Official ER Forum January Inflation Report

[lowflyer]

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.

Dang! I wish I'da said that.

 

[jdw_fire]

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.

Bunny, maybe we should look at this from a different angle. In this angle we split our financial lives in to two hypothetical entities that are connected.

The first, the income producing life (IPL), I will liken to a company that is attempting to make a profit and it has one employee that it has to pay a salary. This company is a financal company that has a net/real value that is invested (physically by the employee) in an assorted list of financial assets which make the company a yearly profit or a loss depending on how well the investments do.

The second, the spending life (SL), I will liken to someone who has a job to provide them money to spend on living their life or on saving for future purchases.

Now in this different angle SL is the employee of the IPL. The IPL doesn't concern itself with how SL spends his/her salary, that is SL's problem. IPL's concern is company growth and making sure it doesn't go bankrupt. IPL needs to pay SL a salary which is the connection I mentioned earlier (and correlates to our retirement withdraw rate). SL needs to live within his/her means. If SL's lifestyle exceeds his/her salary then SL needs to either reduce expenses, ask IPL for a raise, or get a second job. When SL asks IPL for a raise IPL needs to figure out if IPL can afford to give SL said raise. If IPL can then SL gets the raise, if not SL needs a different solution. If SL has a large one time need for money s/he can hope IPL will give him/her a bonus or get a loan.

This angle should sound familiar as most of us probably could see ourselves when we were working as SL. The difference is that in this angle our boss is more likely to find a way to give us the raise/bonus we ask for, there is a high potential we could get a loan from IPL, and we don't need to save for retirement.

Given this angle parallels our ex-working life so closely why would we not be able to handle the concerns you express the same way we did when we were working?

 

[sgeeeee]

The primary factors retirement survival depend on are:
1) How long you live,
2) How much you start with,
3) Your investment returns,
4) Your spending.

Factor 4 is influenced partially by inflation which you cannot control.

Things you can do to deal with the inflation factor are:
1) Kill yourself and avoid further inflation,
2) Build up a larger portfolio before you retire,
3) Invest in things that are more likely to keep up with inflation,
4) Spend less money to compensate for inflation.

 

[cute fuzzy bunny]

Gee, sounds like what I was saying.

Know what your spending is

Know whats effecting the changes in your spending

Do something about it

 

[wabmester]

The primary factors retirement survival depend on are:
1) How long you live,
2) How much you start with,
3) Your investment returns,
4) Your spending.

We all know (1) is tough to determine, and most of us wring our hands a bunch about (3), but I've always sort of assumed that (4) was easy to control.

Spending may be the most out-of-control factor in the group. It's practically unbounded. Over a 40-year period, what is the likelihood of being seriously impacted by a lawsuit, death, birth, disability, divorce, marriage, natural disaster, theft, etc?

Pretty high, I'd think. How many of us budget for this stuff?

 

[sgeeeee]

Gee, sounds like what I was saying.

I don't know but it is definately a short description of what I've been saying.