I'm trying to figure out expense inflation for my ER. I found a historical CPI. Should I just average the past 10 years? Is there a good percentage to go with? Or should I look at each item as a different percentage, i.e., rent 6%, food 4%?
I'm trying to figure out expense inflation for my ER. I found a historical CPI. Should I just average the past 10 years? Is there a good percentage to go with? Or should I look at each item as a different percentage, i.e., rent 6%, food 4%?
It's hazardous to use "averages" for either market returns or inflation since it's extreme behavior in either of these that causes FIRE portfolio failure. I'd test my plan using inflation data from a high inflation period, such as the 80's, and if it passes that, you're good to go....
Good luck!
Or, safer still, use the 1970s. (1913-1919 is likely to not recur, but that would be true belt & suspenders planning.) Average Annual Inflation Rate by Decade
For the purposes of including inflation, I split up my expenses into two categories: Medical and non-medical. I have found this works out very well because it is the medical side which has much higher and often less predictable inflation while the rest of my expenses as a group are much lower and not as variable.
IIRC, Fidelity's planner uses 3.5% generally, but 7% for medical costs.
But picture a retiree walking out of work looking forward to a happy retirement primarily financed by a generous non-cola'd pension in 1974. Picture him/her by 1984! Ouch!
But picture a retiree walking out of work looking forward to a happy retirement primarily financed by a generous non-cola'd pension in 1974. Picture him/her by 1984! Ouch!