|
11-18-2016, 01:24 PM
|
#1
|
Recycles dryer sheets
Join Date: Mar 2016
Posts: 81
|
Inflation impact
If you aren’t exactly retiring early, then factor do you use instead of need 25x expenses? Firecalc comes up with 100% based on expected spending and savings pattern. My issue is inflation. I would like to retire in a few years at 57. DH will continue for a few years to max out his pension until 61 and lower his % of health care sharing. Calculators are coming up with 100% with our estimates. We just need to stay the course with savings and not second guessing the market. DH has a state pension and can buy state health until we reach Medicare age. If our budget is $70k, pension is $42k, SS s/b $22K or higher, plus investments, then we should be on track.
I am calculating on every format I can find. I also have an excel file. The one thing I am not following well is the inflation discussion and how to compensate within my spreadsheet.
If we estimate $1.5M in investments and I deduct 3% with an assumed rate of return of 4%, then how would you add in an estimated inflation rate? I made it very simple just so I could follow easily.
Balance
1,500,000
deduct 3%
45,000
1,455,000
growth 4%
1,513,200
deduct 3%
45,396
1,467,804
growth 4%
1,526,516
Suggestions? Thoughts?
|
|
|
|
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!
Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!
You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!
|
11-18-2016, 01:36 PM
|
#2
|
Moderator
Join Date: Feb 2010
Location: Flyover country
Posts: 25,157
|
First, 57 or even 61 would definitely be considered early by most.
Second, have you used FIRECalc in your planning?
Third, inflation in the future is anyone's guess, so your estimate should be as good as anyone else's. Historically I think it has averaged around 2.5 to 3.5% (in that ballpark anyway), but going forward is unknown.
|
|
|
11-18-2016, 01:39 PM
|
#3
|
Recycles dryer sheets
Join Date: Feb 2011
Location: Arlington Heights
Posts: 271
|
For my spreadsheet I use expense estimates for the amount to reduce. So if I have $1.5M and I need $100k for a yearly expenses then I reduce the $100k for the first year. For the subsequent yearly calculations of expenses it is increased by the amount of inflation. So the next year would be $103k of expenses which is then taken from the remainder of the previous year (plus your estimated return). I also can vary the inflation rate on subsequent years. So if I think inflation will be 2.5% until I'm 62 (I am 60) and then go to 3% until age 65, I can make this adjustment. I can vary it up to 3 times.
This is a simplistic way of doing it. A better way, which I haven't spent time on doing is to be able to adjust inflation on particular line items in my estimated expenses. This way I can adjust inflation for health care differently than food, etc.
|
|
|
11-18-2016, 02:27 PM
|
#4
|
Moderator
Join Date: Feb 2010
Location: Flyover country
Posts: 25,157
|
Quote:
Originally Posted by SoReady
A better way, which I haven't spent time on doing is to be able to adjust inflation on particular line items in my estimated expenses. This way I can adjust inflation for health care differently than food, etc.
|
I don't know of they still do it (haven't checked in a while) but Fidelity's calculator used to use 7% as an inflation factor for healthcare. Going forward, I think that category's inflation factor will be at least as unguessable as the general inflation rate, probably more so.
|
|
|
11-18-2016, 02:38 PM
|
#5
|
Moderator
Join Date: Apr 2012
Location: San Diego
Posts: 14,141
|
Firecalc already has inflation rates calculated in. It assumes the "spending" that you put in on the first page will be increased each year by the CPI. That comes from the trinity study - which showed that a 4% initial withdrawal - increased by inflation rate each year - had a 95% survivability over 30 years. Firecalc back tests your assumptions based on prior years market returns and prior years inflation rates.
If you're looking at deterministic inflation rates - 3% is probably good... but life isn't deterministic... we've been in a low inflation (and low interest) rate period for so long... I haven't increased my withdrawals since retiring 2 years ago... No need to.
__________________
Retired June 2014. No longer an enginerd - now I'm just a nerd.
micro pensions 6%, rental income 20%
|
|
|
11-20-2016, 02:34 PM
|
#6
|
Recycles dryer sheets
Join Date: Jan 2013
Posts: 73
|
Here are the numbers you gave:
Budget: $70K
Pension: $42K
SS: $22K
Savings: $1.5M
You don't give your precise ages (or more importantly, the difference between your age and your husband's age), which means some guesswork, though to be honest, it really doesn't matter, because you're not even close to having to be concerned.
Let me make some conservative assumptions:
Let's say your husband is 3 years older than you, since that increases the amount of time you will be living on no income.
Is his pension available immediately on retirement, or will he have to wait until 65? Let's assume he has to wait.
Based on these assumptions, you will have to provide for your entire $70K budget from savings for 4 years (his age 61 until the pension starts at age 65) and then $28K per year until he starts drawing his SS. After both of your SS payments kick in - you'll have a shortfall of a measly $6K per year.
Let's assume for the moment you have to finance your entire $70K for the first 4 years (i.e., you make 0 real returns) - you'll still have $1.2M left (rounded).
$28K (what you need to withdraw after your husband's pension starts) is 2.3% of $1.2M - so even with no social security income and assuming an absolutely dismal investing environment immediately after retirement, you have a very safe withdrawal rate (i.e., barring a "black swan" event, you will die with plenty of savings - most likely significantly more than when you retired)
Add in social security and more realistic assumptions around investment returns, and you should have absolutely no problems.
The main thing about inflation is that it isn't a constant flat rate. Risk will enter the equation if it spikes suddenly. The main thing you want to make sure is that you have some protection against this - you can research more about what that means on this site and others (I personally feel a decent index-fund based portfolio will provide enough protection, though others may disagree).
|
|
|
11-20-2016, 11:59 PM
|
#7
|
Thinks s/he gets paid by the post
Join Date: Jan 2008
Posts: 1,495
|
Quote:
Originally Posted by braumeister
I don't know of they still do it (haven't checked in a while) but Fidelity's calculator used to use 7% as an inflation factor for healthcare. Going forward, I think that category's inflation factor will be at least as unguessable as the general inflation rate, probably more so.
|
In approx. May of this year Fidelity changed their healthcare inflation rate to 5.5% as a result of updated projections from a source which I don't recall.
|
|
|
11-21-2016, 08:17 AM
|
#8
|
Thinks s/he gets paid by the post
Join Date: Oct 2009
Posts: 1,190
|
Quote:
Originally Posted by Options
In approx. May of this year Fidelity changed their healthcare inflation rate to 5.5% as a result of updated projections from a source which I don't recall.
|
Thought it was 5.9%, but my memory could be wrong. They give the information in their assumption page.
On that issue, not to thread hijack, but I couldn't find on Fidelity a separate input for healthcare expense. My read of their page is that they assume a $ amount for you at age 65 and inflate that number at their chosen inflation rate for healthcare expense.
Am I misinterpreting?
|
|
|
11-21-2016, 08:23 AM
|
#9
|
Moderator
Join Date: Feb 2010
Location: Flyover country
Posts: 25,157
|
You can break your expenses down by category in their calculator. The default is simply essential vs discretionary, but they give you the option to fine-tune it.
|
|
|
11-21-2016, 08:43 AM
|
#10
|
Thinks s/he gets paid by the post
Join Date: Oct 2009
Posts: 1,190
|
Quote:
Originally Posted by braumeister
You can break your expenses down by category in their calculator. The default is simply essential vs discretionary, but they give you the option to fine-tune it.
|
Where do you get to the page that allows category input. All I have ever seen is the essential v. discretionary input?
|
|
|
11-21-2016, 08:54 AM
|
#11
|
Moderator
Join Date: Feb 2010
Location: Flyover country
Posts: 25,157
|
They give you two choices on that page: Estimated monthly or Detailed monthly.
Estimated is selected by default, but you can just click the other one.
|
|
|
11-21-2016, 08:55 AM
|
#12
|
Thinks s/he gets paid by the post
Join Date: Oct 2009
Posts: 1,190
|
Quote:
Originally Posted by braumeister
They give you two choices on that page: Estimated monthly or Detailed monthly.
Estimated is selected by default, but you can just click the other one.
|
Thank you. Will have to look more carefully.
|
|
|
|
Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
|
|
Thread Tools |
|
Display Modes |
Linear Mode
|
Posting Rules
|
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts
HTML code is Off
|
|
|
|
» Recent Threads
|
|
|
|
|
|
|
|
|
|
|
|
|
» Quick Links
|
|
|