thinking about inflation

[medved]

I am in my mid 50s. I have saved enough money so that I can comfortably retire. I plan to work a couple more years, but really don't need to do that. After a couple of years of working on it, I have my asset allocation down to about where I want it -- my goal is 50/50 and I am around 55/45 now. That is close enough.

I feel like at this point my only significant financial risk is inflation. I am trying to think about the best protection against future periods of very high inflation. I am thinking the best protections are probably:

(1) to keep around 50% in equities, rather than moving even more to fixed income, with the idea that over the long term equities will help keep up with inflation;

(2) to keep some TIPS on the fixed income side; and

(3) to generally keep bond maturities relatively short.

Do you have other ideas? Part of me thinks I should take every dollar I have and move it to TIPS and I could live more than fine for the rest of my life. But I don't want to do anything so radical (and I don't want to pay the capital gains tax either).

 

[Gotadimple]

Hi, Medved,
I would agree, that your allocation is a safe one to use. Historically 50/50 or 60/40 gives growth and reasonable volatility. Putting everything in TIPS does put you at risk for inflation, because TIPS don't always match inflation.
You have to do what lets you sleep at night. If a lower equity percentage, like 40%, does it, then that is also a choice.

 

[braumeister]

I am trying to think about the best protection against future periods of very high inflation.

I don't worry about it too much. I don't think we're likely to see "very high inflation" again. We had that in the 70s and it got everyone's attention.

But some inflation is beginning to rear its head again, so I do agree it's wise to keep an eye on it. I'm a 60/40 believer myself, but 50/50 is also very reasonable and seems safe both ways.

 

[OldShooter]

... Putting everything in TIPS does put you at risk for inflation, because TIPS don't always match inflation. ...

Not sure where you got that. The only times TIPS don't match inflation is during deflation, where the gummint does not reduce the principal value by the amount of the deflation. Otherwise, on a new issue you get inflation plus the coupon rate paid on the current inflation-adjusted principle balance. On a secondary market purchase you get the same coupon rate on the current principle balance, but your YTM depends on what you paid for the TIPS.

For I-bonds I have no idea because the tiny annual purchase limit makes them useless to me. IIRC the way they handle inflation is quite different from TIPS, too.

We use TIPS as our main inflation hedge and are very happy with the strategy. We take a small yield hit vs the alternatives when inflation is low but we consider that to be an insurance premium for our inflation insurance policy. If inflation goes nuts, Treasury will stop selling TIPS to avoid throwing gasoline on a fire. In the consequent panic I expect that the value of our TIPS will increase beyond what simple arithmetic would predict as some people run to them almost regardless of cost. So the inflation may make life overall less fun, but we will be happy with our TIPS.

 

[OldShooter]

... I don't think we're likely to see "very high inflation" again. ...

Well, consider this:

The dollar rides high because it is the world's reserve currency. Literally every other country hates this just because most of them don't like the US in the first place and because the dollar's status allows us to use our banking system to punish people we don't like -- with lots of collateral damage worldwide.

The problem for others is that there is no good alternative to the greenback. Various proposals for baskets of currencies have been floated. The ruble, the yuan, and the Euro are the most popular contenders but other BRIC currencies have been discussed. The problem is the no one trusts the Russians, the Chinese are not much more trustworthy, and the Southern European countries have seriously damaged confidence in the Euro. So the dollar wins because the contenders all have self-inflicted wounds. This despite the fact that we are building up to national debt levels that would sink a lesser country's currency. This dollar-favoring situation will probably not go on forever.

So if the dollar drops 20%, all imports go up by 25%. Commodity products like oil, corn/maize, soy beans, and meats go up by similar amounts. The Fed is powerless because it cannot resurrect the failing currency. Nobody in the US will be having any fun, while others worldwide will be rejoicing.

Not worried about that scenario? Then there's less reason, but not zero reason, to worry about inflation.

 

[97guns]

Well, consider this:

The dollar rides high because it is the world's reserve currency. Literally every other country hates this just because most of them don't like the US in the first place and because the dollar's status allows us to use our banking system to punish people we don't like -- with lots of collateral damage worldwide.

The problem for others is that there is no good alternative to the greenback. Various proposals for baskets of currencies have been floated. The ruble, the yuan, and the Euro are the most popular contenders but other BRIC currencies have been discussed. The problem is the no one trusts the Russians, the Chinese are not much more trustworthy, and the Southern European countries have seriously damaged confidence in the Euro. So the dollar wins because the contenders all have self-inflicted wounds. This despite the fact that we are building up to national debt levels that would sink a lesser country's currency. This dollar-favoring situation will probably not go on forever.

So if the dollar drops 20%, all imports go up by 25%. Commodity products like oil, corn/maize, soy beans, and meats go up by similar amounts. The Fed is powerless because it cannot resurrect the failing currency. Nobody in the US will be having any fun, while others worldwide will be rejoicing.

Not worried about that scenario? Then there's less reason, but not zero reason, to worry about inflation.

The decline of the petrodollar is concerning, more and more countries are going away from it, here’s a nice read to familiar yourselves with it.

https://www.thebalance.com/what-is-a-petrodollar-3306358

 

[Car-Guy]

If you work enough years beyond what you think you'll need, all of sudden you may begin to feel inflation isn't a big risk either. Much more money than you need and fewer years to spend it. Happened to me.

 

[97guns]

If you work enough years beyond what you think you'll need, all of sudden you may begin to feel inflation isn't a big risk either. Much more money than you need and fewer years to spend it. Happened to me.

Do you mean it’s happening to you? Or are you dead already?

 

[Car-Guy]

Do you mean it’s happening to you? Or are you dead already?

No, it's happened. I "feel" I have more money than I'll ever need and I'm "sure" I have fewer years left "now" than I did to spend it.

 

[joeea]

I am in my mid 50s. I have saved enough money so that I can comfortably retire. I feel like at this point my only significant financial risk is inflation.

So you can comfortably retire unless inflation gets too high? What level of inflation have you projected to arrive at "comfortably"?

 

[joeea]

I don't worry about it too much. I don't think we're likely to see "very high inflation" again.

What does "very high inflation" mean to you?
5%?
8%?
10%?
12%?
More?

 

[braumeister]

What does "very high inflation" mean to you?
5%?
8%?
10%?
12%?
More?

Look at the first chart on this page:

Historic inflation United States = CPI inflation

The 1970s had "very high inflation."

 

[OldShooter]

... The 1970s had "very high inflation."

There is an interesting trap that people tend to fall in. Thinking that a 30 year average ought to be a good measure of historical inflation just misses the 70s and 80s excitement. Including that period in the average takes it from like 2.5% to 4% or more. Big difference!

Taleb's parable of the turkey also applies:

​

 

[medved]

So you can comfortably retire unless inflation gets too high? What level of inflation have you projected to arrive at "comfortably"?

I am probably too dumb to do that projection in a meaningful way, especially when one must take into account the extent to which my equities portfolio and TIPS may, partially, insulate me from the full impact of high inflation. And then, of course, there is the issue of the duration of high inflation as opposed to simply the rate of inflation (i.e., 18% inflation for one year is very different than 18% inflation for 7 years).

Having said that, if I thought we would be back to "Carter administration" inflation rates for some prolonged period of time during my retirement, I might have some concern. I have a pretty substantial cushion, but it could erode if, a decade from now, a pint of beer costs $42 and a new Honda Civic $135,000.

 

[joeea]

Look at the first chart on this page:

Historic inflation United States = CPI inflation

The 1970s had "very high inflation."

The years of the 70s had a very wide range of inflation rates. I remember them well.

You would have to be more specific.

 

[joeea]

I am probably too dumb to do that projection in a meaningful way, especially when one must take into account the extent to which my equities portfolio and TIPS may, partially, insulate me from the full impact of high inflation. And then, of course, there is the issue of the duration of high inflation as opposed to simply the rate of inflation (i.e., 18% inflation for one year is very different than 18% inflation for 7 years).

Having said that, if I thought we would be back to "Carter administration" inflation rates for some prolonged period of time during my retirement, I might have some concern. I have a pretty substantial cushion, but it could erode if, a decade from now, a pint of beer costs $42 and a new Honda Civic $135,000.

Okay, so you are confident you can retire comfortably, unless you can't.

I can't tell if you should be worried, but you probably shouldn't. Even if a new Honda Civic costs $135,000 in 10 years, you could probably buy something cheaper.

 

[medved]

Okay, so you are confident you can retire comfortably, unless you can't.

That would be one (perhaps slightly snarky) way of putting it. Another way would be to say I am confident in my ability to retire comfortably absent very high inflation rates. But I am concerned about the potential impact of high inflation. I am thinking about the best ways to mitigate that risk, and seeking constructive input from thoughtful people.

As I said earlier, I have a pretty substantial cushion. So I probably have less risk than 99% of others. But it is still worth thinking about.

 

[Cut-Throat]

a

That would be one (perhaps slightly snarky) way of putting it. Another way would be to say I am confident in my ability to retire comfortably absent very high inflation rates. But I am concerned about the potential impact of high inflation. I am thinking about the best ways to mitigate that risk, and seeking constructive input from thoughtful people.

As I said earlier, I have a pretty substantial cushion. So I probably have less risk than 99% of others. But it is still worth thinking about.

I think you can set your mind at ease Financially. As someone that has been retired for about 17 years now and has lived through the inflation of the 70s and the Financial collapse of 2008, I can tell you that finances are probably not a large concern, for those that participate on these forums. So, I wouldn't worry about that much.... If inflation happens you will adjust your shopping basket to cheaper items and do fine....

You can be assured however that Life usually ends bad (We all die). Hopefully without too much pain and suffering. But it will most always end badly.... So, the only thing you can do, is enjoy it while you can and stop worrying about finances.

 

[UnrealizedPotential]

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.

 

[Dtail]

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.

Your expenses are 14k a year?

 

[UnrealizedPotential]

Yes, my expenses are 14K a year. Living in the middle of no where Utah , one can get by very cheaply. I share a place with others and we share expenses. I wouldn't recommend doing what I am doing, it's very boring here, but I won't be here forever. I could spend much, much more if I wanted to, and I will once I relocate again, but I am not even close to that right now.
To be honest, this wasn't my plan to live so cheaply, but circumstances allowed it, and I am near relatives. I keep telling myself I will spend more, but I just haven't felt the need to yet.

 

[Dtail]

Yes, my expenses are 14K a year. Living in the middle of no where Utah , one can get by very cheaply. I share a place with others and we share expenses. I wouldn't recommend doing what I am doing, it's very boring here, but I won't be here forever. I could spend much, much more if I wanted to, and I will once I relocate again, but I am not even close to that right now.
To be honest, this wasn't my plan to live so cheaply, but circumstances allowed it, and I am near relatives. I keep telling myself I will spend more, but I just haven't felt the need to yet.

Hey kudos to you and it will facilitate all your future plans.

 

[audreyh1]

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.

That is simply a strategy of reducing your withdrawal rate. Of course that will help with future inflation.

Sounds like you have many expenses covered in the future by pension and SS, so you can “afford” to draw little from your investments.

 

[imoldernu]

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.

 

[RunningBum]

a


I think you can set your mind at ease Financially. As someone that has been retired for about 17 years now and has lived through the inflation of the 70s and the Financial collapse of 2008, I can tell you that finances are probably not a large concern, for those that participate on these forums. So, I wouldn't worry about that much.... If inflation happens you will adjust your shopping basket to cheaper items and do fine....

You can be assured however that Life usually ends bad (We all die). Hopefully without too much pain and suffering. But it will most always end badly.... So, the only thing you can do, is enjoy it while you can and stop worrying about finances.

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.