How one early retiree dealt with inflation

[ncbill]

Over nearly 30 years of their early retirement:

https://retireearlyhomepage.com/inflation.html

 

[VanWinkle]

Over nearly 30 years of their early retirement:

https://retireearlyhomepage.com/inflation.html

Interesting article, thanks for linking it. The 5% rule for owning vs rental is a very good article.

 

[SecondCor521]

Over nearly 30 years of their early retirement:

https://retireearlyhomepage.com/inflation.html

intercst, the author of that piece, joined this site in 2002. Looks like he stopped activity here in about 2007.

 

[RunningBum]

I didn't see anything related to handling inflation.

1) Renting over buying. I'll take the author's word that renting was cheaper than buying in Houston, but it hasn't been that way anyplace I've lived. Yes, you could invest the money you used for the down payment but that's not inflation, that's the stock market. Rents go up with inflation. If you've locked into a favorable mortgage rate, that part of housing cost does not go up.

2) Getting good international travel deals when the stock market declines. Absolutely nothing to do with inflation.

3) Taking advantage of ACA subsidies. Absolutely nothing to do with inflation.

0 for 3. Hat trick. Maybe there's some gain to be had from the article, but not in the way of dealing with inflation.

 

[brett]

We did three Med cruises and lots of international travel when the global economy crashed. There were bargains galore. Too many ships, not enough cruisers.

Our target price for a balcony cabin on a 10-14 Med cruise was $100. per person, per night. Celebrity, Princess, etc. We were at or below than target price on those three cruises. We also did a Croatia and TA balcony cruise for just under $90 per person per day. All late booking cruises from one week out to 8 weeks out.

 

[bolt]

Over nearly 30 years of their early retirement:
https://retireearlyhomepage.com/inflation.html

Thx for the links & info ncbill!

 

[Starsky]

Methinks the author made a bad investment decision by investing in an apartment in the Galleria in Houston and is using it to justify his theory. If he'd just bought a $100K house in Connecticut he'd be telling a completely different story. (Working title: "How I turned a $9k investment into $500K") If you're not familiar, The Galleria is a very weird mixed-use project with apartments, a hotel, a 90's style indoor shopping mall and office tower. His example, and by extension his experience, is highly atypical.

Buying a home for many people is an opportunity to invest in something that is a necessity and must be paid for one way or another. They have to spend money on rent, so why not make it a long-term investment instead? Other money can go into other traditional types of investments. The ability to purchase an appreciating asset with 20% down, enables the homeowner to earn a potential return on a much more valuable asset than they could otherwise own. (It's no great secret that a lot of people's net worth is a result of their long-term property ownership.)

The money spent on Rent has a negative opportunity cost - it isn't found money for you to invest. It goes into your landlord's pocket. The actual tradeoff in the Rent vs Buy equation is between investing your down payment into the market, or investing your down payment into a long-term appreciating asset worth five times your down payment. It also locks in your monthly housing costs until you sell. Rents will increase with inflation; mortgage payments won't (maintenance and property taxes will tho). Wouldn't it be nice to lock in your coat of housing for up to 30 years?

I certainly don't mean that every property is worth owning investment-wise, or that timing and other issues can't affect the overall return on the investment. Real estate is just like any other investment, there are no sure things. If you want a sure thing, Rent and you won't have to worry about losing any money. But if you could buy in 2008-09 - or even just before COVID - in hindsight, would you argue that renting is better? Likely not. I know this is greatly oversimplified, but there are many valid counter arguments to the author's premise. Frankly, to me, the premise itself seems oversimplified and based on an outlier experience; and like everything else, YMMV.

 

[Telly]

intercst, AKA John Greaney, was integral in the process of creating what became FireCalc. IIRC, Cap'n'Bill, AKA Dory36, used intercst's spreadsheets as a basis to create the FireCalc calculator.

 

[RobbieB]

I did good by the 5% rule here in the central valley. But owning vs renting is way more than financial.

 

[SecondCor521]

@Starsky, I think you misread intercst's article. He wasn't advocating for renting over buying - he mentions later that he did buy a house in Portland later. He was advocating - I think - for doing whichever made more sense at the time and in that place. Thus his reference to the article on the 5% rule, which I had not come across before and didn't examine closely (having a paid off home and not interested in moving, I don't have a dog in that fight currently) but seemed reasonable on the surface.

His second point about opportunistic travel is anti-inflationary in the sense that if you go when the deals are (which you can afford to when FIREd), you can pay less. Maybe you'd argue that's not anti-inflationary, but if travel is something one has as a percentage of their budget, and one can pay less over time by going when demand is lowest, that's a strategy for paying less over time, which lowers one's personal rate of inflation.

His last point about the ACA and healthcare is also indirect. I think his point was that he thought he would have $20K per year premiums, and if you inflate $20K at 5% a year, that's $1K of healthcare inflation. Obviously paying $1.43 a month or whatever his number was means he's not experiencing $1K of healthcare inflation a year, so it's again not a technique or a strategy but just an observation that healthcare inflation for him is not what people expected or feared.

@RB, I think you're right that he wasn't explicit about the connection with battling inflation on any of his three points. His first method of renting for a long time, I think his point was that it is possible that housing can be more of a fixed cost than an inflationary cost - no particular technique or strategy, just an observation that housing isn't always that inflationary, particularly if one is adept and makes good choices between renting and buying.

 

[DrRoy]

Interesting stuff. Thanks for posting.

 

[ExFlyBoy5]

I was slightly curious as to "what if" we had rented instead of buying our current home (late 2018). Of course the past is NOT indicative of what the future may bring, but over that period of time I would have had a 23.6% return on the money that would have been sitting in VTI. If I were to go back to 2012, that return would have been 14.1% which would still much more than our home(s) appreciated.

This doesn't take into account the costs of home ownership...over the last 2 years, those additional cost (over renting) would be an additional $21,000.

 

[friar1610]

intercst, AKA John Greaney, was integral in the process of creating what became FireCalc. IIRC, Cap'n'Bill, AKA Dory36, used intercst's spreadsheets as a basis to create the FireCalc calculator.

That’s my recollection, too. The Retire Early Home Page linked in this thread was the precursor to a Motley Fool forum of the same name in which Greaney played a large part. Unfortunately, it eventually devolved into political diatribes well before things really polarized. I shudder to think what it must be like these days.

 

[Dtail]

In my area using the 5% rule, it is definitely better to own, especially a fully paid off home.

 

[unclemick]

intercst, AKA John Greaney, was integral in the process of creating what became FireCalc. IIRC, Cap'n'Bill, AKA Dory36, used intercst's spreadsheets as a basis to create the FireCalc calculator.

Heh heh heh - Memories. Some of the first guys I read - back in'the old days'.

 

[finnski1]

Heh heh heh - Memories. Some of the first guys I read - back in'the old days'.

Me too. I think the Retire Early home page was the first stuff I ever read on the ER movement. Still check it every once in a great while.

 

[daylatedollarshort]

His second point about opportunistic travel is anti-inflationary in the sense that if you go when the deals are (which you can afford to when FIREd), you can pay less. Maybe you'd argue that's not anti-inflationary, but if travel is something one has as a percentage of their budget, and one can pay less over time by going when demand is lowest, that's a strategy for paying less over time, which lowers one's personal rate of inflation.

Good analysis. I tend to follow the "opportunistic" approach on several budget fronts. It does tend to lower expenses, and the lower one's expenses the less there is to be subject to inflation. I also think of it as being happy with leftovers - grocery stores that have deals on organic and healthy surplus foods; Freecycle type sites and thrift shops; and last minute event tickets.

 

[ncbill]

@Starsky, I think you misread intercst's article. He wasn't advocating for renting over buying - he mentions later that he did buy a house in Portland later. He was advocating - I think - for doing whichever made more sense at the time and in that place. Thus his reference to the article on the 5% rule, which I had not come across before and didn't examine closely (having a paid off home and not interested in moving, I don't have a dog in that fight currently) but seemed reasonable on the surface.

His second point about opportunistic travel is anti-inflationary in the sense that if you go when the deals are (which you can afford to when FIREd), you can pay less. Maybe you'd argue that's not anti-inflationary, but if travel is something one has as a percentage of their budget, and one can pay less over time by going when demand is lowest, that's a strategy for paying less over time, which lowers one's personal rate of inflation.

His last point about the ACA and healthcare is also indirect. I think his point was that he thought he would have $20K per year premiums, and if you inflate $20K at 5% a year, that's $1K of healthcare inflation. Obviously paying $1.43 a month or whatever his number was means he's not experiencing $1K of healthcare inflation a year, so it's again not a technique or a strategy but just an observation that healthcare inflation for him is not what people expected or feared.

@RB, I think you're right that he wasn't explicit about the connection with battling inflation on any of his three points. His first method of renting for a long time, I think his point was that it is possible that housing can be more of a fixed cost than an inflationary cost - no particular technique or strategy, just an observation that housing isn't always that inflationary, particularly if one is adept and makes good choices between renting and buying.

People should not let the recent market fool them but instead remember the long-term return for residential real estate is only ~1% real.

IMHO, 1BR for $850/month in 2021 is still a h*** of a bargain in a metropolis like Houston...I'd certainly be a renter.

And I can see why some want to take their ACA plan into retirement instead of being forced onto Medicare at 65.

 

[jazz4cash]

In my area using the 5% rule, it is definitely better to own, especially a fully paid off home.

Much better to own in my area also. I usually get a chuckle out of the rent vs own debate, esp with no disclaimers for locational variation. This one makes a lot of lifestyle arguments right off the bat (eg plowing snow). It really is primarily a lifestyle decision in the long run and location makes a big difference in the economics. I prefer not to share a wall with my neighbors. You could rent SFH but then you’re still paying a mortgage and all the expenses plus a markup with no appreciation.

 

[Starsky]

@Starsky, I think you misread intercst's article. He wasn't advocating for renting over buying - he mentions later that he did buy a house in Portland later. He was advocating - I think - for doing whichever made more sense at the time and in that place. Thus his reference to the article on the 5% rule, which I had not come across before and didn't examine closely (having a paid off home and not interested in moving, I don't have a dog in that fight currently) but seemed reasonable on the surface.

I only responded to the Rent vs. Buy argument, and that it is highly location specific. If he had lived where I do, he'd be singing a different tune. And buying a home is, for many, the only forced savings they have - regardless of the market.