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Old 07-04-2012, 09:42 AM   #41
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Also inflation is somewhat localized and personal. If you buy a lot of stuff every year and are a huge consumer, then yes it is a big chunk, but as one gets older inflation also depletes somewhat from the posted numbers. Yes it is a factor but not a big as a lot of folk imply.
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OK I will bite, on average the stuff that is important has doubled in 30 years. And BTW Chocolate Chip Cookies, ICE Cream and Chips are not on my weekly list. Not that we do not partake occasionally but not often, and it will nor break us when we do. Milk is though and let us assume it is like butter and eggs.

Using Eggs as an example. Eggs have gone up say 90c in 30 years. (I know it is less but I am giving inflation the benefit of the doubt). That is 3c per year. I think we can afford that. Let us say we consume 1 dozen eggs every 2 weeks which is probably true. Our egg bill will go up about 6c per month per year. Again I think we can afford that. That is 72C per year vs 30 years ago, not a deal breaker. PS Canada's dairy and poultry prices are silly as they are regulated on the up side.

Gas, electricity and other forms of energy would be better examples but of course our illustrious leaders do not count those under inflation.

Food for us is the least of our worries. This again proves my point that inflation is subjective. We do not eat red meat only pork, Chicken and Fish, but I am sure the same applies to them. Fish probably the most.

Again for US personally. Food is not the issue, we eat too much anyway. It is healthcare that has far escalated all of those put together. For my personal circumstance, healthcare is the one I worry about the most, which is ironic as stress causes illnesses and the cures is causing it. [mod edit]
Yes, you are right - - necessities such as food, utilities/energy, and healthcare have all experienced considerable inflation compared with more optional items. So, inflation can be more of a factor for those who are not buying a lot of optional stuff or spending much. Older people generally have higher medical expenses and thus might reasonably expect higher inflation than others.

Also, inflation has been quite low in recent years compared with inflation previously in my lifetime. So, IMO it would be prudent to expect and prepare for significant inflation to come, especially since you seem to have a conservative philosophy regarding money.
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Old 07-04-2012, 09:53 AM   #42
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Using Eggs as an example. Eggs have gone up say 90c in 30 years. (I know it is less but I am giving inflation the benefit of the doubt). That is 3c per year. I think we can afford that.
I'll be blunt. You seem hell-bent on discounting the effects of inflation. Three cents per year is skirting the issue, it is the overall % increase of the things you buy that is the point. It's hard for me to believe that you don't 'get that' - it seems to me that you just don't want to accept it. Are you really ready to retire a second time?

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I am just loving all the opinions, thank you. And yes I did apply a small inflation to the FireCalc.

What do you mean - you 'applied an inflation to the Firecalc'? Using the defaults, FireCalc provides its own inflation adjustments, and does it in the best way possible (IMO), using actual numbers which interact with actual returns. If you were using the static choices on the "Your Portfolio" tab:

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A portfolio with consistent annual market growth of %, fixed income returns of %, and an inflation rate of %

A portfolio with random performance, with a mean total portfolio return of % and variability (standard deviation) of %. Assume an inflation rate of %.
well, I don't put much stock in those. Any spreadsheet could spit that out. The real value of FireCalc is in its historic data.


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Old 07-04-2012, 10:29 AM   #43
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I have just so many friends that lost so much of their nest eggs in the market crash and ups and downs have NOT returned them back to status quo. It is VERY hard to accumulate at our age, but very easy to loose.

SWR
If most of your friends are like most of my friends, they took on way too much risk when everything was great and they lost way more than they should have when the market tanked. Then they got scared and put all of their money in CDs and money markets, earning next to nothing, and they missed the bull market that came next. They bought high and sold low, which is most people do.

Pick an AA and stick to it. In your case maybe 30 / 70 is good, but you can forget about getting 4% risk free anytime soon.
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Old 07-04-2012, 11:53 AM   #44
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Nords:

I agree with your Inflation Analogies, overall it is relatively minor to us based on our current lifestyle, with the exception of House Taxes and Insurance our expenses are low'ish. Also inflation is somewhat localized and personal. If you buy a lot of stuff every year and are a huge consumer, then yes it is a big chunk, but as one gets older inflation also depletes somewhat from the posted numbers. Yes it is a factor but not a big as a lot of folk imply. And yes I am taking what meager SS that we will get into consideration.
The real point of his inflation analogies is that inflation can kill you. It won't do it dramatically and all at once but it will still kill you.

To put it in perspective I went to Firecalc and on tab 1 put in spending of 40000, portfolio 1000000 and 30 years. Then I went to Your Portfolio. In the section called total market where it has percentage of portfolio in equities, I changed 75% to 55% (which is my own percentage) and then hit submit. 5 cycles failed for a success rate of 95.5%. Now, for some here that is good enough. Many would want that to be 100%. If I reduce spending to $36,900 I get it to 100%.

OK I put spending back to 40000 then went to Your Portfolio and changed percentage of equities to 0%. 67 cycles failed, for a success rate of 39.6%. But, you can get it to 100% if you reduce spending to $25,400 a year.

But with just 25% equities you can get to 100% with $34,800 spending which as you can see is very close to what you get with 55% equities.

You think you are reducing risk and increasing your chance of success with 0% equities but you aren't. Now, if you can live with spending whatever 100% success would be at 0% equities then fine but recognize what it is costing you and if your expenses increase more than you expect then you could still fail.
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Old 07-04-2012, 12:37 PM   #45
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SWR, it's obvious you don't believe inflation will have an appreciable impact on your retirement even though history says otherwise. I sincerely hope you are correct because the consequences of getting it wrong aren't pretty.

My work here is done...
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Old 07-04-2012, 01:25 PM   #46
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SWR, it's obvious you don't believe inflation will have an appreciable impact on your retirement even though history says otherwise. I sincerely hope you are correct because the consequences of getting it wrong aren't pretty.

My work here is done...
Not really, it is just it is the least of my worries at this particular juncture. I am fully aware that rampant inflation over time can be devastating. Currently it is relatively low. That may change of course and will warrant attention at that time. It is still somewhat subjective though. I can deal with that after the major (in our minds) issues are covered.
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Old 07-04-2012, 01:39 PM   #47
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Shok, I want mention, that I really respect the advice the posters are giving you and they need to be reflected on as it is excellent advice. However, I will give you a little moral support since you are getting beat up pretty hard with the pillows (just teasing guys). Not many people have the aversion to the market as you do, but I share somewhat your same feelings. It is kind of like all your friends telling you about the health benefits of eating fish, but you cant stand the taste of it. For what its worth, I am drawing my pension, but still consider myself in the asset accumulation stage of my life. I am working part time to fund this through CDs and IBonds mostly, instead of pumping all my reserves into the market. Is this the best thing to do? Maybe not, but I still have plenty of free time and don't mind the PT job, and I have no market worries.
Your concern is not without merits. Someone retiring in 1964 would have had a tough 18 year slog if their money was mostly in the markets and a person retiring in 2000 would have had some worries for a decade. I would find it hard to believe that many funds could have managed to beat your returns on average from 2000-2010 with your investment strategy. However unfortunately its the next 10 years you have to worry about, not the last 10. BTW- I forgot who posted that living off treasuries quote a few posts back, but I loved it!
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Old 07-04-2012, 02:05 PM   #48
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Mulligan:

Thanks for the support. I too like the treasury Q&A from earlier. I also respect the advice/opinions and agree the next 10 years are crucial. We are fortunate as are most of the folk on his site are flush with the "Treasuries" mentioned earlier, but perhaps their own form of them. Some have Market "Treasuries" others CD "Treasuries others Bond "Treasuries" others Money Market "Treasuries" Other may even have ACTUAL Treasuries and other combinations of them. I am of course using the word treasuries very loosely here.

I did some raw calculations on SPIA's and they are a potential solution if one does not mind giving all or part of their cash to an insurance company. For a $500k one time Premium, the return would be equal to only 16 years if just taken from the capital, but for a joint policy it may have to provide return for 30+ years. One would need almost double the premium to achieve that from raw cash. I personally do not care that when we die the insurance company gets the cash, if not them the government would take it anyway in our case.
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Old 07-04-2012, 02:39 PM   #49
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Not really, it is just it is the least of my worries at this particular juncture. I am fully aware that rampant inflation over time can be devastating. Currently it is relatively low. That may change of course and will warrant attention at that time. It is still somewhat subjective though. I can deal with that after the major (in our minds) issues are covered.
The numbers that I gave you about the failure rate for a 0% equity portfolio being hugely greater than one with even 25% equities was not based upon rampant inflation. It was based upon the various historical returns some of which had high inflation while many others did not. You seem to be saying that you will wait until there is rampant inflation and then change. But, here's the thing... you won't change then. That is because with high inflation you will see CD's, for example, paying a high rate and it will look great. But it won't be great since it is still being eaten away by inflation. And, by the time you wait for rampant inflation, you may have wasted many many years of inadequate returns resulting in failure. Do that if you want to and if you can afford the very low withdrawal rate that you will have to have, just do so with your eyes open not because the fact that inflation is low now means very much in trying to plan a long retirement.

The problem with SPIAs in my opinion is the risk of insolvency of the insurance company. The state guarantee funds are generally inadequate to rely on to save you in that event.
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Old 07-04-2012, 03:01 PM   #50
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I am fully aware that rampant inflation over time can be devastating. Currently it is relatively low. That may change of course and will warrant attention at that time. It is still somewhat subjective though. I can deal with that after the major (in our minds) issues are covered.
The point which other posters are attempting to make is that it is very difficult to detect whether you appear to be even slightly aware that low inflation over time will also be devastating.

Take a look at the PDF linked below. If annual inflation stays at 3% for the next 30 years, then each of your dollars will be cut to 41 cents.

If annual inflation stays at 2% for the next 30 years, then each of your dollars will be cut to 56 cents.

Inflation over the last century has been about 3.5%. In 19th century Britain, with the gold standard in effect, it managed to stay at zero for most of the century. But I don't see anybody running back to the gold standard anytime soon.

How low do you think inflation's going to average for the next 30 years? You're gonna find out whether you care to know or not. Maybe it's a good idea to get ready for it now instead of when it's nearly too late.
Attached Files
File Type: pdf Inflation graph.pdf (27.5 KB, 22 views)
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Old 07-04-2012, 05:13 PM   #51
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I happened to look at my bond data for one long rate rise period and it occurred to me that the result is relevant here. Note that the trend was up but there was plenty of sharp ups and downs along the way.

My data from 5 year treasury constant maturity shows the following real rates:

1954 to 1961: 1.1%
1961 to 1971: 0.9%

Not too bad for this component of the portfolio in isolation. During this time the rates moved from 1.9% up to 5.3%. So 16 years of up trending rates with decent though not great real rates.

The current 5 year treasury rate is 0.7%. So it's worse then in 1954.
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Old 07-04-2012, 07:13 PM   #52
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I think we need to get past deflation before worrying too much about inflation ...
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Old 07-04-2012, 07:19 PM   #53
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I think we need to get past deflation before worrying too much about inflation ...
Hi wastin talent, welcome to the forum. Why not stop by and introduce yourself here Hi, I am... - Early Retirement & Financial Independence Community

As to deflation, you have a point. But a good early retirement plan will work if there is deflation and also if there is inflation. Or both, which is what I would bet on.
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Old 07-04-2012, 07:24 PM   #54
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Thanks I figured it out. Still seem to come up with 0 failures but show a low that is scary.
I think we all have trouble imagining just how scary it would be to be riding on that line in real time and not be able to see where it goes. "This method always worked in the past" will be very little comfort.
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Old 07-04-2012, 08:22 PM   #55
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Here's a post I made in another thread recently. It provides a link to an article Brewer mentioned about a roll-your-own Equity Indexed Annuity. ShWaRi: This would allow you to participate in the potential appreciation offered by stocks without risk of losing any principal.

It comes at a cost (in complexity, forfeited stock appreciation opportunities and falling behind to inflation) but for an investor who just can't stomach any volatility it might be better than some other options.
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Old 07-05-2012, 07:46 PM   #56
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Hi wastin talent, welcome to the forum. Why not stop by and introduce yourself
Thanks, I will. I just need to think about it a little bit as I'm a fairly private person. If I omit all the relevant stuff, well, its quite boring
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Old 07-05-2012, 07:48 PM   #57
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The problem with SPIAs in my opinion is the risk of insolvency of the insurance company. The state guarantee funds are generally inadequate to rely on to save you in that event.
Absolutely, plus they are very inflexible (if you don't like them later, too bad). The income they produce is taxable as ordinary income which is the worst kind IMO.
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Old 07-06-2012, 01:36 AM   #58
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ShokWave

I finished reading a short ebook by a William Bernstein, a well known financial writer. The thread on the book is here.
In the book he talks about having a safe income stream. Berstein says that you really shouldn't count on safe money doing anything more than keeping up with inflation. This simplifies retirement planning. You take your current assets and divide by your best case life expectancy (I'd think early 90s for you and your wife). If you got enough to live on then you are fine with a zero risk portfolio.
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Old 07-06-2012, 06:14 AM   #59
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ShokWave
This simplifies retirement planning. You take your current assets and divide by your best case life expectancy (I'd think early 90s for you and your wife). If you got enough to live on then you are fine with a zero risk portfolio.
This is exactly my thinking at THIS juncture. Again for those who think I am not listening, or my Zero Risk Blinkers are in the way. I perfectly understand inflation risks, especially if they get a lot worse. I am just choosing at this point to put them on a back burner as we have a lot larger fish to fry..... HEALTHCARE. This is the main consideration at the moment. Remember the bankruptcy thing again. Once this dilemma is cracked, I can move to other longer term obstacles like inflation etc. The problem I am dealing with is that this one may require a move to Canada as the only cost effective solution excluding any miracles.

Back to Gaucho Marx, if you have enough of the treasuries, they will last.

At the current desired burn rate, our assets will last about 30 years assuming ZERO return and no SS payments (Being VERY conservative here for assessment purposes). This is just a few years off of our desired ideal. This is based on just a simple subtraction and withdrawal from the mattress every month, and not including our home and other assets. While we know that is impractical for the long haul, it does make good for some basic reassurances. Once releaved of the other burdens of a second retirement decision, we can then investigate other avenues of return. Perhaps even in the somewhat less volatile Canadian Stock Market.

SWR
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Old 07-06-2012, 06:39 AM   #60
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At the current desired burn rate, our assets will last about 30 years assuming ZERO return and no SS payments (Being VERY conservative here for assessment purposes). This is just a few years off of our desired ideal. This is based on just a simple subtraction and withdrawal from the mattress every month, and not including our home and other assets. While we know that is impractical for the long haul, it does make good for some basic reassurances. Once releaved of the other burdens of a second retirement decision, we can then investigate other avenues of return. Perhaps even in the somewhat less volatile Canadian Stock Market.
According to Bernstein (and many others), I think you're there; you've won the game.

Find health care and stop 'playing.'
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