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Old 07-20-2016, 03:14 PM   #21
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Inflation for the last 5 years...
Thanks. Is that inflation as measured by the CPI?
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Old 07-20-2016, 03:23 PM   #22
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Ok I guess I do have some implicit forecasts. Like some others I simply assume my divs keep going up at least twice as fast as inflation. Inflation in Canada has been between 1-2%. This will keep my total cash flow increasing faster than inflation. Every once in a while I intend to sell down the portfolio for large gifts or purchases.

Can someone explain to me how they would change their behaviour in retirement based on forecasts rather than actuals. I under how forecasts would be useful in the accumulation phase.
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Old 07-20-2016, 04:05 PM   #23
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...Can someone explain to me how they would change their behaviour in retirement based on forecasts rather than actuals. I under how forecasts would be useful in the accumulation phase.
One example from my spreadsheet... the return assumption affects the projected tax-deferred balance at age 70 (I'm 55 now). That balance determines how much of the RMD will be taxed at various rates (15% vs 25%, possibly 28% or higher in my case). That, in turn, influences my decision today about how aggressively to convert to Roth. At low returns, which is my usual assumption, I can be less aggressive, converting only to the top of the 15% bracket. At higher return assumptions, I may choose to be more aggressive, possibly converting into the 25% bracket for instance.
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Old 07-20-2016, 04:37 PM   #24
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In my spreadsheet I assign separate inflation rates for medical expenses (10%) and all other expenses (3%). For my investments, I assign different rates of return for each bond fund, and a separate number of cents per share via dividends and cap gains in my stock funds.
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Old 07-20-2016, 09:28 PM   #25
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Can someone explain to me how they would change their behaviour in retirement based on forecasts rather than actuals.
In our case, we have in our plans that there are two changes we can easily make to our future behavior if needed based on forecasts:

(1) Modify allowable budget for expenses - currently have a very high allowable budget based on current forcasts but can easily cut ~30%-50% from that if economy takes a dive.

(2) Change how aggressive we do Roth Conversions - currently making very aggressive conversions yearly but could cut back if things looked tighter.
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Old 07-20-2016, 11:49 PM   #26
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I do not use forecasts. All I know is that we need at least a 0% real return.
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Old 07-21-2016, 04:43 AM   #27
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Agreed, some don't need forecasting, those that do should note that actuarial ruin in retirement generally causes one of the following:

4) live in a tent down by the river

(paraphrased from the book)
I was planning to live in a VAN down by the river. I guess I better start saving.
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Old 07-21-2016, 04:44 AM   #28
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Ok I can see there may be tax reasons. My portfolio is entirely in taxable accounts so this doesn't affect me. Hard to see why someone would reduce their spending based on a forecast though unless the actuals precipitated the change in outlook? Maybe we're discussing semantics?
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Old 07-21-2016, 05:55 AM   #29
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It looks like 0 real will pay the bills. I'll wing it with the rest.
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Old 07-21-2016, 06:54 AM   #30
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Hard to see why someone would reduce their spending based on a forecast though unless the actuals precipitated the change in outlook? Maybe we're discussing semantics?

I think we are talking semantics. Our entire decision that we could retire included our assumptions (i.e. Forecasts) of expected expenses, rate of returns, dividends received, tax rates, inflation, etc. Our plan on how much we can spend will be based on similar estimates.


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Old 07-21-2016, 07:48 AM   #31
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Thanks. Is that inflation as measured by the CPI?
Yes, that is the CPI-U for all urban consumers. Note that is different than the CPI-W which is used for Social Security.
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Old 07-21-2016, 07:52 AM   #32
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In my spreadsheet I assign separate inflation rates for medical expenses (10%) and all other expenses (3%). For my investments, I assign different rates of return for each bond fund, and a separate number of cents per share via dividends and cap gains in my stock funds.
This seems like a reasonable assumption to me. But it makes me wonder who is getting advantage of a 10% inflation rate? Insurance companies, pharmaceutical, US government (medicare), doctors, etc? Is there an investment that will help hedge against the higher inflation rate for medical care?
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Old 07-21-2016, 07:56 AM   #33
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I was planning to live in a VAN down by the river. I guess I better start saving.
you can get those pretty cheap on CL
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Old 07-21-2016, 07:57 AM   #34
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This seems like a reasonable assumption to me. But it makes me wonder who is getting advantage of a 10% inflation rate? Insurance companies, pharmaceutical, US government (medicare), doctors, etc? Is there an investment that will help hedge against the higher inflation rate for medical care?
no way medical inflation stays a flat 10%, otherwise medical expenses would overtake the gdp at some point - google Getzen trend model
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Old 07-21-2016, 08:02 AM   #35
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"What are we all using for inflation/investment return rates?"

Can't speak for 'all', but I don't use any numbers for these. I let a tool like FIRECalc use the actual historical data. Markets and inflation do not provide a steady "x%", so why pretend they do? And they won't listen to you anyhow! Sequence of returns have an effect.

But as a gut-check, FIRECalc reports that a 3.34% spending rate is 100% historically safe for a 40 year period. You can run that backwards and come up with the historically worst real return.

As a reference point, and easy math, a zero real return (and no variation), would allow spending at 1/40 = 2.5%. So the worst period in history provided something better than average zero real returns. (I'm not sure you can just subtract them to come up with a 0.84% historical real return, or if you need to look at compounding, as I'm on my first cuppa).

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Old 07-21-2016, 08:06 AM   #36
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Can't speak for 'all', but I don't use any numbers for these. I let a tool like FIRECalc use the actual historical data.
google ASOP 27 on selecting economic assumptions and you will see why no one uses 100% historical data for future projections
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Old 07-21-2016, 08:32 AM   #37
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Can't speak for 'all', but I don't use any numbers for these. I let a tool like FIRECalc use the actual historical data.
google ASOP 27 on selecting economic assumptions and you will see why no one uses 100% historical data for future projections
Thanks, I may look at that a bit later, but it appears to be somewhat irrelevant. I'm not using historical data to to tell me the future, it's just a data point for reference. At any rate, any look at future spending against the portfolio has to involve "future projections".

Even a zero return calculation assumes your portfolio keeps up with inflation. That might be considered a safe assumption, but it is an assumption none-the-less. Dang future!

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Old 07-21-2016, 08:46 AM   #38
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Thanks, I may look at that a bit later, but it appears to be somewhat irrelevant. I'm not using historical data to to tell me the future, it's just a data point for reference. At any rate, any look at future spending against the portfolio has to involve "future projections".

Even a zero return calculation assumes your portfolio keeps up with inflation. That might be considered a safe assumption, but it is an assumption none-the-less. Dang future!

-ERD50
it's fairly short and extremely relevant, IMO - it's guidance on how professional guessers select assumptions for things like future inflation, asset returns, wage growth, etc.
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Old 07-21-2016, 09:27 AM   #39
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if you don't you may run the risk of actuarial ruin

I think this is a must read - https://www.amazon.com/Money-Life-Li.../dp/0985384603

I've read about half of it and it's outstanding.
Some of the reviews say the book is simplistic and steers you towards annuities. Is that true?
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Old 07-21-2016, 09:30 AM   #40
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Some of the reviews say the book is simplistic and steers you towards annuities. Is that true?
it's somewhat simplistic but I think it's a good read - not sure it "steers" one towards annuities but honestly everyone should at least consider them as part of the total retirement income package, IMO, especially those that don't have DB and SS income, which unfortunately may be the majority of retirees after 10 years or so

systematic withdrawals are one if the 3 RIGs (retirement income generators one can get from a sample portfolio) in the book, the other two being investment income and the third annuities

he goes over the pros and cons of each, including hybrid approaches; he also talks about the huge con of SW being market risk, which can be a huge risk as we all know, especially if you take a significant hickey right after you retire with that big lump sum distribution

I think this is great book for everyone to read (even those of us that think they know it all.)
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