Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Trying to Understand????
Old 02-07-2006, 02:05 PM   #1
Dryer sheet wannabe
 
Join Date: Feb 2006
Posts: 12
Trying to Understand????

I have heard so many of you talking about the effect of inflation over time, and its impact on the purchasing power of the dollar however, here is my question, if you are debt free, (and stay that way) what is inflation going to attack?

Walk through this senerio with me, if the following items are PAID FOR, one can live quite well off of 40K a year (taking the rule of 4% into account) and with 1mill in your retirement fund you will NEVER touch the principal:

Paid For Items:
Home
Cars
Credit Cards

Fixed Payments to Make:
Utilities: $300 Month
Auto Insuranc$150 Month
Health Insurance $ 500 Month (currently)
Food $800 Month
Total: $1,750
Total Draw Monthly: $3,333
Left Over for Month: $1,583

Is there something I am missing?
__________________

__________________
scoopsteve is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Trying to Understand????
Old 02-07-2006, 02:20 PM   #2
 
Posts: n/a
Re: Trying to Understand????

Yeah you are missing a lot!

You give a budget of Utilities for $300. I don't know about you but my heat Bill has doubled this year. I'd call that Inflation!

Food will go up, gas will go up - You do continue to buy food and Gas right?
__________________
  Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 02:21 PM   #3
Thinks s/he gets paid by the post
 
Join Date: Jul 2003
Location: Pasadena CA
Posts: 2,695
Re: Trying to Understand????

Try collecting all your costs for say three months and see where your money goes.

So lets see, entertainment? travel?
Home maintenance, car operations and replacement fund, gifts, charity, eating out, computer use & replacement.
Hobbies?
Making spouse happy, looking for a spouse, getting away from spouse...
__________________
T.S. Eliot:
Old men ought to be explorers
yakers is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 02:24 PM   #4
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
Re: Trying to Understand????

Missing your personal inflation on the goods and services you are buying. For example, in 2004 health insurance premiums increased 11.2%, far outpacing general inflation. For a number of years, the cost of health insurance has risen greater than the general inflation rate. http://www.nchc.org/facts/cost.shtml

And as CT mentions, look at increases in costs of fuel.

There are also figures in a recent Economist which shows pretty hefty inflation on food prices.
__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 02:31 PM   #5
Thinks s/he gets paid by the post
SteveR's Avatar
 
Join Date: Jul 2005
Posts: 2,803
Re: Trying to Understand????

Also, you need to add taxes to your list. RE tax, Fed. income tax, State income tax, realestate tax, and what ever other taxes you might have to deal with.

Travel? Gifts? Repairs, maintenance, replacements etc. as stated by the others so far also need to be included in your list.

__________________
Work? I don't have time to work....I'm retired.
SteveR is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 02:32 PM   #6
Full time employment: Posting here.
 
Join Date: Mar 2005
Posts: 557
Re: Trying to Understand????

Inflation eats away at your ability to purchase goods and services over time. *Unless your income is inflation adjusted in some way, inflation will reduce the goods and services you can purchase each year in the future.
So your $300 a month in utilities may be, even at 6% inflation, $600 in 12 years, $1,200 in 24 years, etc.
__________________
uncledrz is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 02:33 PM   #7
Thinks s/he gets paid by the post
Spanky's Avatar
 
Join Date: Dec 2004
Location: Minneapolis
Posts: 4,046
Re: Trying to Understand????

Quote:
Fixed Payments to Make:
Utilities: $300 Month
Auto Insuranc$150 Month
Health Insurance $ 500 Month (currently)
Food $800 Month
Total: $1,750
Total Draw Monthly: $3,333
All these items go up in cost with inflation.

__________________
May we live in peace and harmony and be free from all human sufferings.
Spanky is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 02:35 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Aug 2005
Posts: 2,056
Re: Trying to Understand????

Even if you're debt free and your house is paid off, inflation will still stick it to you in other ways. For example, my property taxes were $2356 in 2004, and around $2550 in 2005. That's an 8.2% increase right there!

I paid $1.74 per gallon last year for home heating oil. This year it's market price with a $3.19 cap. I think I paid $2.59 per gallon at the last fill-up. That's a 49% increase. I just thank God this has been a mild winter so far!

Look at what's happened to gasoline costs over the years. And when gasoline goes up, food items often do, as well. I'm actually surprised that my electric bill hasn't increased over the years. I first had an account in my name in December 2004. I think the cost per kilowatt hour is about the same now as it was back then...although they do tack on fees and stuff that go up.

If you have a car, depending on your age, or changing demographics in your neighborhood, your car insurance can go up. Mine shot up when I moved a couple years ago, but then this year I went into the 35-39 age bracket, so it's come back down. Now car prices haven't kept up with inflation, especially when you factor in all the safety equipment and features that today's cars have. I could probably get a base Dodge Charger for not much more than what I paid for my base Intrepid over 6 years ago. But car repairs have definitely gone up, as labor rates continue to rise. Replacement parts get more expensive, and cars themselves just become more complex and expensive to repair, in general.

And even if your house is paid for, chances are that eventually you'll need new appliances, plumbing work, new roof, etc. Oddly, appliance prices don't seem like they've gone up over the years, especially with respect to inflation. But anything that has a labor rate attached to it, or raw materials, sure seems to.

It all adds up, and it can be pretty scary how fast inflation can get you if you don't watch out.
__________________
Andre1969 is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 02:37 PM   #9
Full time employment: Posting here.
 
Join Date: Aug 2004
Posts: 909
Send a message via ICQ to Marshac Send a message via AIM to Marshac Send a message via Yahoo to Marshac
Re: Trying to Understand????

10 Years @ 3.5%

Utilities 300 $356.31
Insurance 150 $178.15
Health 500 $593.84
Food 800 $950.15
__________________
Marshac is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 02:52 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 4,005
Re: Trying to Understand????

Quote:
Originally Posted by Marshac
10 Years @ 3.5%

Utilities 300 $356.31
Insurance 150 $178.15
Health 500 $593.84
Food 800 $950.15
?? Seems low? I got $423 for utilities.
__________________
justin is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 03:14 PM   #11
Recycles dryer sheets
 
Join Date: Dec 2005
Posts: 137
Re: Trying to Understand????

You want to protect against inflation if thats what is occuring, which most people assume is the only thing that can happensince that's all they've experienced (unless they happen to live in Japan or Switzerland). However, in peacetime mild (good) deflation of oversupply (1-2%) is the norm.

The Fed, contrary to popular belief, is fighting deflation, not really inflation at the moment. They're deadly afraid of the (bad) deflation of deficient demand, which is what has caused Japan so much trouble. That's why we had a housing bubble, as the Fed a few years ago dropped interest rates below the floor to stimulate demand.

So your no debt scenario is a good deflation hedge, as effective debt increases in deflation. In the immediate years ahead we're going to have, at best, mild inflation (assuming they can keep the party going), so I wouldn't worry much about it if your retiring soon. If you retire at the outbreak of a major war then you want to load up on those TIPS.
__________________
danm is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 03:25 PM   #12
Thinks s/he gets paid by the post
Rustic23's Avatar
 
Join Date: Dec 2005
Location: Lake Livingston, Tx
Posts: 3,624
Re: Trying to Understand????

? my trusty HP 17b gets different numbers
10 Years @ 3.5%

Utilities 300 $423.18
Insurance 150 $211.59
Health 500 $705.30
Food 800 $1,128.48

that was compounding anual. Would be slightly higher if monthly figures used utilities goes to $425.50, daily figures even higher.
__________________
If it is after 5:00 when I post I reserve the right to disavow anything I posted.
Rustic23 is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 04:29 PM   #13
Thinks s/he gets paid by the post
 
Join Date: Jan 2004
Posts: 2,049
Re: Trying to Understand????

It can't be done. No American lives on less then $40k a year!

The 4% rule takes inflation into account (generally).


Edit: month to year
__________________
eridanus is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 04:41 PM   #14
Full time employment: Posting here.
 
Join Date: Aug 2004
Posts: 909
Send a message via ICQ to Marshac Send a message via AIM to Marshac Send a message via Yahoo to Marshac
Re: Trying to Understand????

Quote:
Originally Posted by Rustic23
? my trusty HP 17b gets different numbers
I used the FV function in excel.
__________________
Marshac is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 05:04 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
mickeyd's Avatar
 
Join Date: Apr 2004
Location: South Texas~29N/98W
Posts: 5,880
Re: Trying to Understand????

An easy way to imagine how inflation affects the average person is to picture a loaf of bread that you purchese at the market today. With inflation, next year there will be one less slice of bread in the loaf, but you probably will not miss it. Year 2, same story, but now missing 2 slices from original loaf. After 10 years, you will probably begin to notice it however it is now too late as you can not afford to buy a larger loaf.

Inflation is insidious and there ain't a damn thing that you can do about it. That's why the Fed is so powerful in D.C. They can do something about it.
__________________
Part-Owner of Texas

Outside of a dog, a book is man's best friend. Inside of a dog, it's too dark to read. Groucho Marx

In dire need of: faster horses, younger woman, older whiskey, more money.
mickeyd is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 06:19 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,408
Re: Trying to Understand????

there has not been a 20 year period in our history where prices have not doubled
__________________
mathjak107 is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 06:32 PM   #17
Thinks s/he gets paid by the post
Rustic23's Avatar
 
Join Date: Dec 2005
Location: Lake Livingston, Tx
Posts: 3,624
Re: Trying to Understand????

Marshac,
I am not sure where the difference is. Below is a paste from my excell FV function. It agrees with the HP. I also ran it through an HP 19bII same answer. Don't mean anything disrepectful, Just wondering where the difference is.

10 years
0.035 rate
300 amount
($423.18)
__________________
If it is after 5:00 when I post I reserve the right to disavow anything I posted.
Rustic23 is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 06:35 PM   #18
Thinks s/he gets paid by the post
Rustic23's Avatar
 
Join Date: Dec 2005
Location: Lake Livingston, Tx
Posts: 3,624
Re: Trying to Understand????

mathjak107
Quote:
Originally Posted by mathjak107
there has not been a 20 year period in our history where prices have not doubled
This appears an accurate statement. That would be about a 3.6% inflation rate. I think you will find it even higher for the past 30 years. Long term 3.5-4% inflation rate for U.S., however, I think it has been closer to 5% in the last 30 years. I think that is more due to the high inflation of the Carter years.
__________________
If it is after 5:00 when I post I reserve the right to disavow anything I posted.
Rustic23 is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 07:38 PM   #19
Full time employment: Posting here.
 
Join Date: Aug 2004
Posts: 909
Send a message via ICQ to Marshac Send a message via AIM to Marshac Send a message via Yahoo to Marshac
Re: Trying to Understand????

Quote:
Originally Posted by Rustic23
Marshac,
I am not sure where the difference is.
Heck of a thing- I'm home now and using Excel 2003, and I put in the formula again
=fv(3.5%,10,,300)
And our numbers match. I'll have to check that at work tomorrow in Excel XP. Who knows... I could be totaly warped too- It was a full day of TSQL.... hopefully those numbers are better
__________________
Marshac is offline   Reply With Quote
Re: Trying to Understand????
Old 02-07-2006, 08:04 PM   #20
Thinks s/he gets paid by the post
Rustic23's Avatar
 
Join Date: Dec 2005
Location: Lake Livingston, Tx
Posts: 3,624
Re: Trying to Understand????

I've punched FV values in the the old HP for a long time. Thought they were right, but I learned a long time ago, I can make a mistake.... just can't let the DW know that.
__________________

__________________
If it is after 5:00 when I post I reserve the right to disavow anything I posted.
Rustic23 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Help me understand asset allocation in later years accountingsucks FIRE and Money 2 04-28-2007 02:58 PM
I'm in AMT Hell - anyone understand how to recover AMT Credit from ISO exercise? JB FIRE and Money 4 04-14-2007 10:39 AM
Anybody Understand I-Bond Rates? km4hr FIRE and Money 10 07-30-2006 03:14 PM
Anyone understand exactly how TIPS work GTM Other topics 5 11-04-2005 01:07 PM
CONFUSED BUT TRYING TO UNDERSTAND AJL FIRE and Money 26 10-07-2005 01:57 PM

 

 
All times are GMT -6. The time now is 11:18 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.