With everyone convinced CPI is understated, how many are . . .

[Gone4Good]

reducing their expected withdrawal rate? 

Firecalc and other estimates of portfolio survivability assume spending increases at the rate of CPI.  With so many here convinced that CPI massively understates "real inflation" (by as much as 3% points, or more?), how many are planning to reduce their withdrawal rate by an equivalent amount . . . e.g. SWR = 1%

 

[gayl]

Not me, I have a higher net worth now then when working despite taking money out.

 

[justin]

Not me. I think CPI will probably track what I buy within a percent or so, plus or minus. Of course, when I budget I assume health insurance will inflate at a little higher rate. But it can only go so high before popular sentiment causes socialization of medicine. That or I learn how to get cheap last minute tickets to Bangkok for medical treatment.

 

[youbet]

  learn how to get cheap last minute tickets to Bangkok for medical treatment.

"Hey Agnes! Help!  I'm having severe chest pains and feel dizzy!  Go check the travel site for discount tickets to Bangkok, will ya?"

 

[BigMoneyJim]

If I understand correctly, CPI is used to interpret today's dollars versus year X's dollars. I would think if you assume CPI is understanded then whatever the real number is theoretically also boosts your portfolio.

That's not stated well, but I think the underlying assumptions are that you withdraw an equal amount of spending power each year, and the historical analyses use CPI to determine what is each year's spending power.

So if CPI is not an adequate guide as to spending power anymore--but was in the past--I would think you could "safely" adjust your withdrawal rate based on real spending power.

 

[youbet]

how many are planning to reduce their withdrawal rate by an equivalent amount

I'm not reducing my withdrawal rate by an "equivalent amount," but:

I believe historical cpi understates the rate of price increases my family has seen.  I believe that the bubble in demand for retirement/aging related goods and services caused by the baby boomers (that's me!) will escalate this trend.  I don't know exactly how much the cpi understatement is, but those beliefs caused me to delay ER to put some cushion in the plans.

When I start ER in a few weeks, having delayed a few years, my plans call for a WR of less than 4%, a budget that includes some downward flexibility and some options for working part time if the financial markets are unfavorable early in RE.

Sheeeesh......  all that just because a silly spreadsheet I made showed retirement budget increases beyond plan, driven by higher than expected inflation, really take a toll on the portfolio as the years go by!  Bummer! 

Some factors I've always assumed:

1.  Inflation must be accounted for in time periods of more than a few years and inflation levels may be more than commonly used measures, such as cpi, indicate.

2.  Meeting or beating planned investment returns over time is not guaranteed.

3.  Timing matters.  If 10 of your 30 years of withdrawals will be in down markets, it would be much better to have those 10 years at the end rather than the beginning.  Unfortunately, we don't know how many down years there will be or when they'll be.

So, having said all that, you walk up to the betting window, you plop down your bet as you see fit, you cheer your horse and you ENJOY YOUR LIFE! 

 

[audreyh1]

I just plan to withdraw 3 to 4% out of my portfolio and hope it grows enough to keep my cost of living from going down.

I don't plan on doing the "initial withdrawal adjusted for inflation" bit. I'm comfortable with variation in my withdrawal from year to year - I don't need it to act like a salary with a raise based on the CPI every year. I'd feel better taking out a little less after a bad year anyway, even if it means a slight tightening of the belt.

Audrey

 

[justin]

I plan on ERing a few decades before Medicare and SS kick in. I'm pretty confident they'll be there in some form or another in 2047 or so. So in the meantime, I am budgeting based on not having these payments, since they won't start until a few decades into ER. If inflation outpaces my portfolio by a bit each year, I'll have these resources to fall back on in the middle of ER to hopefully offset inflation.

 

[Gone4Good]

If I understand correctly, CPI is used to interpret today's dollars versus year X's dollars. I would think if you assume CPI is understanded then whatever the real number is theoretically also boosts your portfolio.

I don't think it works that way. The portfolio calculations are based on historic equity and fixed income returns. Your withdrawal's are escalated using historic CPI or PPI. So if the CPI calculation understates inflation, it doesn't change the equity or fixed income returns. It does, however, understate how much you need to spend to maintain your purchasing power. Firecalc assumes CPI, but if your actual spending is CPI+3%, then the actually success rate of your plan will be dramatically lower than what Firecalc calculates.

I think it's a truism that if CPI understates inflation, then Firecalc overstates the safe withdrawal rate.

 

[BigMoneyJim]

I think it's a truism that if CPI understates inflation, then Firecalc overstates the safe withdrawal rate.

The gotcha there is that CPI is calculated differently in the past few years. It's entirely possible that CPI correctly reflected inflation for the term of Firecalc's withdrawal runs but underestimates it now. If were to believe that's true then you would actually be able to increase withdrawals at a rate better than modern CPI.

Or maybe I'm confused. People never seem to agree with my interpretation of FIRECalc.

 

[youbet]

I don't think it works that way.  The portfolio calculations are based on historic equity and fixed income returns.  Your withdrawal's are escalated using historic CPI or PPI.  So if the CPI calculation understates inflation, it doesn't change the equity or fixed income returns.  It does, however, understate how much you need to spend to maintain your purchasing power.  Firecalc assumes CPI, but if your actual spending is CPI+3%, then the actually success rate of your plan will be dramatically lower than what Firecalc calculates.

Well......kind of......

Remember, Firecalc is testing withdrawal rates and asset allocations historically.  It is not a forward looking projection.

The CPI numbers Firecalc uses are the recorded CPI numbers for the historical time period involved.  Now, whether the inflation impact for you or for me was exactly what the government recorded as inflation using the CPI methodology is another matter.

I would look at it this way:  Historically, if you increased your withdrawals over time in excess of the recorded CPI data Firecalc assumes, then Firecalc overstates your initail SWR.

Whether the historical testing Firecalc does completely applies to the future we will see is up to the user to decide.  Caveat emptor.  Personally, while historical performance does not guarantee future results, I think it's very relavent.  But, everyone needs to decide for themselves.

 

[d]

there are so many uncertainties going forward ... I'd guess that the accuracy of the CPI and its use in Firecalc is among the least of our worries.

 

[Gone4Good]

I would look at it this way:  Historically, if you increased your withdrawals over time in excess of the recorded CPI data Firecalc assumes, then Firecalc overstates your initail SWR.

Isn't that what I said? 

there are so many uncertainties going forward ... I'd guess that the accuracy of the CPI and its use in Firecalc is among the least of our worries.

Well, if CPI is really off by 3 percentage points then maintaining both your standard of living and a positive net worth may be very large worries using a 4% withdrawal rate.

 

[sgeeeee]

I'm not convinced. 

- I've reduced personal spending since retiring. 

- To the extent that I can measure it, CPI seems to track my actual inflation experience fairly well. 

- Recent studies show that most people begin to reduce spending fairly significantly as their retirement progresses.

- My retirement plan has plenty of room for unexpected expenses and I have many options.

 

[youbet]

- My retirement plan has plenty of room unexpected expenses and I have many options.

You're a smart guy.

When I discuss retirement funding with seemingly bright, educated people, the most common flaw I find in their analysis is not accounting for inflation over long periods of time. Especially if their retirement funding inlcudes a significant non-COLA pension, some go into denial. "My $50K pension is plenty to live on today and I'll just trim back a few things as prices increase." Yeah....... right.