CPI Rate in Advvanced FireCalc - Inflation Rate

al4trade · 10-03-2006, 10:53 AM

Does anyone know what rate Advanced FireCalc uses when you select CPI? My results using CPI are much worse than when I use a flat 3% rate of inflation.

Thanks
Al4

brewer12345 · 10-03-2006, 11:03 AM

I'm under the impression that it uses historical CPI. In the 1966 to 1972 period, inflation went nuts (well over 3%) and it would have killed a lot of hypothetical retiree ortfolios that did just fine in other periods.

dory36 · 10-03-2006, 11:41 AM

It's the Consumer Price Index on a per-year basis, which ranged from 20.7% inflation to 15.7% DEflation during the period covered. Average was 2.24%, and more typical range (+/- 1 standard deviation) was 8.4% inflation to 4% deflation.

Here's a chart of CPI for the timeframe covered by FIRECalc.

(Click on the thumbnail to enlarge)

al4trade · 10-03-2006, 12:51 PM

Dory - thanks for the response.

What are the boards' thoughts on using the annual variance of the CPI number versus a static 3%?

Thanks,
Al4

SecondCor521 · 10-03-2006, 01:32 PM

Quote:

Originally Posted by al4trade

Dory - thanks for the response.

What are the boards' thoughts on using the annual variance of the CPI number versus a static 3%?

Thanks,
Al4

Personally I like the idea of using an historically-based calculator like firecalc. Once you start making changes like you suggest, then you start moving towards a Monte Carlo style simulator, which will give you more pessimistic results in general.

2Cor521

brewer12345 · 10-03-2006, 02:07 PM

Quote:

Originally Posted by al4trade

Dory - thanks for the response.

What are the boards' thoughts on using the annual variance of the CPI number versus a static 3%?

Thanks,
Al4

I think a static CPI assumtion will give an overly optimistic view of things. Inflation is the biggest killer of retirements, historically. You want to make sure you can survive it.

Nords · 10-04-2006, 01:29 AM

Quote:

Originally Posted by al4trade

What are the boards' thoughts on using the annual variance of the CPI number versus a static 3%?

Inflation over the last century has been about 3% (admittedly the Hedonics Committee has been working overtime adjusting the goods baskets from whalebone corsets to LCD flat-panel displays) but inflation over the last 30 years has averaged 5%. Which one is a better proxy for today's inflation? Tomorrow? Next decade?

FIRECalc uses history as a predictor of the future. So why not use a Monte Carlo calculator and choose your own CPI?

sgeeeee · 10-04-2006, 01:40 AM

Quote:

Originally Posted by Nords

. . . So why not use a Monte Carlo calculator and choose your own CPI?

You can do that, but your real rate of return (investment return - inflation) is what matters. Therefore, the correlation between investment return and inflation is critical to your results. Monte Carlo simulation does nothing to simulate this correlation.

10-03-2006, 10:53 AM	#1
al4trade Dryer sheet wannabe Join Date: Aug 2006 Posts: 18	CPI Rate in Advvanced FireCalc - Inflation Rate Does anyone know what rate Advanced FireCalc uses when you select CPI? My results using CPI are much worse than when I use a flat 3% rate of inflation. Thanks Al4

10-03-2006, 11:03 AM	#2
brewer12345 Give me a museum and I'll fill it. (Picasso) Give me a forum ... Join Date: Mar 2003 Posts: 9,226	Re: CPI Rate in Advvanced FireCalc - Inflation Rate I'm under the impression that it uses historical CPI. In the 1966 to 1972 period, inflation went nuts (well over 3%) and it would have killed a lot of hypothetical retiree ortfolios that did just fine in other periods. __________________ “When you realize that you are one of the rare few who observe moral principles in their relationships with others, there is a temptation to sink into amorality, not out of conviction or pleasure but simply to avoid further pain, because there is no greater suffering than being an angel in hell, whereas a devil feels at home wherever he goes.” – Martin Page, How I Became Stupid

10-03-2006, 12:51 PM	#4
al4trade Dryer sheet wannabe Join Date: Aug 2006 Posts: 18	Re: CPI Rate in Advvanced FireCalc - Inflation Rate Dory - thanks for the response. What are the boards' thoughts on using the annual variance of the CPI number versus a static 3%? Thanks, Al4

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