feel they want to do. So if you have business and Dems wanting something, then everybody is covered and it'll happen.

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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 03:59 PM   #92
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Re: Official ER Forum January Inflation Report

On Healthcare reform:
Quote:
Originally Posted by ESRBob
. . .So if you have business and Dems wanting something, then everybody is covered and it'll happen.
Well, that's a pleasant enough thought. I hope you're right.
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 04:02 PM   #93
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Re: Official ER Forum January Inflation Report

Dreamers. TANSTAAFL. If health care costs go down, taxes will go up. Zero sum game.
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 04:27 PM   #94
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Re: Official ER Forum January Inflation Report

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Dreamers. TANSTAAFL. If health care costs go down, taxes will go up. Zero sum game.
Of course its a zero sum game. But once the game is in play, everyone will work hard to ensure that someone else pays more or that you receive more than what you pay in. In the end, the Chinese will pay by buying new debt from us and our grandkids and great grandkids will pay them back throughout their lifetimes.
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 04:40 PM   #95
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Re: Official ER Forum January Inflation Report

A Ponzi scheme? OK, that could work.
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 05:06 PM   #96
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by Cut-Throat
I don't disagree with you on this. But, I would call this 'lifestyle inflation' rather just an effect of rising prices. You added a Wife and Child to the mix, while most of us here are now dumping kids, getting rid of college costs etc.
Whats the difference? Its still something to be accounted for.

While some are dumping the kids and college costs, others are adding them. Or planning to travel. Or wanting to change their lifestyle.

By the way, my core spending cost increases of 6%/yr have absolutely nothing to do with the wife and kids. They're the same costs whether I were single, married, or married with kids.

Let me try this again:

My core message/advice is to keep at least a rough idea of your spending and make sure your plan will continue to be successful. Know how inflation - in any form at all - is influencing your costs and spending.
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 05:14 PM   #97
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by wab
Dreamers. TANSTAAFL. If health care costs go down, taxes will go up. Zero sum game.
Not necessarily. Such a huge piece of health care costs is overhead and paperwork, you make HC universal you can wipe out a lot of that overhead and paperwork. Supposedly the MA state plan is going to almost completely offset the cost of paying for those currently without insurance.

But yeah, the businesses who are forced to pay for care by that and other prospective state laws will make it an excuse for jacking up their prices.

Lots of businesses are doing well cutting their expenses by offshoring, cutting health care, dropping product quality, etc. Theres sort of a diminishing return to that strategy. Eventually the rubber band is wound as tight as it'll go.

Once again, look at home depot for a great example. Lost a lot of business to lowes by cutting costs too far and employing cheap people who didnt know anything or do anything. Hell, I was going into Lowes last summer just because they ran air conditioning in the 110 degree weather and home depot runs evaporative coolers and had a big floor fan in each aisle. No thanks...but enjoy saving a few hundred bucks a month on electricity. Now that they're tossing the idiots who work there in favor of more expensive employees, they've run headlong into the housing boom. Anyone that knows enough to be a decent home improvement store worker can make $25+ an hour building homes.

Bottom line...their prices are going up.
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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 05:23 PM   #98
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by Cute Fuzzy Bunny
Should you have any disagreements with what I just said, do everyone a favor and quote the part you dont agree with, explain what you think i mean and then explain why you dont think its good advice or why you disagree with it.
I just find the whole concept of a "personal inflation rate" irrelevant to the process. What I have is a budget. That budget increases by a certain amount each year. If certain things are growing faster than my budget allows, then I purchase fewer of those things, replace them with less expensive alternatives, etc, etc. It's really pretty simple.

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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 05:34 PM   #99
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Re: Official ER Forum January Inflation Report

Ah I see the problem. Everyones hung up on the "personal inflation rate". That ones easy. I dont care about it at all. Not even an important part of what I was trying to get across.

The point I was trying to get across was that taking a baseline spending # and adding CPI to it every year isnt going to produce an accurate spending figure over time. Your spending will change as a function of retiring, changing your lifestyle, regular old price inflation and many other factors.

You're right, its really pretty simple. I figured out what the problem is now. Overfocus in the discussion on points I didnt particularly consider to be important and invalid presumptions of what I was trying to say.

Wherever I said "personal rate of inflation" I was far more interested in "change in your spending" vs coming up with some formulaic characteristic of market basket price fluctuations. Which I think is what I said right off the bat and kept repeating.

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Re: Official ER Forum January Inflation Report
Old 01-20-2007, 06:33 PM   #100
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Re: Official ER Forum January Inflation Report

Quote:
Originally Posted by Cute Fuzzy Bunny


The point I was trying to get across was that taking a baseline spending # and adding CPI to it every year isnt going to produce an accurate spending figure over time. Your spending will change as a function of retiring, changing your lifestyle, regular old price inflation and many other factors.



Amen - a little Katrina, a few unplanned deaths/funerals, 1000 mile move, some remodeling, toss in a few emotional vacations - etc.

Still - it's not that hard to watch the two bouncing balls(spending and expected portfolio SWR ala FireCalc and others).

Probably need to rebuild an emergency reserve for future unknown events - a SWAG number if there ever was one.

So far my no 2 pencil says I could/can throttle back to current yield plus early SS plus defined pension in a 'hard times' mode.

heh heh heh - and that's without a psst Wellesley current yield.
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