CPI Rate in Advvanced FireCalc - Inflation Rate

[al4trade]

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]

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]

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]

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]

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]

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]

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]

. . . 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.