What are your inflation expectations

[Midpack]

As (most) everyone here already knows - don't throw up your hands, but know that no plan provides any guarantees (that none of us can predict the future is but one of the reasons why). Just use FIRECALC or something like it with default returns and inflation to see what all the possible outcomes and success rates with every sequence of returns since 1871 have been, and hope that covers it. Monitor your progress throughout retirement, and have a plan B/C/D in case it doesn't...life is uncertain, always has been/always will be.

And if you want to play with real returns, duration, etc. from there to see how those inputs play out in comparison, might be instructive. YMMV

The possible outcomes in the future are probably at least as broad as the past...

 

[rbmrtn]

I use the default value for the calculator in use. But as another post mentioned the personal effects may differ. Looking back at quicken data since 2000, my year over year spending has declined significantly. It was fairly flat 2000-2006, took step down in 2007 by slashing expenses, has been flat 2009 - present.

 

[Brett_Cameron]

For projection purposes, I use 2.5% inflation for expenses, SS benefits, and Federal tax parameters. Some expenses, I project suing multiples of the base inflation rate. I project using 3.5% real return on investment.

I plan using the projections with lots of contingencies on expenses. It amuses me. I know that reality will not match any plan I make.

 

[george76]

A good part of my post-retirement strategy includes upcoming inflation expectations over the next 40-50 years. I will be very concentrated in fixed income and the main risk is inflation. Also, inflation will push up nominal AGI which will push me into higher brackets. I do plan to invest small amounts into gold and TIPPS to hedge.

Looking at inflation swaps that trade in the financial markets, I pretty much derived

2013 2.10%
2014 2.30%
2015 2.60%
2016 2.70%
2017 2.80%
2018 3.00%
2019+ 3.00%

Any thoughts out there about your inflation expectations and what you are doing about this risk.

You mentioned inflation swaps that trade in the financial markets. Would you mind sharing a link as to where one can find the inflation projections that you come up with? I tried to google it, but I couldn't find anything that gave data as far out in the future as you have.

Thanks.

 

[timeasterday]

I use 3% inflation and 2% real returns for planning purposes.

 

[MichaelB]

You mentioned inflation swaps that trade in the financial markets. Would you mind sharing a link as to where one can find the inflation projections that you come up with? I tried to google it, but I couldn't find anything that gave data as far out in the future as you have.

Thanks.

The Cleveland Fed reports inflation expectations over the next 10 years to be 1.43%. This is derived primarily by comparing rate differentials between Treasury and TIPs. They report it regularly, here Cleveland Fed Estimates of Inflation Expectations :: Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.47 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade.

 

[george76]

The Cleveland Fed reports inflation expectations over the next 10 years to be 1.43%. This is derived primarily by comparing rate differentials between Treasury and TIPs. They report it regularly, here Cleveland Fed Estimates of Inflation Expectations :: Federal Reserve Bank of Cleveland

Thank you!

Very interesting site.

 

[Midpack]

Thank you!

Very interesting site.

+1. The real interest rate chart was awfully grim, but it won't last forever...

 

[audreyh1]

As (most) everyone here already knows - don't throw up your hands, but know that no plan provides any guarantees (that none of us can predict the future is but one of the reasons why). Just use FIRECALC or something like it with default returns and inflation to see what all the possible outcomes and success rates with every sequence of returns since 1871 have been, and hope that covers it. Monitor your progress throughout retirement, and have a plan B/C/D in case it doesn't...life is uncertain, always has been/always will be.

And if you want to play with real returns, duration, etc. from there to see how those inputs play out in comparison, might be instructive. YMMV

The possible outcomes in the future are probably at least as broad as the past...

Same here - I don't bother. I just use a conservative withdrawal rate and trust my portfolio to take care of itself as long as I maintain my AA.

My personal experience with inflation since retiring has been that our own spending has remained somewhat flat, whereas inflation is supposedly up 38% since then.

FWIW - I think quite a few of the inflation expectations here are high. I would really be surprised to see average inflation exceed 2.5% over the (nearer) long term. The global economy is just not that strong. A great deal of things would have to change.

 

[Lsbcal]

Those Fed curves derived from TIPS and nominal Treasuries (as mentioned by MichaelB) show the market's expected inflation rates.

Although those rates are probably our best future estimates (as I understand it from academic research), they do not cover unexpected inflation. TIPS cost a bit more then nominals because one is getting insurance for unexpected inflation.

FWIW, I don't own TIPS now but do have some older Ibonds. Shortening maturities helps to ride the unexpected inflation bumps but then you loose the premium for going out longer.

 

[David1961]

I generally use 4% inflation and 1.5% real return for planning.

 

[ziggy29]

I tend to look at it more in terms of real growth of my portfolio, not an absolute inflation rate. For example, I may hope a 60/40 AA will produce a 3% "real" return, and if it does, "Class of 2016" looks good for me. It's of secondary importance whether I earn 8% with 5% inflation or 5% with 2% inflation (though it can matter more for large taxable accounts).

 

[ejman]

I just hope we don't go into an extended deflationary period. It seems that the common wisdom is that all this stimulus money on a global basis will result in unprecedented inflation.
As Japan has shown it ain't necessarily so. It really wouldn't take much:
1) a bank crisis in Europe,
2) balance the budget by vastly reducing government expenses right now argument wins the day
3) Any number of geopolitical kabums

 

[ziggy29]

I just hope we don't go into an extended deflationary period. It seems that the common wisdom is that all this stimulus money on a global basis will result in unprecedented inflation.
As Japan has shown it ain't necessarily so. It really wouldn't take much:
1) a bank crisis in Europe,
2) balance the budget by vastly reducing government expenses right now argument wins the day
3) Any number of geopolitical kabums

I believe we've been in a "biflationary" environment for years now, where there are two inflation rates: one for the consumable essentials (with a high inflation rate), and one for discretionary items and certain asset types (which have little to no inflation or even negative inflation).

Unfortunately too many household budgets have the flat or falling "inflation" of their income, while the essential day-to-day stuff they buy is inflating rapidly.

 

[EvrClrx311]

3.23% sounds as good as any to use, then again... we're due for a 5%-7% decade soon. That would likely require a war though. Lets hope Iran/Israel continue to play nice, and we hold of WWIII for at least another couple decades.

(although there is evidence to support: wars are great for the economy - that is as long as they are not fought on our soil... bad bad bad thoughts, throw them out! )

 

[ejman]

I believe we've been in a "biflationary" environment for years now, where there are two inflation rates: one for the consumable essentials (with a high inflation rate), and one for discretionary items and certain asset types (which have little to no inflation or even negative inflation).

Unfortunately too many household budgets have the flat or falling "inflation" of their income, while the essential day-to-day stuff they buy is inflating rapidly.

Maybe so. It's not statistically valid but I've found that my expenses have been more or less flat for many years now. Perhaps it is due to the ability since ER to get better deals or research things more but I find the personal inflation rate in ER to be a fairly controllable item for a lot of things.

 

[palomalou]

I use 3.5% inflation and 5% return for a 50/50 portfolio. I tend to be very pessimistic when running these numbers, knowing that things will end up better than they calculate at.

I've been using 3% and 5%, respectively.

 

[sengsational]

It looks like wars might cause inflation (ww ii and viet nam on your chart), but I no longer think any destruction is good for the economy. Say someone destroys property, say throws a rock through a window. There might be a winner, like the repair man, but overall society loses. When I heard about pallet loads of 100 dollar bills shipped to Iraq is when I got worried more about inflation. I though, incorrectly as it turned out, that the money presses would churn out too much money to pay for the war, and cause inflation. As Ha indicates, it's not something guessable.