Anyone here concerned about inflation?

[Corporateburnout]

Are we concerned about inflation? not a lot. The future may be different than the past but based on Firecalc's 147 years of data our portfolio would survive periods of super high inflation like the 70's and early 80"s.

As retirees with no mortgages or any other debt there is little we can do to mitigate high inflation other than to buy high rate CDs in our fixed income investment to offset some of the increase in prices of goods and services.

So we plan to keep our AA as is and continue to enjoy retirement...

 

[bobandsherry]

Of course since retirees don't have wages, their problem is different.

You don't get dividends? Wouldn't you expect dividends to rise? How about interest on your money? You don't have any cash in CDs, bonds, etc? You don't expect that stock prices will rise due to higher P/E? Even those on pension and social security will see COLA adjustments. So why do you not think retirees wouldn't see higher income? So, not wages per say, but obviously MAGI income.

 

[Dtail]

Are we concerned about inflation? not a lot. The future may be different than the past but based on Firecalc's 147 years of data our portfolio would survive periods of super high inflation like the 70's and early 80"s.

As retirees with no mortgages or any other debt there is little we can do to mitigate high inflation other than to buy high rate CDs in our fixed income investment to offset some of the increase in prices of goods and services.

So we plan to keep our AA as is and continue to enjoy retirement...

+1

 

[joeea]

You don't get dividends? Wouldn't you expect dividends to rise? How about interest on your money? You don't have any cash in CDs, bonds, etc? You don't expect that stock prices will rise due to higher P/E? Even those on pension and social security will see COLA adjustments. So why do you not think retirees wouldn't see higher income? So, not wages per say, but obviously MAGI income.

As I said, no wages = different problem with different solutions.

 

[MichaelB]

Of course since retirees don't have wages, their problem is different.

This is a critical distinction that many do not grasp. Inflation is a general rise in prices, wages and real assets. So, when chronic inflation sets in most skilled wage earners are protected over time, as are owners of real assets. The real pain is felt by those with fixed income streams and low / risk free financial assets, such as bonds.

Inflation is a measurement that has no application on a personal level, because it represents a total economy view of prices. Adjusting one's consumption basket to deal with changing prices is fine, but just like investing, past performance is no guarantee of future performance. When the rate of inflation does rise, and then stays high (chronic), it becomes impossible to fully adjust and this leads to some decline in real consumption by some segments of the population. Historically in the US and around the world, seniors are the greatest losers.

There are only two kinds of inflation: not enough and too much. Both are impossible to deal with. Inflation is always a real threat to retirees.

 

[copyright1997reloaded]

Some of the above posts endorse the point I made earlier that we can control our own inflation rates. If Potatoes go up to $10 a pound and we do NOT buy them. That metric does not affect us. If our Favorite Pizza place puts the prices up, and we change out favorite Pizza place, it does not affect us.

Costco still has a Dog & Drink for $1.50. The BEST deal on the Planet bar none.

AKA "Substitution Effect"
Also see "Cross Elasticity of Demand".

Of course, my Econ degree is from 1978, FWIW.

 

[dallas27]

It's all the rage in the news these days. To be clear, I don't think we're going into an inflationary supernova (thanks to new government spending plans and tax cuts), but I'm wondering what others on the board think of this issue.

Huh? You think tax cuts and spending are deflationary? Huh? Wha? Huh?

 

[Tadpole]

Inflation still occurs in a product whether you decide to quit buying it or not. Controlling personal inflation by denying oneself something you could afford last year has to do with voluntary reduction in your life style, not your inflation. It is not inflation control; it is inflation avoidance.

 

[audreyh1]

You don't get dividends? Wouldn't you expect dividends to rise? How about interest on your money? You don't have any cash in CDs, bonds, etc? You don't expect that stock prices will rise due to higher P/E? Even those on pension and social security will see COLA adjustments. So why do you not think retirees wouldn't see higher income? So, not wages per say, but obviously MAGI income.

Stock P/E does not rise with interest rates or inflation, it shrinks.

Stocks may eventually rise enough to keep up with inflation, but initially they are hit pretty hard as rising interest rates make fixed income assets more attractive.

 

[Looking4Ward]

I remember inflation and the high interest rate mortgages of the early 80's. So I went back and looked at how Wellington performed during those years.

I'll take several years of +20% returns, thank you.

 

[bobandsherry]

Here's how S&P performed, also with comparison to DOW and NASDAQ during the 80's (high interest w/all time high prime rate of 21.5% Dec80, high inflation, etc).


200% growth in the 10 year period, 250% for NASDAQ, I think I could take that. That outperformed the past 10 years by double for S&P and DOW, about the same for NASDAQ.


Let's hope we don't see an 10 year period like the 70's. Inflation more than doubled to 8.8% in 1973, then climbed to 12%. Economic growth was weak, unemployment hit double digits -- I don't think there are any predictions those type of levels. But anything is possible, I'm sure economists then didn't think that financial crisis would occur either.

 

[NW-Bound]

I remember inflation and the high interest rate mortgages of the early 80's. So I went back and looked at how Wellington performed during those years.

I'll take several years of +20% returns, thank you.

This chart shows wonderful stock performance starting from 1982, after Volker as the Fed chairman was able to slay the high inflation by jacking up rates to unprecedented levels. In 1980, I bought my 1st home and paid a mortgage rate of 14%. Later that year, it went as high as 18%.

Earlier, the stock market was in the doldrums for a long time. If one runs FIRECalc, he will see that this was the period when 4% WR will deplete a 60/40 portfolio in 30 years.

PS. The market wonderful bull run starting in 1982 was due to inflation coming down, allowing the S&P P/E to expand from 7 to the 20's that we take for granted these days. Yes, the P/E was as low as 7 in 1980.

PPS. If one sticks with 4%WR, he will be OK, unless things get even worse than they did in the past. You just have to die before your 30 years are over, that's all. I don't think I will live another 30 years, but I do not want to lose my multi-millionaire status. I am scroogy.

 

[daylatedollarshort]

I'm interested in living in a self sufficient house like this:

Solar Decathlon: College students built a $250,000 solar-powered home - Business Insider

With a house like that, or at least some subset of those features, and living in a place where there's a lot of free and cheap things to do, it seems like we can minimize the impact of inflation as we wouldn't have a need to buy a lot of stuff. This year we can get a National Lifetime Parks pass for $80, a state parks pass for $20, a vets pass for the regional parks for $40 and have hundreds of pretty cool parks all within a an hour of so driving driving distance of our house for no extra monthly cost. We don't have an electric car yet, but that is on our list, so that will make our day trips even cheaper.

 

[NW-Bound]

History shows that the worst time to start one's retirement was in the period of 1962-1967 or thereabout.

Starting with $1M and a WR of $40K, your stash would be depleted through the bad 1970's such that when the market turned around in the 1980's and gave you 20% return, it was already too late because your stash was down to $100-200K.

That's the bad sequence of returns that people fear and talk about.

On the other hand, if you started your retirement in 1980-1982 with 4% WR, you would have so much money that you could blow money left and right. Kind of like retiring in 2008-2009.

 

[aja8888]

History shows that the worst time to start one's retirement was in the period of 1962-1967 or thereabout.

Starting with $1M and a WR of $40K, your stash would be depleted through the bad 1970's such that when the market turned around in the 1980's and gave you 20% return, it was already too late because your stash was down to $100-200K.

That's the bad sequence of returns that people fear and talk about.

On the other hand, if you started your retirement in 1980-1982 with 4% WR, you would have so much money that you could blow money left and right. Kind of like retiring in 2008-2009.

And besides having your stash reduced because of the mess in the 1970's, the early 1980's punished those folks with astronomical inflation.

 

[NW-Bound]

And besides having your stash reduced because of the mess in the 1970's, the early 1980's punished those folks with astronomical inflation.

High inflation also caused lousy stock returns. From 1970 to 1982, the market was flat which meant its value dropped once inflation was accounted for.

Dividend yield was higher than it is now, at about 3 to 6%. However, inflation was running 5 to 12%.

Pure pain and misery.

 

[aja8888]

High inflation also caused lousy stock returns. From 1970 to 1982, the market was flat which meant its value dropped once inflation was accounted for.

Dividend yield was higher than it is now, at about 3 to 6%. However, inflation was running 5 to 12%.

Pure pain and misery.

1981 was the year I changed jobs and moved from Connecticut to southern California to work for Big Oil. I sold my ranch on three acres in CT for $105,000 and bought a smaller tract home in Thousand Oaks for $250,000. Good thing Big Oil had a very generous moving policy. I went from a 6% mortgage to an 18% one overnight. I was scared and it took a while to get accustomed to CA. It all worked out, though.

 

[Free bird]

The only worry about inflation is not having any.

 

[DEC-1982]

To OP, yes, I am concerned about inflation.

Not exactly related ... here is an article about inflation rise and stock performance that I read yesterday. And yes, 2017 inflation increased over 2016 inflation.

"In the years when inflation was lower than it was the previous year, the median return on the S&P 500 was 18.3 percent. Yet the median return on stocks was just 5.6 percent when inflation came in higher than it did the previous year."

"So, it would make sense for investors to be more concerned about rising inflation than rising rates. Both could occur at the same time, but inflation appears to be more menacing to stocks when we look at these variables separately. Inflation is still running at just 2.1 percent based on the latest reading, so it’s still below average based on the past 90 years or so of data."

https://www.bloomberg.com/view/arti...a-bigger-danger-to-stocks-than-interest-rates

 

[cooch96]

I understand inflation hurts the working poor the most; those in unskilled labor; the consumers. I’ve heard inflation described as a tax on the poor. I feel a lot of sympathy for them. But I’ve been working like mad for decades to put as much distance as possible from their predicament. I think it will pay off personally.

I really can’t think of a scenario where I’m not hurt much less than the most:
Natural gas prices spike: insulate home and wear long johns.
Gasoline prices spike: I’ve always wanted a moped.
Food prices spike: I can lose 30lbs and my backyard can produce eggs year round and produce for months.
Severe illness and US healthcare costs skyrocket: there are good hospitals in Mexico, China, and Thailand, etc.

So, I’m not concerned about inflation, but I believe all the measures I’m taking to FIRE are also good hedges against inflation.

 

[Chuckanut]

My big fear is not an out of control run-up of inflation to double digits, though it certainly could happen again as it did in the 70's. My biggest regret was buying 10 year CD's at 12% back then, when I could have bought 30 year Treasury bonds at a similar rate. A spike in inflation will be obvious to us all.

My major fear is a lingering higher inflation rate in the area of 3-5%. Using the rule of 72 a 2% inflation rate causes a dollar to lose 1/2 its value in 36 years. 3% takes only 24 years. 4% takes 18 years. 5% a bit over 14 years. It might be to easy to get lulled into not taking action soon enough. Not so good.

 

[audreyh1]

I always track my NW versus inflation* so that I know how our net worth measures in real terms - i.e. spending power compared to CPI. So I'm very aware of how inflation has behaved over decades+, as I keep track of records over the years.

Inflation from 2000 through 2009 was 28.3%, so your $1 in Jan 1 2000, would have been worth $0.72 on Dec 31, 2009. Over this period inflation averaged ~2.5% annually.

Inflation from 2000 through 2011 was 34%. So a couple more years, and now your $1 is down to $0.66

Inflation from 2000 through 2017 was 46.5%. Now we're getting close to cutting your $1 in half, and a good chunk of this time was a very low inflation period. Over this period, annual inflation averaged 2.14% as the years from 2010 on saw a much lower inflation rate. Still, spending power decreased quite a bit.

Interestingly, inflation from 2012 through 2017 - a very low inflation period - was still 9.24%. Six years at ~1.5% inflation per year - yet still almost a 10% haircut. Inflation from 2012 through 2016 was a bit lower at 7%. Those 5 years averaged out to 1.36% per year. These are compound calcs in case folks wonder.

*Even though my personal inflation rate (only tracked as spending) was pretty much zero for the decade 2000-2010. We started off with higher spending, gradually pulled back, and only just reached the original spending level in nominal terms after 10 years.

 

[Senator]

Many people are getting bonuses and raises. Wage growth spurs inflation. Whether it is the minimum wage increases, bonuses, cities raising their own wages, contract negotiation, etc. It all leads to inflation. Companies cannot raise prices if people are unwilling to pay for the goods.

Too much money chasing too few goods is the definition of inflation.

I expect 5-6% inflation.

 

[audreyh1]

Many people are getting bonuses and raises. Wage growth spurs inflation. Whether it is the minimum wage increases, bonuses, cities raising their own wages, contract negotiation, etc. It all leads to inflation. Companies cannot raise prices if people are unwilling to pay for the goods.

Too much money chasing too few goods is the definition of inflation.

I expect 5-6% inflation.

When? This year? Next year?

 

[joeea]

There are only two kinds of inflation: not enough and too much. Both are impossible to deal with. Inflation is always a real threat to retirees.

Yup.

My current plan can survive during retirement even if the inflation rate is double the long-term inflation rate of about 3% over the past 100 years or so.

Should it get higher than that for a protracted period of time, I'll have to re-evaluate and adjust my plan. I'm confident I won't be the only one doing so.