What Inflation Rate for 2009

[TromboneAl]

Related to plans that increase spending by inflation each year, what inflation rate will you use for 2009?

 

[REWahoo]

2.5%

 

[MasterBlaster]

You could use CPI as an inflation barometer with all of it issues. As you know the official 2009 US CPI will be released on January 15th.

Based on 11 months of data 2009 CPI through November has gone up around 1.8 Percent.

 

[Gone4Good]

Most of the academic research that supports "safe" withdrawal rates assume spending is increased by CPI. So I'd use that number which was 1.8% for the last twelve months.

 

[bbbamI]

3%

 

[SecondCor521]

My FIRE spreadsheet uses 3%. In reality, I expect my taxes to increase (due to a higher paying job) and the rest of my expenses to be basically flat.

2Cor521

 

[W2R]

This year (2010) is my first year. I have decided to withdraw 3.5% and I don't have to increase anything for inflation.

But in the following years, I plan to increase my withdrawal by the CPI. I am not sure which CPI is used (CPI-W? CPI-U?), but I have a while to figure that out.

But will a CPI increase for inflation every year be realistic for me? I am not so sure, for the following two reasons.

1.) My withdrawals will be a spending ceiling for me rather than a spending guideline, and actually I may try not to spend more than my dividends. Even if I increase my withdrawals by the CPI, I may end up lowering my withdrawals each year by the total left unspent at the end of the previous year.

2.) This first year (2010) is going to be NUTTY anyway so I may have to abandon the CPI approach for 2011. In 2010 I am hoping to sell my house, pay for a move north, possibly obtain an apartment temporarily, buy and furnish a house, and get a new car. I have tried to estimate the effect of all of this on my portfolio, if any, but there are two many unknowns to be sure right now.

So, if I complete all of this in 2010 (unlikely, but possible), then maybe I can just start over in computing my SWR for 2011, using the portfolio size one year from now. I don't know if that's "fair" or not, but if not I might have to figure out some other way to adjust.

 

[dm]

I have increased my budget by 3%. If the market tanks I'll tighten up though. I'm flexible.

 

[bizlady]

We'll do 2.5% this year. We are not yet retired, but lived comfortably on our expected retirement income for 2008 and 2009. Took no increase in 2009. But are glad we have done the "trial" to be sure we are comfortable. 16 months and counting when we are both out....

 

[Moemg]

I do the flat 4% of portfolio but last year I only spent 3% despite several trips , a large amount of gifting , a few big home purchases and buying out Toys r us for my grandson . I really need to get better at this spending thing .

 

[TromboneAl]

W2R, that's how I've been doing it for the last three years. Here is a generic version of the simple spreadsheet that I use each year. It calculates my spending allowance for each year, and shows me what my withdrawal rate was based on the plan (that is, increase by inflation every year), or on my net worth.

 

[samclem]

. . . This first year (2010) is going to be NUTTY anyway so I may have to abandon the CPI approach for 2011. In 2010 I am hoping to sell my house, pay for a move north, possibly obtain an apartment temporarily, buy and furnish a house, and get a new car. I have tried to estimate the effect of all of this on my portfolio, if any, but there are two many unknowns to be sure right now.

So, if I complete all of this in 2010 (unlikely, but possible), then maybe I can just start over in computing my SWR for 2011, using the portfolio size one year from now. I don't know if that's "fair" or not, but if not I might have to figure out some other way to adjust.

We've got several big expenses coming up in the next few years (finish the basement, a big hobby expense, a contingency pile of cash in case DD gets her head screwed on straight and goes to school, etc). I just estimated how much they would cost and don't count this amount in my annual withdrawal calcs. That keeps everything simpler, and I've mentally "written off" the money so I don't have any hesitation to spend it for its intended purpose. Maybe you could do the same thing for your moving expenses.

 

[Spanky]

I would not increase our spending by any arbitrary inflation rate. Is it true that current rate is actually flat (i.e., -0.4) or the forecast is 1.6%?

 

[Spanky]

We've got several big expenses coming up in the next few years (finish the basement, .... .

Come to think of it .. we may have to purchase either a new or hardly used car soon .. that would debunk my earlier post about not increasing spending.

 

[LARS]

I don't know if that's "fair" or not, but if not I might have to figure out some other way to adjust.

It may not be "fair", but it is certainly reasonable.

Another approach would be to amortize some of the expenses as incurred on your yearly budget and "pay them off" from an accounting standpoint over time.

In other words, furniture cash expense in 2010 of $10,000. Budget expense in 2010 of $1,000 (assuming a useful life of 10 years). The $1,000 will hit your SWR for ten years (and not the $10,000 in one year).

 

[W2R]

W2R, that's how I've been doing it for the last three years. Here is a generic version of the simple spreadsheet that I use each year. It calculates my spending allowance for each year, and shows me what my withdrawal rate was based on the plan (that is, increase by inflation every year), or on my net worth.

Al, thanks for the "peek" at your spreadsheet. I looked at it and that is very similar to what I meant.

We've got several big expenses coming up in the next few years (finish the basement, a big hobby expense, a contingency pile of cash in case DD gets her head screwed on straight and goes to school, etc). I just estimated how much they would cost and don't count this amount in my annual withdrawal calcs. That keeps everything simpler, and I've mentally "written off" the money so I don't have any hesitation to spend it for its intended purpose. Maybe you could do the same thing for your moving expenses.

Normally I would do that. But with selling and buying a house in this recession, I am shooting at a moving target. Not only that, but I can afford to buy much more house than I need and I have no idea how much I will want to spend.

We have been to open houses up there and I can get a very nice house for quite a bit less than it would cost down here. Probably the difference in housing prices will pay for the closing costs, realtors, moving expenses, 6 months of apartment up there while I look for a house, completely furnishing and decorating the new house, and the new car. Problem solved.

BUT - - location near to Frank's house and businesses would be a big plus for me in choosing a house. If my dream house is right next door to his house, and the price is reasonable for that particular house in that market, then I might buy it even if it was much more expensive than the amount I have been thinking of paying. In that case my profit might not cover any of that.

It may not be "fair", but it is certainly reasonable.

Another approach would be to amortize some of the expenses as incurred on your yearly budget and "pay them off" from an accounting standpoint over time.

In other words, furniture cash expense in 2010 of $10,000. Budget expense in 2010 of $1,000 (assuming a useful life of 10 years). The $1,000 will hit your SWR for ten years (and not the $10,000 in one year).

That might be a good approach. I had been thinking of doing that in one year, but I don't want to LBYM that much!

 

[DunWrkingSoon]

I am pretty sure that CSRS uses the CPI-U index, so perhaps FERS is the same? For the CSRS COLA, take the Q4 average (Jul, Aug, Sep) and compare to the previous year. For 2009, it was -1.6%, so no COLA in 2010.

Earlier this year I found the CPI-U index that is published by BLS, probably even from one of the threads here.

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

 

[DunWrkingSoon]

I stand corrected, it is CPI-W, for both CSRS and FERS. Sorry about that.

Guide to Federal Retiree COLAs: What Are They and How Are They Calculated?

 

[kumquat]

We're just going to continue what we started when we retired in 2007. We'll spend what we want to and if at year end it exceeds 4% of portfolio, then we'll worry about it. So far 2007 was 1.8% (retired June1), 2008 was ~3% and 2009 looks like ~3.5%. Both included some fairly large gifts to the kids.

 

[TromboneAl]

I would not increase our spending by any arbitrary inflation rate.

The goal is to not spend too much and also to not spend too little. One way to estimate the probability of the success of your plan is to use Firecalc, and that will have meaning only if you increase spending (or your spending upper limit) by an arbitrary inflation rate.

 

[REWahoo]

I arrived at our 2.5% increase by taking our 2009 spending and making adjustments for known and anticipated changes to expenses in 2010. For example, our electric rates are going up 30%, our health insurance increasing by 15%, and the death of my FIL means we won't be making a 350 mile round trip every two weeks so our gas costs should decline by $900.

The net impact of all these adjustments an increase of 2.5% in spending. More than the CPI - yep. Individual circumstances don't always match govt. statistics.

If need be, I'll cut back spending when I get "old".

 

[deserat]

So, REWahoo computed a personal inflation rate - just like some of the examples given in Your Money or Your Life. In W2R's case, her personal inflation rate will be difficult to ascertain based on the housing situation, although based briefly on what she said, I would net that a zero (sell house, buy a house in lower cost area) - sounds like she could buy the new furniture even with the 'wash' scenario. The car may be the outstanding item. Will be interesting to see if my 'back of the envelope' prediction will turn out true.

For us this year, it will be very interesting - we are living on much less than before. However, as we looked at it, we were still able to save nearly as much as the year before when I was working full-time - bizarre. However, I have tried to be very diligent in not purchasing certain things I did before - also, the tax burden has been reduced significantly - amazing how much in taxes we were paying!

When we retire, we will be fortunate to have several pensions (staggered over different times of eligibility) - managing the distributions from our tax-deferred accounts will be the main issue, I believe - hence the desire to put as much in Roth's as possible to minimize that headache.

Generally, to get back on the thread track, I believe the inflation rate will be going up significantly in the future due to the obligations coming due on profligate spending by our gubmint. I would hope that would benefit the savers as those more immediate financial vehicles interest rates hopefully will go up - however, in some of the reading I've been doing, it's an upside down world right now. In any case, I am hoping (hope springs eternal) that the ant (asset saver and astute manager of a personal inflation rate) still gets some benefits by LBYM.

 

[Gone4Good]

My plan is to use an initial withdrawal rate + CPI as a spending ceiling. I'm pretty sure I can spend less than that "safe" rate but our expenses are going to change so dramatically going forward nothing is certain. To the extent we underspend in a given year, I'll track that to offset any future overspend. But if no such slush amount exists, we'll have to find ways to cut back. Overspending CPI is the same as raising your initial withdrawal rate, in my view.

 

[Animorph]

I'm using the Social Security yearly bump, so 0% for me. I'm surprised no one has mentioned that one yet. I cheated last year and didn't take the 5+% for 2009 since it was obvious energy expenses drove much of that and would be dropping for 2009. So this will be our second year at 0%.