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FIRECalc inflation assumption
Old 03-17-2013, 06:54 PM   #1
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FIRECalc inflation assumption

Just wondering what other people use for this option in FIRECalc?

I'd like to be able to calculate a realistic vs most conservative scenarios...
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Old 03-17-2013, 07:03 PM   #2
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I use CPI.
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Old 03-17-2013, 08:28 PM   #3
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I plug in 5%. Better to build in a margin on safety.
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Old 03-17-2013, 10:46 PM   #4
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Originally Posted by truenorth418 View Post
I plug in 5%. Better to build in a margin on safety.
And what was inflation in the 1980's? What would your margin of safety be?

Like REWahoo - I use CPI. The advantage I see to FIRECALC is it matches inflation to the other market factors. It's not a constant. Keeping inflation constant while you let markets vary just does not make sense to me. Why would you do that?

You could (and I did) buy CDs paying >11% in the 80's. That would have been great if inflation was 5%, but it wasn't.

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Old 03-18-2013, 04:55 AM   #5
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Originally Posted by ERD50 View Post

And what was inflation in the 1980's? What would your margin of safety be?

Like REWahoo - I use CPI. The advantage I see to FIRECALC is it matches inflation to the other market factors. It's not a constant. Keeping inflation constant while you let markets vary just does not make sense to me. Why would you do that?

You could (and I did) buy CDs paying >11% in the 80's. That would have been great if inflation was 5%, but it wasn't.

-ERD50
I agree although based on the CPI-U numbers announced in Jan 2013 the long term average since WWII was 3.96%, and of course that includes the high inflation 1970s and 1980s. So 5% seems like a reasonable hedge to me.

Another approach I have used is to rely on the CPI preset, which produces a 100% success rate for me, and then run it a few more times while gradually increasing the inflation number to see where the tipping point is. I have found a 6% plug to be the point where my failure rate begins to shoot up.

Here's hoping inflation sticks to historical averages or less.
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Old 03-18-2013, 07:50 AM   #6
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I agree although based on the CPI-U numbers announced in Jan 2013 the long term average since WWII was 3.96%, and of course that includes the high inflation 1970s and 1980s. So 5% seems like a reasonable hedge to me.
I still think it would be better to use CPI in FIRECALC, and if you want to add a hedge, add X% to the investment fees (expense ratios) on the "Your Portfolio" tab. That way you are not underestimating inflation during critical times like the 80's, which make up some of the failures in many runs.

The 80's would have been a picnic with a 5% inflation average.

Remember, with FIRECALC, averages aren't driving the failure scenarios - the worst case conditions drive the failures. I think you are may be giving yourself a false sense of security by using averages. At a minimum, IMO you are undermining the strength of FIRECALC, which is reporting all these historical interactions.

Heck, easy enough to prove for yourself; 5% minus your 3.96% average is 1.04%. Add that to expenses and use CPI and see what you get versus average 5% inflation and default expenses.

edit/add - sorry, on my first cup of coffe, missed the importance of this:

Quote:
Another approach I have used is to rely on the CPI preset, which produces a 100% success rate for me, and then run it a few more times while gradually increasing the inflation number to see where the tipping point is. I have found a 6% plug to be the point where my failure rate begins to shoot up.
OK, so doesn't that tell you your 5% underestimated things, and 6% gets you to par with CPI? So your 5% isn't a hedge, it is an underestimate?

-ERD50
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Old 03-18-2013, 10:03 AM   #7
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I use CPI.
Me too. Though real return is what I pay attention to, I'm planning on 1-2% real return. You can improve the 'margin of safety' by reducing your expected returns and leaving "inflation" alone as well. Tomato - tomatoe...
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Old 03-18-2013, 04:25 PM   #8
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I use CPI for the reasons stated above. But it wouldn't hurt to plug in whatever inflation percent you like and compare the two results. Take the worse result of the two and you can feel conservative.
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Old 03-18-2013, 04:49 PM   #9
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Originally Posted by truenorth418 View Post
I agree although based on the CPI-U numbers announced in Jan 2013 the long term average since WWII was 3.96%, and of course that includes the high inflation 1970s and 1980s. So 5% seems like a reasonable hedge to me.

Another approach I have used is to rely on the CPI preset, which produces a 100% success rate for me, and then run it a few more times while gradually increasing the inflation number to see where the tipping point is. I have found a 6% plug to be the point where my failure rate begins to shoot up.
Please tell me if I'm doing what you suggested correctly? Over 40 years, using CPI, Firecalc tells me 100%. Switching from CPI to entering inflation adjustments, at 5.8%, it goes down from 100 to 98%. At 5.9=94, 6.0-93, 6.1=87, 6.2=77, which would seem to have "shot up". So by that measure, still pretty safe until over 6%, right?

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Heck, easy enough to prove for yourself; 5% minus your 3.96% average is 1.04%. Add that to expenses and use CPI and see what you get versus average 5% inflation and default expenses.
I also tried adjusting my expense ratio from .54% to 1.58% (added the 1.04 that was mentioned). Still comes out 100%.
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Old 03-19-2013, 08:21 PM   #10
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Another approach I have used is to rely on the CPI preset, which produces a 100% success rate for me, and then run it a few more times while gradually increasing the inflation number to see where the tipping point is. I have found a 6% plug to be the point where my failure rate begins to shoot up.

Here's hoping inflation sticks to historical averages or less.
That's interesting. If I use "% for inflation adjustments to the historical data." I started failing with >2%, but Im OK with CPI option

Does not it sound odd?
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Old 03-20-2013, 09:32 AM   #11
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That's interesting. If I use "% for inflation adjustments to the historical data." I started failing with >2%, but Im OK with CPI option

Does not it sound odd?
Yes odd it doth sound (jk).

I just ran the default inputs with CPI and got a 94.6% success rate. With same inputs, when I entered 2.0% for inflation I got a 98.6% success rate. So it appears to be working as expected. Maybe you inadvertently changed else something or overlooked a button?
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Old 03-20-2013, 09:43 AM   #12
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Yes odd it doth sound (jk).

I just ran the default inputs with CPI and got a 94.6% success rate. With same inputs, when I entered 2.0% for inflation I got a 98.6% success rate. So it appears to be working as expected. Maybe you inadvertently changed else something or overlooked a button?
Here is what I have

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Old 03-20-2013, 09:44 AM   #13
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That's interesting. If I use "% for inflation adjustments to the historical data." I started failing with >2%, but Im OK with CPI option

Does not it sound odd?
Are you using defaults for other settings? I don't know, but if a large % comes from SS or other COLA'd pension, it could act differently?


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Old 03-20-2013, 10:10 AM   #14
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Are you using defaults for other settings? I don't know, but if a large % comes from SS or other COLA'd pension, it could act differently?


-ERD50
I change only CPI or %
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