Join Early Retirement Today
Reply
 
Thread Tools Display Modes
FIRECalc inflation assumption
Old 03-17-2013, 05:54 PM   #1
Full time employment: Posting here.
 
Join Date: Apr 2010
Posts: 717
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...
__________________
“The problem with the world is that the intelligent people are full of doubt, while the stupid people are full of confidence.”

(—Charles Bukowski)
wanaberetiree is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 03-17-2013, 06:03 PM   #2
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,004
I use CPI.
__________________
Numbers is hard
REWahoo is offline   Reply With Quote
Old 03-17-2013, 07:28 PM   #3
Full time employment: Posting here.
truenorth418's Avatar
 
Join Date: Sep 2011
Location: Bushnell
Posts: 607
I plug in 5%. Better to build in a margin on safety.
truenorth418 is offline   Reply With Quote
Old 03-17-2013, 09:46 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 26,821
Quote:
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.

-ERD50
ERD50 is offline   Reply With Quote
Old 03-18-2013, 03:55 AM   #5
Full time employment: Posting here.
truenorth418's Avatar
 
Join Date: Sep 2011
Location: Bushnell
Posts: 607
Quote:
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.
truenorth418 is offline   Reply With Quote
Old 03-18-2013, 06:50 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 26,821
Quote:
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.
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
ERD50 is offline   Reply With Quote
Old 03-18-2013, 09:03 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: NC
Posts: 21,204
Quote:
Originally Posted by REWahoo View Post
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...
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
Midpack is online now   Reply With Quote
Old 03-18-2013, 03:25 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 4,366
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.
Animorph is offline   Reply With Quote
Old 03-18-2013, 03:49 PM   #9
Dryer sheet aficionado
 
Join Date: Mar 2013
Posts: 46
Quote:
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?

Quote:
Originally Posted by ERD50 View Post
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%.
Sandman62 is offline   Reply With Quote
Old 03-19-2013, 07:21 PM   #10
Full time employment: Posting here.
 
Join Date: Apr 2010
Posts: 717
Quote:
Originally Posted by truenorth418 View Post
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?
__________________
“The problem with the world is that the intelligent people are full of doubt, while the stupid people are full of confidence.”

(—Charles Bukowski)
wanaberetiree is offline   Reply With Quote
Old 03-20-2013, 08:32 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: NC
Posts: 21,204
Quote:
Originally Posted by wanaberetiree View Post
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?
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
Midpack is online now   Reply With Quote
Old 03-20-2013, 08:43 AM   #12
Full time employment: Posting here.
 
Join Date: Apr 2010
Posts: 717
Quote:
Originally Posted by Midpack View Post
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

Attached Images
File Type: jpg cpi.jpg (32.8 KB, 1 views)
__________________
“The problem with the world is that the intelligent people are full of doubt, while the stupid people are full of confidence.”

(—Charles Bukowski)
wanaberetiree is offline   Reply With Quote
Old 03-20-2013, 08:44 AM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 26,821
Quote:
Originally Posted by wanaberetiree View Post
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?


-ERD50
ERD50 is offline   Reply With Quote
Old 03-20-2013, 09:10 AM   #14
Full time employment: Posting here.
 
Join Date: Apr 2010
Posts: 717
Quote:
Originally Posted by ERD50 View Post
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 %
__________________
“The problem with the world is that the intelligent people are full of doubt, while the stupid people are full of confidence.”

(—Charles Bukowski)
wanaberetiree is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


» Quick Links

 
All times are GMT -6. The time now is 12:27 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.