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Old 03-24-2013, 09:08 PM   #21
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It's been proven time and again, that economists and so called experts get inflation expectations wrong at every turning point.

So I would say unless we are all better than the economists, we have no idea what inflation will be, and whatever we "use" in our planning has no more than a random chance of matching events as they actualy turn out.

Ha
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Old 03-24-2013, 09:13 PM   #22
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Quote:
Originally Posted by haha View Post
It's been proven time and again, that economists and so called experts get inflation expectations wrong at every turning point.

So I would say unless we are all better than the economists, we have no idea what inflation will be, and whatever we "use" in our planning has no more than a random chance of matching events as they actualy turn out.

Ha
So what are you saying Ha - don't plan?

In life as you would do in business, you plan using the best info you have in hand. As long as you understand the assumptions and how outcomes vary with when these variables change, then you're better off then the person who makes no plans whatsoever.
I have 3 sets of scenarios that I plan for

Worst Case
Best Case
Most likely

If my Worst Case scenario says I can fire at the income level I want (not need) then I'm good to go
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Old 03-25-2013, 12:41 AM   #23
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Originally Posted by jags View Post
So what are you saying Ha - don't plan?

In life as you would do in business, you plan using the best info you have in hand. As long as you understand the assumptions and how outcomes vary with when these variables change, then you're better off then the person who makes no plans whatsoever.
I have 3 sets of scenarios that I plan for

Worst Case
Best Case
Most likely

If my Worst Case scenario says I can fire at the income level I want (not need) then I'm good to go
You may very wel be right. But, the only alternative to planning with meaningless parameters is not failing to plan. I think you can think of other possibilities.

Anyway, I am happy for you that you will be good to go.

Ha
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Old 03-25-2013, 07:05 AM   #24
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I tend to agree that real returns are the more important issue. My spreadsheet uses a 2 tier CPI assumption - 3% until 2016 and 3.5% beyond.

I do assume higher real returns of 3.5% for the next 10 years and the reason is that I currently have 40% of my money in rental real estate earning 9.5% returns. These returns are almost a certainty as I use conservative cost estimates and they are somewhat protected from inflation since rents rise pretty closely with inflation most of the time.

After 10 years I may decide to dump them or hire a property manager so I assume a smaller real return.
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Old 03-25-2013, 08:21 AM   #25
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Mr. Ha makes an important point. Inflation is only one factor and no one can predict what it will be. Just looking over the threads of the past couple of years, so many expected such a different outcome compared with our current inflation. How can we possibly plan for inflation a decade from now?

We focus, even obsess, with returns, but I think they are most important during the early and middle accumulation years. When approaching retirement, and certainly once there, portfolio survivability is what matters, and that has to do more with volatility than return. The key questions in my mind is not how high inflation will be but 1) how will we see it coming when there is still time to react, and 2) what should we do then?
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Old 03-25-2013, 08:25 AM   #26
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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...
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Old 03-25-2013, 08:38 AM   #27
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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.
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Old 03-25-2013, 09:06 AM   #28
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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.
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Old 03-25-2013, 09:22 AM   #29
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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.
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Old 03-25-2013, 09:32 AM   #30
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I use 3% inflation and 2% real returns for planning purposes.
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Old 03-25-2013, 09:40 AM   #31
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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
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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.
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Old 03-25-2013, 09:44 AM   #32
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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.
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Old 03-25-2013, 09:54 AM   #33
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Thank you!

Very interesting site.
+1. The real interest rate chart was awfully grim, but it won't last forever...
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Old 03-25-2013, 10:06 AM   #34
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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.
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Old 03-25-2013, 10:47 AM   #35
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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.
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Old 03-25-2013, 10:54 AM   #36
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I generally use 4% inflation and 1.5% real return for planning.
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Old 03-25-2013, 02:46 PM   #37
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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).
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Old 03-25-2013, 03:43 PM   #38
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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
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Old 03-25-2013, 04:04 PM   #39
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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.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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Old 03-25-2013, 04:12 PM   #40
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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! )

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