What is your Spreadsheet INFLATION assumption?

[Chuckanut]

I deal with future inflation by holding very serious six figures in TIPS and a strong equity position.

+1 More or less.

Inflation concerns me a lot.

 

[MarcJoli]

Thanks to those who contributed to this thread.

I find it helpful to hear that many are using something around 3.5-3.7% as an average number.

I am 5-7 yrs away from ER so I currently have no cushion in case we have some bad years that erodes our spending power. If I was forced to retire early due to a job layoff today, I would be very worried about future inflation!!

Since inflation goes up and down in multiple month cycles, I may add cyclicality to my spreadsheet math. I will show it dropping this year, then stable in 2025, then rising back up in 2026. Make a few guesses on where it will peak again in 2028 before down trending once again.

I don't know if this precision provides a better forecast or not but I want to know what is the worst case with respect to my current expenses in 2030 dollars when I hope to retire.

 

[Koolau]

No longer spread-sheeting but I just assume whatever the national rate is, I add 1% because that's pretty much my experience in the Islands. Of course, that's MY basket of goods and services. YMMV

 

[LateToFIRE]

^^^

"my basket of goods"

Yes, that's exactly how I think of it. And my basket of goods contains a lot of fluff: things I could do without or downsize or substitute, etc, so in general I think my personal inflation rate is relatively low, hence ~2.5%-3.0%

 

[SecondCor521]

If I was forced to retire early due to a job layoff today, I would be very worried about future inflation!!

Why would you be forced to retire if laid off? Unless you're severely disabled or your income prospects are in an extraordinarily narrow field (like you're a Magnificent 7 tech CEO), you should generally have the option of getting another job.

...

As an aside, I use 3%, but my personal measured rate of inflation over the past decade or so is approximately 0.5% per year.

 

[Surewhitey]

3%. Gotta start somewhere.

 

[Montecfo]

I do not use an inflation assumption. I think it is easy to overwork that.

I simply use current dollars for expense forecasting and use a very conservative 3% real net investment return assumption.

It seems like busy work to do an inflation estimate and use it to blow up both expenses and investment returns.

Just does not seem like a productive exercise

 

[levindb]

I cannot forecast inflation...and it is something that I cannot control. Instead, I forecast how my investments will do above inflation...which results in everything being in TODAY's DOLLARS. It is much easier to understand for my feeble mind.

Also, I have tried to protect myself from inflation...so my DW and I have waited till 70 for our SSA benefits, which will grow according to some definition of inflation. Also, our 30 year mortgage is fixed at 2.85%, so a significant portion of our income and a significant portion of our spending is inflation protected.

I forecast our investment ROI just 3% over inflation...after 11 years away from megacorp, our investment ROI (60/40 AA) has been 7.5% and inflation has averaged 4.1%...and we are very comfortable with those results. It is just not important to me to try and forecast things in more detail. I cannot control it, and we have enough spending flexibility to deal with any short term variations...so we both sleep well at night.

 

[Closet_Gamer]

3%. Like others I have built in hedges through a more modest SWR and within that a lot of it is discretionary.

I think inflation is a very serious concern and I think lots of the prevailing winds point to higher rather than lower inflation, but I don't have any expertise to warrant something more sophisticated.

 

[Sunset]

I do not use an inflation assumption. I think it is easy to overwork that.

I simply use current dollars for expense forecasting and use a very conservative 3% real net investment return assumption.

It seems like busy work to do an inflation estimate and use it to blow up both expenses and investment returns.

Just does not seem like a productive exercise

+1

Much easier, in many ways.

 

[jeroly]

I don't use a single rate, but rather will play around with different inflation assumptions to see how the overall picture is affected by changes to inflation. It's right up there with the most important variables impacting the viability of financial plans. I'll look at rates from 2% up to 5%, often using a 'base rate' of 3%.

I use I-bond purchases, plus delaying SS until 70, as the main ways I'm protecting myself against inflation (beyond the usual tricks like portfolio diversification, having a willingness to change purchase habits, etc.). I figure that in a worst-case scenario, the larger amount I'll get (if I'm still alive) from SS at 70, plus $10k from I-bond sales, will be enough to get by quite comfortably in an LCOL area, and that will be indexed to inflation (as long as the US government doesn't default on its obligations). So, I just need to buy I-bonds until my balance will cover $10k/yr (inflation adjusted) in annual withdrawals over my life expectancy, which may be in another ten years or so, and I'll have the optimal level of insurance against inflation I desire.

If the portfolio itself (outside of the I-bonds) goes to hell, well, that's a bummer but at least I won't be eating cat food (chow, chow, chow!).

 

[big-papa]

I do not use an inflation assumption. I think it is easy to overwork that.

I simply use current dollars for expense forecasting and use a very conservative 3% real net investment return assumption.

It seems like busy work to do an inflation estimate and use it to blow up both expenses and investment returns.

Just does not seem like a productive exercise

I also use current dollars but I use estimates for stock returns based on a number of sources/methods, along with some conservatism. TIPS ladder is going to be what it is, so nothing to forecast for that part of the portfolio.

Cheers.

 

[ERD50]

I do not use an inflation assumption. I think it is easy to overwork that.

I simply use current dollars for expense forecasting and use a very conservative 3% real net investment return assumption.

It seems like busy work to do an inflation estimate and use it to blow up both expenses and investment returns.

Just does not seem like a productive exercise

Pretty much agree. I don't do spreadsheets for my portfolio (I use FIRECalc ir FICalc for that), but I have done some projections to look at RMDs and Roth conversions.

Like you, I keep things in current $ (no inflation adjustment). Tax brackets and some other factors will more/less keep up with inflation. Except... I reduce my pension by a 3% inflation figure, to show its reduced buying power and effect on RMDs.

-ERD50

 

[Montecfo]

^^^ To your point, I do not grow SS in my modelling since not doing so keeps it in "real" dollars. Same approach as financial assets. Not taking SS currently however and retirement planning assumed no SS.

 

[SecondCor521]

Pretty much agree. I don't do spreadsheets for my portfolio (I use FIRECalc ir FICalc for that), but I have done some projections to look at RMDs and Roth conversions.

Like you, I keep things in current $ (no inflation adjustment). Tax brackets and some other factors will more/less keep up with inflation. Except... I reduce my pension by a 3% inflation figure, to show its reduced buying power and effect on RMDs.

-ERD50

^^^ To your point, I do not grow SS in my modelling since not doing so keeps it in "real" dollars. Same approach as financial assets. Not taking SS currently however and retirement planning assumed no SS.

In my RMD prediction worksheet, I use nominal dollars because (a) I'm trying to [-]predict[/-] guess over a 35 year period, and (b) I think things will inflate at different rates - investment returns, inflation, and IRMAA premiums.

The different rates of return/inflation/adjustment can make things wildly diverge over that long of a time frame. I still do my Roth conversions based on what it says, but I also am slowly accepting the fact that it is mostly just a SWAG anyways.

 

[kgtest]

Now that inflation is coming down, what are your Spreadsheet Inflation assumptions for inflation in the coming year, rest of the decade, and long term?

In my opinion, we are not likely to go back to the lowflation from the last decade due to structural changes in our economy the last few years:

• Raises in minimum wages
• Labor union actions
• Reshoring of some supply chains
• Geopolitical split between the G10 and the BRICS reversing previous globalization trends.
• demographic changes in China and Japan (fewer workers)
• Labor hoarding (no layoffs)
• Low unemployment, hard to find good workers.
• Red Sea and Panama Canal shipping and general security at sea. Will the US be willing to provide security for all?

This chart shows the decade of the 70's and how there were big cycles in inflation in the the 70's that averaged 7% over that period.

https://twitter.com/x/status/1737952531072831932

So, if our inflation will stabilize at a new level, what level will that be? What do you plug into your spreadsheets? What are your guesstimates? Here are my guesses:

End of 2024: 2.0%

Rest of the Decade: 3.5%

Avg for the 2030's decade: 4.0%


Please share what numbers are you using and why?

3% which is fair considering what I relate to as the "season" of life that our family is in.

We are high expense, large and wide budget years currently and I use 3%. The idea being, there will likely be MORE years where we experience less than 3% rise in our actual COL... vs just some inflationary things.

I sort of breakout inflation into two sections of expenses... our core expenses...and everything else.

Our CORE expense inflation was down -2.81% in 2023 from 2022.

Home/Car/Property/Health Insurance, electric, water, trash, internet, cellphone and fee's.

Then I have everything else which is like personal needs, child related expenses, vacations, healthcare related costs, food, gas, membership fee's etc.

This is harder to track, as we consume different volumes of food at different quality and price points from year to year, but as my kids get bigger and eat more that expense is baked in to rise.

Knowing my inflation numbers are great, but I also try to track one-off expenses that will be coming up in the next year.

Both DW and I will be getting raises that outperform our inflation rate. This is why I don't care as much. Maybe also because we have "more than enough"? Not too sure to be honest.

We took the most expensive trip of our life this past year. And we travelled more this past year than we normally do. I will say that pace will likely continue as it hasn't impacted our LT ER goals too much.

Key for us, is that our raises and earnings potential keeps up with inflation. Whether its 3%, 8% etc I sort of average it all out over the long term to 3%.


Core expenses 2022 = $15,382.81
Core Expenses 2023 = $14,950.43

I can project these core expenses pretty well and I know it won't impact me much. Especially since we run a budget close to 300k now. I just hope that after taxes, the next second largest expense is our retirement saving...and it has been for a long time. Blessed.

 

[GenXguy]

I do not use an inflation assumption. I think it is easy to overwork that.

I simply use current dollars for expense forecasting and use a very conservative 3% real net investment return assumption.

It seems like busy work to do an inflation estimate and use it to blow up both expenses and investment returns.

Just does not seem like a productive exercise

I do the same with long term expense planning in my spreadsheet. I calculate it in today's dollars. And I keep my stash in today's dollars as well, so I'm effectively assuming each dollar maintains its purchasing, and anything above that is a bonus.

I most definitely include SS in my retirement plan as those dollars are as useful as any others, and I also add that in today's dollars, but I do currently project it to be 25% less than the promised benefit amount due to the future funding shortfall. But hopefully, that will be addressed so that I don't see the 25% haircut of benefits.

 

[brett]

I am more concerned about the delta between my inflation rate and our ROI on investments.

I no longer bother with a spreadsheet. I do not see the point of f'casting years out on a spreadsheet using financial data that can change. Three or four years is max for me. I simply use a fudge/inflation percentage on a conservative back of envelope calculation based on current actual after tax spend. I only use after tax numbers.

Since retiring 13 years ago this method has been fairly accurate for me.

One thing that I do consider is our inflation rate. It is different than any published rate and going higher. Our travel spending is up considerably like for like. Much higher than the published rate of inflation.

 

[MarcJoli]

in my planning spreadsheets, in addition to planning for inflation, I am attempting to model what will be the cost of "fun" during the Go Go years, Slow Go years, and No Go years.

Today, while both are working, we spend about $16K on travel and entertainment. This includes a couple of week long trips in warm places in the winter, summertime at the lake, trips to visit kids, professional sports tickets, and everything else in the "travel" category like extra eating out, rental cars, flights, etc.

In Go Go years we hope to double this travel and entertainment. Cut it back during Slow Go, and minimize it after No go (adjusting for inflation)

Using an inflation rate on top of current expenses makes sense for core living expenses but does not make much sense for estimating discretionary lifestyle costs.

 

[jebmke]

in my planning spreadsheets, in addition to planning for inflation, I am attempting to model what will be the cost of "fun" during the Go Go years, Slow Go years, and No Go years.

Today, while both are working, we spend about $16K on travel and entertainment. This includes a couple of week long trips in warm places in the winter, summertime at the lake, trips to visit kids, professional sports tickets, and everything else in the "travel" category like extra eating out, rental cars, flights, etc.

In Go Go years we hope to double this travel and entertainment. Cut it back during Slow Go, and minimize it after No go (adjusting for inflation)

Using an inflation rate on top of current expenses makes sense for core living expenses but does not make much sense for estimating discretionary lifestyle costs.

you just never know how it turns out. I have two friends who turn 100 this year. One made his annual one-month trip to Paris last summer. The other pretty much stays at home in her small town.

 

[Kork13]

I just keep it simple -- everything is calculated as above-inflation values, comparable to today's dollars. For average investment returns (all stock), I normally estimate 5-6% returns above inflation. Force me to use an inflation figure, I'm gonna use 3%.

 

[LateToFIRE]

in my planning spreadsheets, in addition to planning for inflation, I am attempting to model what will be the cost of "fun" during the Go Go years, Slow Go years, and No Go years.

Today, while both are working, we spend about $16K on travel and entertainment. This includes a couple of week long trips in warm places in the winter, summertime at the lake, trips to visit kids, professional sports tickets, and everything else in the "travel" category like extra eating out, rental cars, flights, etc.

In Go Go years we hope to double this travel and entertainment. Cut it back during Slow Go, and minimize it after No go (adjusting for inflation)

Using an inflation rate on top of current expenses makes sense for core living expenses but does not make much sense for estimating discretionary lifestyle costs.

This is a really great food for thought for model junkies like me. For sure, I plan to do some BTD in first years of retirement but I'm fairly certain discretionary spending will settle down in a few years, though essentials would continue to inflate.

 

[jebmke]

This is a really great food for thought for model junkies like me. For sure, I plan to do some BTD in first years of retirement but I'm fairly certain discretionary spending will settle down in a few years, though essentials would continue to inflate.

if you can't make it settle down, then it would seem to me to not be discretionary. I say that in all seriousness because I do believe that everyone has their own definition of what is discretionary, and rightly so.

 

[LateToFIRE]

if you can't make it settle down, then it would seem to me to not be discretionary. I say that in all seriousness because I do believe that everyone has their own definition of what is discretionary, and rightly so.

Point well taken. I'm abundantly aware of the hazards of lifestyle inflation, having spent most of my adult life in a VHCOL city. I was specifically thinking of things like extended travel and perhaps indulging some of the more expensive, time-intensive leisure pastimes that were not feasible during my intensive working years.

I have not taken a vacation that wasn't somehow or another interrupted or disrupted by work in the past 30 years. That's not a complaint (though DW might beg to differ). I had my reasons for burning the candle at both ends - I knew what I was signing up for.

It's just that there is a bit of catching up to do. We may have a relatively narrow window in which to do some of these things, so not gonna hold back on spending the dollars I have spent so much of my time, effort and energy to accumulate. That said, we are pretty cautious people when it comes to BTD, almost to the point of needing to unlearn a bit of that LBYM.

 

[MarieIG]

I have always used 3% - but I don't think OP's "guesstimates" are unreasonable. We shall see.

I am already retired, and while I could not plan for every scenario, I tried to include some cushion - which for me came in handy, as I retired at the end of 2021.