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What inflation rate is in your retirement plan?
Old 10-15-2009, 01:29 PM   #1
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What inflation rate is in your retirement plan?

Still have 18 months to go before retirement for both of us, but am tweaking and updating the plan a bit.

I am wondering what inflation rate most of you use when doing retirement plans such as FireCalc or Quicken.

We are using 3.5% as an inflation rate-hoping that actuallly gives a smidge of a margin long term.

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Old 10-15-2009, 04:25 PM   #2
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FireCalc uses the historical inflation rate if you do not enter one. It includes the 70's so it's a pretty good simulation.

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Old 10-15-2009, 04:29 PM   #3
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I use the CPI option in FIRECalc.

On my own spreadsheets, when necessary I use 3.5% sometimes, but really I don't have any vital computations depending on it. I use historical returns minus historical CPI for some projections.
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Old 10-15-2009, 04:40 PM   #4
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I tend to assume my inflation will be 1% above the CPI. Partly because of the inflation in health care and partly because the CPI is calculated by the fox guarding the henhouse...
"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 10-15-2009, 04:43 PM   #5
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I use CPI at 3%, I'm 60, if I were younger I'd use 3.5%. Hopefully by the time a higher CPI catches up with me I'll be long gone.
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Inflation rate
Old 10-15-2009, 04:54 PM   #6
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Inflation rate

I don't have an inflation rate. I have a deflation rate!
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Old 10-15-2009, 05:25 PM   #7
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I use 3% but sometimes wonder if that is sufficient because a large percentage of our expenses are items which are either not subject to full competitive pressures (property taxes, property management fees, school fees, utility bills etc) or are subject to expansion for other reasons (e.g. medical care due to new technology etc) and, in each case, have historically and can be expected to increase by more than the CPI.
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Old 10-15-2009, 07:06 PM   #8
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I figure 3%, then I take a nap.
There's no need to complicate, our time is short..
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Inflation rate
Old 10-16-2009, 08:08 AM   #9
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Inflation rate

i agree with bbbamI..
I used 3% apy back in 99/2000 figuring out my retirement to start in 03'
For inwesting?
I also took Investment Apy's and Subtracted -20% from them to error on the side of caution of over estimating a Higher Rtn..
Eg: 8% -20% = 6.4%

that forced me to Put More into Bonds and Less went into The Equities

I did this way back in 99' fwd for my retirement
Put me Alot more Into Treas. and other Bonds than I though I would need and it Really paid off ever since for me..( although Bonds were really In the Tank in 99')
But sure saved my Butt for 00-02' and of course, last yr...

of course, I don't need more than a 2.5% YWD or from my Bonds either..and Ylds are taking care of that very nicely..So far

and they are more than taking care of both Inflation and Growth ... So far

20/20 Hindsight? Should have gone 100% bonds.. Now just holding onto my Equities until they get back to even and going to Reduce the % in them.. But, then again, I only expect about a 10 yr lifespand remaining for me..

If you think you have longer? Probably Add 1% more to your equties..
and we just might see 1980's -LT treas. +15% rates come stay Short term just in case.. It won't last long.. Just like it did during the Carter Yrs..

Of cousre, I have had over 50% of my $ in ST Bonds since mid 07' and just waiting for Recovery to wind up and the Treas to start doing the same..Probably don't expect that till Next yr sometime..But that's ok, the ST Bonds are doing terrific!
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Old 10-16-2009, 08:32 AM   #10
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I use 3-3.5%, but I also use very (historically) conservative rates of return on investments. I also use a projected age of 95-100, I really hope I don't live anywhere near that long. Good to add a "safety factor," but overkill to add safety factors to every assumption IMHO. What you use for any one assumption (OP is asking about just one), is sort of immaterial if others are unrealistic.
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Old 10-16-2009, 08:37 AM   #11
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I hope I'm wrong, but I think those of you projecting 3% are being way optimistic, given the debt pressures that are building. I don't think economic growth, at least for the near- to medium term, will be robust enough to absorb the tsunami of public debt heading our way.
I use 4.5%, and I,m not all that comfortable with that.
I still don't get it...
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Old 10-16-2009, 10:09 AM   #12
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I have a significant DB non-COLA pension, so inflation is important to me. I've run 3% and 5%.

I'm over-weighted (at least compared to other people on this board) in TIPS because they offset some of the pension risk.
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Old 10-16-2009, 10:39 AM   #13
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I used different rates for differnet items based upon the actual change over the last 20 years. If the amount is less than 3% from this calculation for an item I bump it up to 3%. Yes I have kept a detailed budget for over 20 years. It of course has items that are not that old on it. I use 3% for some items and more for others. For health care I use 15% for the premium and the HSA part.
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Old 10-16-2009, 05:41 PM   #14
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I use 3.5%
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Old 10-16-2009, 06:05 PM   #15
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I never planned on an assumed inflation rate so I let FIREcalc just use the historical inflation data as it varied in history.

My inflation strategy is not to increase my annual withdrawal by the CPI, but rather to base it on the value of my portfolio each year. I figure over the long run, it will keep up with inflation as long as I have a high enough equity allocation.

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Old 10-16-2009, 06:06 PM   #16
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I use 3-3.5% and I'm ok with that. I think we may see more deflation before we see inflation again, and that a period of high inflation is likely to be short-lived. On top of that, while medical insurance will probably inflate faster than CPI, property will only inflate a little at a time under CA prop 13...maybe 1% if I remember right. My budget for health insurance and my budget for prop tax being the just about the same amounts, it becomes a wash. The other point is that my projections go out to 95-100 on various spreadsheets, but are not discounted for being no longer able to drive a big RV or take long trips, or no longer being able to stay in the McMansion because I can no longer care for it, which will all inevitably happen if perchance I do happen to make it to 95 or 100.

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Old 10-17-2009, 09:49 AM   #17
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If the calculator asks for inflation & estimated return, I use 0% for
inflation and 4% for my return on equities, that way everything is
in current dollars and is easier for me to analyze the data.
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Old 10-17-2009, 12:42 PM   #18
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My notes (from the 2007 edition of Stocks, Bonds, Bills and Inflation) say, "what cost $1 in 1945 cost about $11.26 in 2006...prices went down during the Depression and were about the same in 1945 as they had been in 1925". I think historic inflation rates of +/-3% are calculated over the period starting in 1926, but IMO this results in understating the actual inflation rate, because almost all of the inflation occurred after WW II. A more accurate annual rate would annualize the total increase in cost over fewer years.

My trusty HP calculator tells me an inflation rate of 4.05% for 60 years would result in a 2006 value of $11.31, which is very close to the actual figure of $11.26, so I use 4.05% in my calculations. For most of my estimating, I use an online Monte Carlo simulator that also makes it possible to test what happens if inflation goes way up for a few years, or there is a fierce bear market, or you have extra expenses in some years.
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Old 10-22-2009, 09:20 PM   #19
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Originally Posted by Aussie Trooper View Post
I use 3.5%

Think about it...for the next 1-2 years it may be negative.

I agree that long term we could see some fairly high numbers.

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