Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
What are your inflation expectations
Old 03-24-2013, 01:27 PM   #1
Recycles dryer sheets
kmt1972's Avatar
 
Join Date: Mar 2013
Location: Scarsdale
Posts: 175
What are your inflation expectations

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.
__________________

__________________
kmt1972 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!

Old 03-24-2013, 01:37 PM   #2
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,487
Quote:
Originally Posted by kmt1972 View Post
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.
Tax tables are indexed to CPI so the real, after inflation tax should remain the same.
__________________

__________________
MichaelB is offline   Reply With Quote
Old 03-24-2013, 01:51 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
calmloki's Avatar
 
Join Date: Jan 2007
Location: Independence
Posts: 5,459
I tend to believe very little about the government reported inflation rate ever since I heard about equivalencies. Steak does not equal hamburger IMHO. On the other hand, using or thinking about what I really think inflation is scares the crap outa me (medical expense, college cost, car part/mechanic cost). I use 3.5% looking ahead because that figure in Quicken retirement planner means we only run out of money about 4 years before we croak.
__________________
calmloki is online now   Reply With Quote
Old 03-24-2013, 01:51 PM   #4
Recycles dryer sheets
kmt1972's Avatar
 
Join Date: Mar 2013
Location: Scarsdale
Posts: 175
Quote:
Originally Posted by MichaelB View Post
Tax tables are indexed to CPI so the real, after inflation tax should remain the same.
From where I see it, not really. Lets use this example. Say I have $1 million in assets that has 1% real after inflation return by investing in fixed income. If inflation is zero then my coupon/capital gains should be $10K. If inflation was say, 9%, then my coupon/capital gains would be $100K since my nominal rate of return would be 10%. So my AGI in these two cases are either $10K or $100K. Shifting the income tax brackets by 9% does not compensate me for an AGI of 10x bigger. Of course in reality my portfolio would more likely be a mix of fixed income and equities to have me return 10% nominal in a 9% inflation environment. In that case some of the 10% return will not be realized but will be counted as unrealized capital gains. But eventually I will have to pay taxes on those (mostly fake) gains when I do sell said asset.
__________________
kmt1972 is offline   Reply With Quote
Old 03-24-2013, 03:14 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
braumeister's Avatar
 
Join Date: Feb 2010
Location: Northern Kentucky
Posts: 8,620
I think about 3.5% is the historical average, so that's what I use, but medical costs have a much higher rate.
__________________
braumeister is offline   Reply With Quote
Old 03-24-2013, 03:15 PM   #6
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Quote:
Originally Posted by kmt1972 View Post
From where I see it, not really. Lets use this example. Say I have $1 million in assets that has 1% real after inflation return by investing in fixed income. If inflation is zero then my coupon/capital gains should be $10K. If inflation was say, 9%, then my coupon/capital gains would be $100K since my nominal rate of return would be 10%. So my AGI in these two cases are either $10K or $100K. Shifting the income tax brackets by 9% does not compensate me for an AGI of 10x bigger. Of course in reality my portfolio would more likely be a mix of fixed income and equities to have me return 10% nominal in a 9% inflation environment. In that case some of the 10% return will not be realized but will be counted as unrealized capital gains. But eventually I will have to pay taxes on those (mostly fake) gains when I do sell said asset.
So inflation goes up 9%, your income goes up 1000% (!), and you're complaining?

Spread your gains better, into multiple years, and it will not look that bad. You're taking all your potential capital gains into one year. Or stay in the 15% tax bracket and get the 0% CG rate. Or not a problem inside an IRA. CG's are always a problem with inflation and taxes. That's one reason the tax rate is a little lower than for regular income.
__________________
Animorph is offline   Reply With Quote
Old 03-24-2013, 04:02 PM   #7
Thinks s/he gets paid by the post
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 3,847
Quote:
Originally Posted by kmt1972 View Post
From where I see it, not really. Lets use this example. Say I have $1 million in assets...
Excellent point made. Inflation can pick your pocket not only if your investments somehow don't keep up (which is a likely reality for many), but also when you are obliged to pay taxes on "gains" that merely keep you even.
__________________
sengsational is offline   Reply With Quote
Old 03-24-2013, 04:52 PM   #8
Recycles dryer sheets
 
Join Date: Jul 2008
Location: Sacramento area
Posts: 444
My spreadsheets are 3% inflation, earnings 6% (3% real).
__________________
AWeinel is offline   Reply With Quote
Old 03-24-2013, 05:34 PM   #9
Thinks s/he gets paid by the post
Live And Learn's Avatar
 
Join Date: Feb 2012
Location: Tampa Bay Area
Posts: 1,689
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.
__________________
"For the time being no discipline brings joy, but seems grievous and painful; but afterwards it yields a peaceable fruit of righteousness to those who have been trained by it." ~
Hebrews 12:11

ER'd in June 2015 at age 52. Initial WR 3%. 50/40/10 (Equity/Bond/Short Term) AA.
Live And Learn is offline   Reply With Quote
Old 03-24-2013, 05:49 PM   #10
Recycles dryer sheets
TOOLMAN's Avatar
 
Join Date: Jan 2013
Posts: 220
Quote:
Originally Posted by kmt1972 View Post
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.



Any thoughts out there about your inflation expectations and what you are doing about this risk.
Short answer; I don't know where inflation is going, and I don't suspect anyone else does either, otherwise they would have all the money. :-)
There have been large variations in inflation; over time, and among countries. http://data.worldbank.org/indicator/NY.GDP.DEFL.KD.ZG

My Speculation; I expect 3% inflation for now, then more than normal in 5 years. I suspect; global population growth, the rise of the global middle class, financial crime; (counterfeiting, cyber crime - electronic funds fraud), end of national austerity programs, all will increase the pace of inflation.

For inflation protection, it seems to me stocks, commodities, & REIT's would be a good hedge. My base model is 3% inflation, with 6% investment growth. I have a small amount of GLD, and a little more in gold miner stocks, which have been dead money. I have som CD & older I-Bonds. I don't see any no, or low risk investment that beats today's inflation, so the Fed is moving me out on the risk curve, for now.
__________________
TOOLMAN is offline   Reply With Quote
Old 03-24-2013, 05:58 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,978
I use 1-2% real returns in all my calculations. If pressed I'd use historic average (3.3%?) for inflation, but I'd never plug an inflation number into a calculator without knowing what rate of return was being used. So if a calculator assumed 8% returns, I'd enter 6-7% inflation even though I don't expect that at all. And I'm wary of fixed numbers anyway, I'd rather run historic sequences or Monte Carlo to forecast/simulate. Sorry for the long answer. YMMV
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 03-24-2013, 06:02 PM   #12
Recycles dryer sheets
KM's Avatar
 
Join Date: Jan 2007
Posts: 391
I use 4% inflation and 5% return (1% real). Inflation is also my biggest concern....because our pensions are not COLA'd (actually mine is sort of, but not until I turn 75). So the higher inflation goes, the more our investments will have to cover it.

Therefore, we made sure we had enough padding in our budget that we could tighten our belts, if need be. And we have some rental property income that I have never included in our "income" projections. I expect those two hedges to get us through any bad times.
__________________
KM is offline   Reply With Quote
Old 03-24-2013, 06:05 PM   #13
Recycles dryer sheets
 
Join Date: Oct 2007
Posts: 138
I use 2% for inflation estimate for two reasons. First, I tend to substitute cheaper items for more expensive when possible and second, most of my expenses are discretionary so I can always stay in a Hampton Inn instead of Waldorf or Conrad.

Marc
__________________
Marc is offline   Reply With Quote
Old 03-24-2013, 06:27 PM   #14
Thinks s/he gets paid by the post
heeyy_joe's Avatar
 
Join Date: Nov 2012
Location: Madeira Beach Fl
Posts: 1,403
I keep 20% of my portfolio in TIPS. I consider it an insurance hedge in case there is a big spike in inflation.
__________________
_______________________________________________
"A man is a success if he gets up in the morning and goes to bed at night and in between does what he wants to do" --Bob Dylan.
heeyy_joe is offline   Reply With Quote
Old 03-24-2013, 06:44 PM   #15
Recycles dryer sheets
kmt1972's Avatar
 
Join Date: Mar 2013
Location: Scarsdale
Posts: 175
I use 3.5% for inflation and 0.5% real return. So I mostly assume nominal return of 4%.
__________________
kmt1972 is offline   Reply With Quote
Old 03-24-2013, 07:07 PM   #16
Thinks s/he gets paid by the post
MooreBonds's Avatar
 
Join Date: Aug 2004
Location: St. Louis
Posts: 2,091
Assuming 3% inflation average over next 10-15 years, probably 3.5%-4% average for years 15-30+.

Assuming real portfolio growth of 1%, but will likely see 1.5%-2%.
__________________
Dryer sheets Schmyer sheets
MooreBonds is offline   Reply With Quote
Old 03-24-2013, 07:07 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Sep 2009
Location: Hong Kong
Posts: 1,576
It's not CPI that I worry about but the rate of inflation in our personal expenses. Unfortunately, our household expenses are much more heavily weighted to items that have historically gone up by more than the official inflation data: utilities, education, travel, medical, insurance, taxes and other government charges.

I'm currently assuming 4% for personal inflation - which is a really scary number over a retirement that could last 50+ years (at least for DW).

I'm also assuming that over the longer term, stocks and real estate will provide better real returns than bonds, CDs or deposits (although with considerable gut wrenching volatility along the way).
__________________
Budgeting is a skill practised by people who are bad at politics.
traineeinvestor is offline   Reply With Quote
Old 03-24-2013, 07:11 PM   #18
Recycles dryer sheets
TOOLMAN's Avatar
 
Join Date: Jan 2013
Posts: 220
Quote:
Originally Posted by TOOLMAN View Post

My base model is 3% inflation, with 6% investment growth.

S&P & Inflation data. http://inflationdata.com/
Attached Images
File Type: jpg image-905680658.jpg (251.5 KB, 26 views)
__________________
TOOLMAN is offline   Reply With Quote
Old 03-24-2013, 08:57 PM   #19
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,487
Quote:
Originally Posted by kmt1972 View Post
From where I see it, not really. Lets use this example.
I think the example is extreme and not realistic, but do agree that over a long period of time inflation is the great risk. A real return of only 1% seems too low to finance a realistic early retirement over such a long period of time, as does an investing strategy that depends primarily on fixed income.
__________________
MichaelB is offline   Reply With Quote
Old 03-24-2013, 09:01 PM   #20
gone traveling
 
Join Date: Oct 2012
Posts: 329
I use 4% and because I believe in preserving principal and living only on income, I would ensure that my principal compounds by 4% every year.
__________________

__________________
UserRequested 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


 

 
All times are GMT -6. The time now is 10:32 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.