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Ss cola 3.968 1975-2009
Old 06-05-2010, 11:34 AM   #1
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Ss cola 3.968 1975-2009

Here's a COLA chart that social security has used for adjustments since 1975. If I did my math right, the average is 3.968%-yikes. We budgeted for inflation in retirement at 3.5% thinking that was a safe number to use. I know inflation was high in the late 70's and early 80's- but thoughts??

Cost-Of-Living Adjustments
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Old 06-05-2010, 11:53 AM   #2
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I use 4.05% for my estimate of inflation over the long haul. I derived that from the inflation data in Stocks, Bonds, Bills and Inflation. One often hears that inflation averages 3 or 3.5% over the years from (IIRC) 1929 to present, but that doesn't take into account that prices after the first twenty years of that time were essentially the same as at the beginning—all of the inflation has happened since the end of WW II. If the change is calculated over the number of years during which all the inflation actually occurred, it comes out just a hair over 4% per year.
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Old 06-05-2010, 12:20 PM   #3
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Quote:
Originally Posted by bizlady View Post
Here's a COLA chart that social security has used for adjustments since 1975. If I did my math right, the average is 3.968%-yikes. We budgeted for inflation in retirement at 3.5% thinking that was a safe number to use. I know inflation was high in the late 70's and early 80's- but thoughts??

Cost-Of-Living Adjustments
My thoughts are that counting on <= 3.5% inflation over time, given today's world, is akin to counting on eternal life.

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Old 06-05-2010, 12:45 PM   #4
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Originally Posted by bizlady View Post
Here's a COLA chart that social security has used for adjustments since 1975. If I did my math right, the average is 3.968%-yikes. We budgeted for inflation in retirement at 3.5% thinking that was a safe number to use. I know inflation was high in the late 70's and early 80's- but thoughts??
Dimson & Marsh's "Triumph of the Optimists" pegged 20th century inflation (in the U.S.) at about 3%, but in the last 30 years of that century it was closer to 5%.

Another issue-- let's say that you're wildly off in your estimate and the actual inflation rate is 5% vice 3.5% for the final 40 years of your life. At the end of the four decades, your expenses have risen by a factor of 7x vice 4x. Clearly you're not going to keep working for most of those 40 years (perhaps not for any of them), and just as clearly you're not going to blindly raise your spending by 5%/year or even 3.5%/year.

Doesn't matter what Social Security or the CPI are. Inflation rates are like SWRs-- they're personal and they vary over ER. Have you been able to calculate your personal inflation rate, and have you thought about how you'd change your asset allocation or your lifestyle if inflation took off?
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Old 06-05-2010, 12:54 PM   #5
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another problem - the cpi calculation methodology underwent major changes during your time period.
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Old 06-05-2010, 02:55 PM   #6
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Hmmm, excel says the average is 4.3%, so maybe you *did* do the math wrong. Unfortunately, that's more than you figured.

FWIW, that average includes 14.3% and 11.2% from the Carter years. Hopefully we'll never see anybody like him again. If you take out those two, the average is 3.8%.

If we just take the average from 1990 it's 2.8%.
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