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Old 06-20-2015, 07:21 PM   #21
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Substitution is not beef to chicken, it is consuming something different but maintaining the same approximate level of satisfaction and lifestyle.

Well, no, that is not what the substitution effect is. It's maximizing goods desired given a set of opposing prices relative to each other and a consumer's preference curve. If everything triples in price tomorrow, you are gonna be less happy but will substitute to maximize it.



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Old 06-20-2015, 07:26 PM   #22
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Inflation hasn't seemed that bad to me thus far in retirement, although some things are higher.

With the market surging as it has, and considering that life is short, I decided to spend more this year anyway and buy my dream house. Maybe this is a reverse substitution effect? I'll be upgrading my lifestyle.
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Old 06-20-2015, 07:29 PM   #23
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So, is flat nominal spending over a decade the result of superior spending management or could it be our inflation rate is really much lower?

Substitution is not beef to chicken, it is consuming something different but maintaining the same approximate level of satisfaction and lifestyle.
I don't know. Definitely our discretionary spending dropped. This just happened all by itself. I don't see that as the same as low inflation.
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Old 06-20-2015, 07:35 PM   #24
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I'm going to go out on a limb on this one. I suspect that most of the reason retirees get in trouble with inflation is because they haven't factored it's cumulative effect into their (real) net worth. It's so easy to think "Wow, look at my portfolio value. It's never been so high." Not so much with people on this forum but in the general population I think this is very common.

I had to go back and work out our picture for the last 20 or so years before realizing that our real peak portfolio (net worth) value was probably back in 2000 when I was still working. Then there was a recession while I was working. For the last 10 years, our portfolio has gained some altitude. I'm prepared to see it go down in real terms (I think) because life is finite and we have to do the fun stuff now.
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Old 06-20-2015, 07:49 PM   #25
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Well, no, that is not what the substitution effect is. It's maximizing goods desired given a set of opposing prices relative to each other and a consumer's preference curve. If everything triples in price tomorrow, you are gonna be less happy but will substitute to maximize it...
Yes, if the price goes up, people will substitute lesser goods, though they are not happy about it. But humans are adaptable, and thankfully have short memories too. So after a while they will forget and get used to the lower standards. Else, life would be too miserable.

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I don't know. Definitely our discretionary spending dropped. This just happened all by itself. I don't see that as the same as low inflation.
Ah hah! And some people do not believe in Bernicke effect, which was empirical data to start out with.
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Old 06-20-2015, 09:27 PM   #26
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Since retirement a little over 12 years ago we have been deriving our living expenses from our after tax portfolio and SS which both my wife and myself started at age 62. In nominal terms our taxable fund has increased by 50% since ER after all the draws.

Over that time our expenses and perceived standard of living have remained remarkably level and satisfactory (normal middle class living - no Learjet parked at the end of our private runway) but we don't really deprive ourselves of anything we want.

I don't know if it's a substitution effect, lack of inflation, Bernicke (and Bernanke) effect or all of these combined. The end result however is that the IRA portion continues to zoom upwards to where it's now considerably bigger than the taxable nut. and as mentioned earlier it appears that the RMD's are going to be toe curling.... Makes me wonder why we both contributed the maximum we could to tax deferred (IRA's and 401K's) investments that appear unnecessary at this stage anyway. Maybe we should have partied on earlier...
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Old 06-20-2015, 10:51 PM   #27
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... Maybe we should have partied on earlier...
Uh Oh! Do you have offsprings to whom to bequeath the stash?

In any case, it's better late than never to party! Travel, fancy cars, exotic booze, more loudspeakers?

Or is it true that the Bernicke effect is so potent that one cannot escape its grip once geezerdom is reached? One stops caring about "stuff" or even "experiences", and just wants to sit on the rocking chair in the front porch, waiting to see his flowers bloom?
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Old 06-20-2015, 11:20 PM   #28
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Already h have a nice stereo in every room of the house. Me thinks if I bring another set in the paddy wagon will show up. Travel? Nah got my fill on megacorps dime. Watching flowers grow is most appealin...and rather inexpensive.
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Old 06-21-2015, 12:04 AM   #29
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Much of my income goes to my mortgage payment which isn't affected by inflation. I have only been retired 18 months but my SS is only slightly more than my mortgage. Even if everything doubled my mortgage principal wouldn't so my total inflation would be less than a young person trying to buy a house or car, my used house and used car would be worth more so it wouldn't hurt as much. I could also substitute my big old house for a little condo with less taxes and insurance and maint so still afford more expensive food and gas.
Many of us older retired people while not be needing things like a car, house, education that really inflate. I am 67 with a car with 43K miles on it I drive 6K miles a year it might last 25 more years and not be replaced or I could buy a new one but get a decent trade in.
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Old 06-21-2015, 12:36 AM   #30
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I thought I already spent too much when my recent annual expenses run 36% above what I originally thought it would be.

Then, when I sat down to figure out SS plus some other fine tuning, I found that I could run 82% above that original number. And that original number included some expenses that I could cut if in hardship.

Of course, the market may just crash, and all that safety margin can disappear overnight.
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Old 06-21-2015, 03:17 PM   #31
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Of course, the market may just crash, and all that safety margin can disappear overnight.
Yep, safety margins are fickle. That's why I've more carefully tracked basic expenses as opposed to the "fun + discretionary". Basics for us still include weekly restaurant visits and stuff that makes life fun.
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Old 06-21-2015, 08:40 PM   #32
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My sense is our lifestyle is as enjoyable now as when I retired, but our spending – the basket of goods and services we enjoy – is totally different. Our wants and needs are constantly evolving, and we are continuously adapting to changing prices in the marketplace by shifting and redirecting our consumption so easily that we hardly recognize the effort. A real life example of the substitution effect.
Interesting observation, and I can say that my wife and I have had a similar experience (after 5 1/2 years of retirement). It seems to me that we enjoy life more than ever (and certainly want for nothing), yet our spending has not really increased much, if at all. Some of it probably has to do with having the time to find bargains on virtually everything we buy now, some of it probably has to do with our tendency to spend much of our time doing things that don't cost a whole lot (yet bring us great enjoyment). I haven't really taken the time to analyze it, and I guess it doesn't really matter. The bottom line is that our expenses are easily within the budget I set up for us when I retired, so we are actually accumulating a little bit now, rather than spending down. That may change in the future, but if does, we should be prepared for it.
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Old 06-21-2015, 10:04 PM   #33
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Interesting observation, and I can say that my wife and I have had a similar experience (after 5 1/2 years of retirement). It seems to me that we enjoy life more than ever (and certainly want for nothing), yet our spending has not really increased much, if at all. Some of it probably has to do with having the time to find bargains on virtually everything we buy now, some of it probably has to do with our tendency to spend much of our time doing things that don't cost a whole lot (yet bring us great enjoyment). I haven't really taken the time to analyze it, and I guess it doesn't really matter. The bottom line is that our expenses are easily within the budget I set up for us when I retired, so we are actually accumulating a little bit now, rather than spending down. That may change in the future, but if does, we should be prepared for it.
Time for bargain hunting and freebies has made life much cheaper for us. I enjoy the thrill of the hunt. It is kind of wild the difference in local prices even on groceries. For example, Chinese eggplant prices here varied recently from 3 pounds for $1 (33 cents a pound) to $3 a pound, depending on the store.
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Old 06-22-2015, 10:00 AM   #34
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Time for bargain hunting and freebies has made life much cheaper for us. I enjoy the thrill of the hunt. It is kind of wild the difference in local prices even on groceries. For example, Chinese eggplant prices here varied recently from 3 pounds for $1 (33 cents a pound) to $3 a pound, depending on the store.
DW and I have come to the conclusion that we've been getting ripped off for the past 30 years!
With time to 'hunt' there's a whole world out there of equal/"just as good" things available. $25 'hanging around' khakis at Costco vs $140 at Brooks for example.
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Old 06-22-2015, 10:07 AM   #35
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Inflation hasn't been an issue for me in the last few years. I do notice my discretionary spending tends to rise over time, regardless of prices. Meanwhile, when I look at some notes I had from comparison shopping 10 and 20 years ago, prices are considerably higher. It's not something I just notice because it's so slow and subtle. It's a good reminder that I need good inflation protections in my retirement budget. Both price inflation and demand inflation will likely be a factor for me. Oh, sigh, that also leads to OMY.
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Old 06-22-2015, 11:02 AM   #36
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I am still working, but I have 5 years of spending history in a spreadsheet that I summarized recently to see if I could spot any trends. I was somewhat surprised to see that, for the 19 line items that I track, most of the 2014 totals were close to their 5 year averages.

There was one standout item; the insurance row (home & car) was almost 20% higher and showed a steady increase year over year. Most of the rest of the rows had a lot of variability from year to year, but nothing that couldn't be explained, for the most part. The grocery row, which includes most household items (soap, lightbulbs, etc) has increased the past 2 years, but 2014 was still below the 5 year peak, so I don't know if I can conclude that my food costs have gone up.
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Old 06-22-2015, 11:37 AM   #37
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Inflation hasn't seemed that bad to me thus far in retirement, although some things are higher.

With the market surging as it has, and considering that life is short, I decided to spend more this year anyway and buy my dream house. Maybe this is a reverse substitution effect? I'll be upgrading my lifestyle.
21 yrs of ER. We pay more in fed/state taxes than it cost to live early in ER when I was really cheap.

A good part was crossing 70 1/2 aka RMD and increasing awareness - you can't take it with you.

heh heh heh - at least I don't think you can.
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Old 06-22-2015, 11:49 AM   #38
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... you can't take it with you.

heh heh heh - at least I don't think you can.
See: Take it with you.
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Old 06-22-2015, 01:08 PM   #39
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It is fascinating and no small relief to see ER commenters on this thread actually living out what the book "Your Money or Your Life" described about inflation being much lower and far more manageable than the government CPI. Also, I wonder if ERs commenting here are experiencing a surprise savings dividend from their previously substantial costs of going to work everyday? I was laid off a few summers ago and, with a healthy pruning exercise plus no job-related costs, our spending dropped like a stone - like half. I really didn't appreciate how much it costs us to go to work every day until that experience and it seems now a small, tantalizing glimpse into ER.


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Old 06-22-2015, 01:47 PM   #40
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It is fascinating and no small relief to see ER commenters on this thread actually living out what the book "Your Money or Your Life" described about inflation being much lower and far more manageable than the government CPI. Also, I wonder if ERs commenting here are experiencing a surprise savings dividend from their previously substantial costs of going to work everyday? I was laid off a few summers ago and, with a healthy pruning exercise plus no job-related costs, our spending dropped like a stone - like half. I really didn't appreciate how much it costs us to go to work every day until that experience and it seems now a small, tantalizing glimpse into ER.


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I think a lot of savings do come in initially from no longer having to pay a premium for stuff because you don't have time for cheaper alternatives while working. And then another leg as retirees start finding bargains that take time to find or flexibility in time to take advantage. Some bargains require a bit of research to find.
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