thinking about inflation

[Cut-Throat]

Wondering how much cheaper the guy spending $14K a year can go...

"Don't worry about it" doesn't seem like much of a plan. "Don't over stress about it" sounds reasonable though.

Except that the OP was not the one spending the 14K a year......



So, my advice stands to the OP... Don't worry about it or Stress About, however you like the terminology.

 

[medved]

I’m not overly stressed. Just trying to make a smart plan to address what I see as my only material financial risk.

If I could manage on $14k a year I would not even be thinking about this. But I spend more than that per month!

 

[audreyh1]

I’m not overly stressed. Just trying to make a smart plan to address what I see as my only material financial risk.

If I could manage on $14k a year I would not even be thinking about this. But I spend more than that per month!

Hah! Our new blow that dough idol!

IMO 50% equities should cover inflation and you don't need to try to beat inflation with the fixed income allocation.

You might gain a lot with reducing your monthly spending. But if your investments are enough to cover it, then never mind!

 

[UnrealizedPotential]

Medved,



have you looked at ways to lower your 14K + a month spending? Or are comfortable with that amount and just want to put padding on your nest egg to cover inflation? Not judging, just asking.

 

[medved]

I could reduce spending and I would certainly do so if it becomes necessary. For now, absent some black swan event, I should be OK at that level. But a decent amount of my spending is discretionary (restaurants, charitable, helping the kids, etc) so I could reduce if need be.

 

[UnrealizedPotential]

Medved, I'm no expert and I don't claim to be. However, my only suggestion would be to try and cut the inflation rate out of your budget and invest it. That way inflation is covered. I'm no math expert, but 2.2%, my inflation rate guess , taken out of 15K, my guess as to your monthly expenses, would be $330 a month. Invest the $330 a month and you're covered.

 

[Sunset]

OP - I can only suggest a reduction in required spending is a way to insulate from inflation.

The classic example is to buy real estate to live in, vs renting.
The extreme example would be to buy a farm to live on, and grow crops and raise animals for your own food supply, which I think you are far past that level of savings.

 

[imoldernu]

FWIW, the current CPI @2.8, is the highest since February 2012.

Loved the Charlie Munger quote... Reminded me of when I was sitting in on meetings in NYC with him and Rawleigh Warner (Mobil CEO) (me as a fly on the wall) back in the early 1980's. Lots of respect, sitting at the base of power, even though they brought down my company. Bit of nostalgia.

 

[medved]

OP -
The extreme example would be to buy a farm to live on, and grow crops and raise animals for your own food supply, which I think you are far past that level of savings.

I think I probably need something other than the Old McDonald approach. But it’s an interesting idea.

 

[scrabbler1]

The best protection against inflation I know of is to have a surplus of monthly income every month. You can save it, invest, or do anything you want with it. For example, I live on about 14K a year , but my portfolio produces much more than that. I wanted a surplus of extra money every month because I quit my job so young, at age 46, I wanted to address inflation, and I wanted my portfolio to continue to grow over time.


So what I have been doing is putting the extra money I don't spend every month back in my investments. There are some funds I have that produce income and I don't take it, I just let it reinvest. That is my inflation protection, because someday I will need those funds. I have my pension I can begin to collect at age 50 if I am desperate, that is not looking likely at this point, I doubt if I will need it very soon.


I have a T-Ira I can tap at age 59.5 and SS later down the road. I look at all these as protecting myself against future inflation.

You have described my general ER plan. When I ERed 10 years ago at age 45, I built into my budget a cushion, or surplus, of investment income over expenses to protect me against inflation as well as to cover any small, unforeseen spikes in spending.

I have been living off only my taxable investments for the last 10 years and will continue living off them for the next ~5 years until the first of my "reinforcements" arrive. That is unfettered access to my rollover IRA at age ~59.5. In my 60s, the other reinforcements will arrive, meaning my frozen company pension and SS. All those items will act as a hedge against inflation, especially inflation in health care and health insurance premiums. Another hedge against inflation is, of course, any equity holdings in my taxable and IRA investments.

I have been reinvesting less and less of my investment income surplus in the last few years but still clear a surplus. I always anticipated this, even the possibility of having to use some principal to cover expenses as I near the time I can tap into the IRA. That hasn't happened yet, but it could. Just having made it to age 55 without having to do so has put me ahead of my original ER projections from 10 years ago.

My longer-term ER projections show my financial picture only improving once those reinforcements kick in, wiping out any real chance of inflation being a problem.

 

[Cut-Throat]

Medved, I'm no expert and I don't claim to be. However, my only suggestion would be to try and cut the inflation rate out of your budget and invest it. That way inflation is covered. I'm no math expert, but 2.2%, my inflation rate guess , taken out of 15K, my guess as to your monthly expenses, would be $330 a month. Invest the $330 a month and you're covered.

Most withdrawal schemes have already built into them 'inflation protection'. So this is 'doubling down' on the problem, and will result in even more money left on the table when you die.... Even the '4% rule' will usually leave a Pile on the table about 80% of the time. You are making this more complicated than need be....

 

[george76]

FWIW, the current CPI @2.8, is the highest since February 2012.

Does anybody know how the CPI compares to the Cleveland Fed's 10 year expectation of future inflation? 2.8% vs 2.04% is a big difference. Maybe we can assume the future expectation number to go up?

https://www.clevelandfed.org/our-research/indicators-and-data/inflation-expectations.aspx

 

[MichaelB]

I think the most effective way to deal with inflation is to let someone else worry about it. By that I mean expect business management to find a way to grow profits after inflation, so invest in them, as that will be reflected in the price of equities. Something similar with commercial real estate - expect businesses to be willing to pay higher rents over time as they find new ways to make a profit after inflation, so invest in the property they will be using.

So, equities and commercial real estate are ways for investors to look for real, inflation adjusted growth over time. One risk, probably the greatest, is that valuations do not grow in step with inflation over long periods. Like the hare and tortoise, early inflation often outpaces equity valuations, and equities later recover and pass inflation.

This would lead to a diversified portfolio of equities and short term fixed income, ready to rebalance and increase the equity allocation once higher inflation rates become fully factored into equity prices.

 

[USGrant1962]

Does anybody know how the CPI compares to the Cleveland Fed's 10 year expectation of future inflation? 2.8% vs 2.04% is a big difference. Maybe we can assume the future expectation number to go up?

https://www.clevelandfed.org/our-research/indicators-and-data/inflation-expectations.aspx

I don't know the Fed's expectation of the future expectation, but the Fed uses the Personal Consumption Expenditures (PCE) index when it looks a inflation, including for its targets. PCE was 2.2% in May.

 

[Amethyst]

Holy cow, that is some graphic. Where is the user manual?

I see where you can hover over each item and a short explanation appears, but the explanations are not much help to this non-economist.
Example: It says the Dollar to Gold Ratio is $4,483.00 per oz. Obviously, that's not the price of gold in dollars. The explanation is "Year over year increase in U.S. M2 money supply, divided by the yearly world gold production in ounces."

It would be helpful to know how to relate each of the fields to a particular concern, such as inflation risk.

While this may seem afield of the discussion, I would suggest that understanding debt, and international debt may be the best guide to planning for the future.

U.S. National Debt Clock : Real Time

Learning to use the debt clock is not easy. What seems to be simple numbers, the clocks' many tools allow for personal, household, historical, state, national, international comparisons... with eight major contributing sets of statistics (at the bottom of the clock.).

Use it not just for understanding the movement of money, but as the broader satisfaction of developing a Weltanschauung to help living in the coming years.

Inflation is always directly related to debt, but all of the connections, taken together can help to project the parts of the economy... that are changing. Personal debt, mortgages, sales, the price of gold, and a dozen other factors, looked at with the available historical comparison provide a better comprehensive overview than some simple single factor graph/charts.

A good place to learn in your spare time.

 

[audreyh1]

I don't know the Fed's expectation of the future expectation, but the Fed uses the Personal Consumption Expenditures (PCE) index when it looks a inflation, including for its targets. PCE was 2.2% in May.

+1

 

[UnrealizedPotential]

Most withdrawal schemes have already built into them 'inflation protection'. So this is 'doubling down' on the problem, and will result in even more money left on the table when you die.... Even the '4% rule' will usually leave a Pile on the table about 80% of the time. You are making this more complicated than need be....

Maybe , maybe not. Retiring in your 40's is very young. Not many people can do it. Many that can are afraid to, I know I was, but did it anyway. It is true that a healthy stock allocation will provide some inflation protection, but nothing is guaranteed. If I was in my 50's or 60's perhaps I would feel differently about it, but I'm not, I am 48.


I know in time I will ratchet up spending. It has already begun and I am fine with it. I expect it, even welcome it. But I am still very, very conservative and that's my right . So far my plan is working, and if it ain't broke , don't fix it.

 

[brett]

We expect inflation to tick up over the next 2 years because of the current trade wars.

 

[Cut-Throat]

Maybe , maybe not. Retiring in your 40's is very young. Not many people can do it. Many that can are afraid to, I know I was, but did it anyway. It is true that a healthy stock allocation will provide some inflation protection, but nothing is guaranteed. If I was in my 50's or 60's perhaps I would feel differently about it, but I'm not, I am 48.


I know in time I will ratchet up spending. It has already begun and I am fine with it. I expect it, even welcome it. But I am still very, very conservative and that's my right . So far my plan is working, and if it ain't broke , don't fix it.

Well sure......But just understand that the more conservative you are, the bigger chance that you will leave more money on the table. The challenge for most retirees is to spend as much as possible and be assured that you don't run out of money.



I could probably 'survive' on 14K per year, but that would not fit my 'Retirement dream'. So, your plan works for you, but it would not work for Most people. I've been retired for 17 years now.



I employ VPW, which is a much safer withdrawal method than any fixed amount system. It accounts for Historical Inflation and Market downturns. It has been shown to be the most efficient withdrawal method in terms of spending down your portfolio. I invest in only 30% stocks and delay SS to age 70 to 'Buffer' withdrawal amounts.

 

[ESRwannabe]

Yes, my expenses are 14K a year.

That's awesome. Lifestyle creep has gotten me up to around $2,400 a month ($28,800) but half of that is for a one bedroom apt rent ($1,090) and a car lease ($260). The car lease was stupid in hindsight.

I have $500k in investments ($400k in taxable) and 17 years in a state gov pension. I'm 42 and make $72k w-2 income.

I was hoping to retire by 45 but I don't think I will make it. I have been incredulous about inflation, but not anymore with the way things are going. Tariffs will make everything more expensive. So I have bailed out of leveraged assets (CEFs) and put it all into VPGDX. So now I will have to wait for compounding to get me up to $750k, which will probably take a decade.

The only way to speed things up will be to decrease spending. I have been watching a lot of youtube videos on expating and living in a RV recently lol.

 

[traineeinvestor]

Inflation protection for us is having a high allocation to equities and real estate + arbitrarily assuming our post-retirement expenses will be 20% higher than pre-retirement expenses.

Another inflation hedge is to take on some debt - at the moment we can borrow at or slightly below the local rate of inflation and invest in assets that yield more than the rate of inflation (with an acceptable level of risk). In addition to picking up a small carry each year, the real value of the debt declines. Over time, it's a meaningful addition to our finances.

 

[97guns]

Can the trade wars be a catalyst for inflation? Cost of goods increase on their own accord, add tariffs to the mix and we’ll see goods inflate quite a bit.

 

[Jerry1]

You can stockpile non-perishable goods, locking in today’s price. That $135K Honda is only about $30K today. Of course holding costs and the advancement in technology then become your risk.

Agree with others. OP is worrying about something he already has under control. Stick with the current allocation and focus on spending reductions if it gets bad.

The worse thing about hyper inflation, IMO, will be the impact on the majority of people who were not able to be prepared at any level. When societies break down, holding tips isn’t going to be much comfort.

 

[Oz investor]

i bought a block of land in 1975 and the interest was 17.5% p.a. ( because i was classed as sub-prime aka no credit history )

oh the joy i get now from watching the mess G.E. Finance is in now

it wan't instant but karma DID get them

however i quickly learned about inflation ( and that block of land did increase in value )

 

[OldShooter]

Can the trade wars be a catalyst for inflation? Cost of goods increase on their own accord, add tariffs to the mix and we’ll see goods inflate quite a bit.

Not just a catalyst, but a direct cause. A self-inflicted wound, really, but the resulting inflation is not something that the Fed can affect very much with monetary policy.

The more serious, and also uncontrollable, risk is a decline in the value of the dollar. Unlike tariffs, which are sort of rifle shot attacks on specific imported products, a decline in the dollar hits the majority of the economy. In addition to direct imports like tv sets, clothing, etc. it also drives up the prices of internationally-traded commodities like oil and agricultural products --- even if they are produced in the US.