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SWR and inflation rate
Old 12-30-2010, 05:27 AM   #1
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SWR and inflation rate

Hello everyone

I was using my FIRE spreadsheet last night and lowered the inflation rate from 3% to 1.5%. The impact of this change on the amount I can withdraw over 45-50 years is significant.

My question - how does your SWR factor in inflation ?

This is my last post for 2010 (I am traveling again until Sunday), so best wishes for 2011 to everybody.
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Old 12-30-2010, 06:14 AM   #2
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Sensitivity to inflation rates, especially over longer time periods, is one of my greater concerns with early retirement. It's quite scary inputting higher rates of inflation into Firecalc and watching the success rate fall.

At the risk of being inducted into the tinfoil hat society, I do expect my personal cost of living to increase by more than official CPI numbers and elevate my inflation assumption accordingly. How much? I'm currently hoping that 4% as a base assumption will prove to be too high.
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Old 12-30-2010, 07:14 AM   #3
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Huge. I sure wouldn't base expectations on the current rates.
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Old 12-30-2010, 08:17 AM   #4
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Originally Posted by obgyn65 View Post
Hello everyone

I was using my FIRE spreadsheet last night and lowered the inflation rate from 3% to 1.5%. The impact of this change on the amount I can withdraw over 45-50 years is significant.

My question - how does your SWR factor in inflation ?

This is my last post for 2010 (I am traveling again until Sunday), so best wishes for 2011 to everybody.
SWR doesn't factor in inflation. WR plus inflation plus tax needs to be equal to or less than total portfolio return. So, the safe WR needs to be less than total portfolio return less inflation.

A lower inflation rate has a significant positive impact on portfolio survivability. Lower inflation is a risky assumption, however, and the consequences of being wrong can be severe.

In general, inflation is trending lower in those areas that are most important to younger consumers (manufactured goods, low value services) and inflation is trending higher in those segments most important to retired folks - travel, professional services, high value services.
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Old 12-30-2010, 03:42 PM   #5
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Underestimating inflation over the long term can be a real killer. Probably better to overestimate it.
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Old 12-30-2010, 04:12 PM   #6
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Don't make the mistake of using a constant inflation rate over your projected retirement period. Order of events matters. An "average" inflation rate of 3% resulting from greater than 3% early and less than 3% late will result in less favorable outcomes, by far, than an "average" inflation rate of 3% resulting from less than 3% inflation early and greater than 3% late.

Early high inflation is the survival rate killer, even if the "average" inflation rate for the tested period is a reasonable number, such as 3%. I'd much rather retire into a recession, which I did, than retire into a high inflation period such as the poor suckers who were wearing "WIN" badges during their intial retirement years in the 70's.

One of the niftiest features of FireCalc is that it calculates survival rates vs actual historical rates of inflation. It's a mistake to override this and plug in an "average" number.
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Old 12-30-2010, 04:57 PM   #7
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Does anyone use a different, higher inflation rate on health care costs than on living expenses in general? I always hear health care goes up faster than inflation in general, but how much faster?
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Old 12-30-2010, 05:02 PM   #8
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Does anyone use a different, higher inflation rate on health care costs than on living expenses in general. I always hear health care goes up faster than inflation in general, but how much faster?
Absolutely. I haven't messed with firecalc much but I have a complex spreadsheet and healthcare goes up a lot more than inflation. Without doing any research - 8-12% wouldn't be unreasonable numbers right now. After 2014 with the new US healthcare, I have no idea what will happen.
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Old 12-31-2010, 05:08 AM   #9
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A more complicated topic than one might expect...

Using an average inflation rate for analysis can be somewhat helpful, but it does not reflect reality.

FIRECALC let's you do some what-if scenarios on inflation variable (historical PPI, CPI, or a fixed inflation rate). You should be able to runs some scenarios and see how it changes. This will probably be more realistic than you spreadsheet (assuming your spreadsheet is just factoring in TMV and not the fluctuations in the variables from year to year).
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Old 12-31-2010, 09:54 AM   #10
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We use 12% for healthcare inflation and that per the last four years has been right on. this is on top of 3.5% for inflation in general for all other items in the budget.
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Old 12-31-2010, 02:27 PM   #11
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We use 12% for healthcare inflation and that per the last four years has been right on. this is on top of 3.5% for inflation in general for all other items in the budget.
Is that a total inflation rate of 15.5% on health care, or do you mean you inflate health care at 12% and all other expenses at 3.5%?
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