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Inflation rate used?
Old 07-27-2017, 01:11 PM   #1
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Inflation rate used?

We have atypical retirement income - rent and loaned money payments, a very small amount of social security, and some CD/bond/stock fund money. We end up with increased net worth each year and I keep thinking about bailing out on the rentals. If we turned everything into cash we are probably at 35x current expenses+ - at almost 68 it seems like we should be very ok.

Being of a dubious nature I keep gaming the retirement calculators. Inflation rate is easy to ratchet up, so sometimes 3.5% gets used, or even 4. Income from investments? I use 3% real. Taxes, 27% - and that doesn't include state tax. What numbers do you plug in? It all seems so arbitrary!
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Old 07-27-2017, 01:16 PM   #2
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How could it be other than arbitrary? None of us can predict the future. We make a rough guess based on the decades gone by. Then we hope for the best, adjusting along the way as we can.
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Old 07-27-2017, 02:10 PM   #3
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Quote:
Originally Posted by braumeister View Post
How could it be other than arbitrary? None of us can predict the future. We make a rough guess based on the decades gone by. Then we hope for the best, adjusting along the way as we can.
I just think there are people out there who have a better handle on some things than I. While my course is my own it is good to keep tabs on what others see as reasonable. Group think is better at predicting the number of jelly beans in a jar, so I wonder what inflation rate others use. Having said that, maybe it is time to learn how to do a survey..

Thanks!
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Old 07-27-2017, 02:39 PM   #4
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I tend to use the default of whatever tool I'm playing with, followed by plugging 0% in to get constant value dollars. (And using real returns on investments, rather than nominal.) Makes it easier for me to get a feel on what hypothesized numbers roughly mean 45 years out when DW is living it up without me.

Helps that most spending is planned to be discretionary, so if inflation outpaces our portfolio, we can easily cut.
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Old 07-27-2017, 03:50 PM   #5
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I do everything in real dollars. I don't try to guess at what the inflation rate will be. It makes it easy to deal with projecting my RMD since all our IRAs are fixed income. I just assume zero real interest rate - which is close enough for my purposes.
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Old 07-27-2017, 07:07 PM   #6
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In the 5 or 6 years before ER I obsessed over the various calculators and always used a wide range of inflation values just to see what could happen. Oddly, since I've FIREd, I seem a lot less interested in calculators. I spend more of my time spit-balling what I WOULD do if inflation would suddenly rear it's ugly rear. I have several levels of cut-backs I could make. Plus I have a final ITSHTF-disaster-plan. At this point, as long as my NW continues to rise, it's difficult to get too concerned about inflation or any of the other potential roadblocks to a successful ER. Still, I do worry about black swans, so YMMV.
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Old 07-27-2017, 07:27 PM   #7
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DW has government pensions and I have investments. We'll be flexible spending my $$$s. I use a price inflation number .5% higher (say 3%) than her inflation adjustments to income (say 2.5%). And 4.5% (including div/int) on 401K and brokerage.
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Old 07-27-2017, 08:55 PM   #8
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I avoid inflation rate all together and prefer to use real return rates in my projections. Makes things simpler to think about
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Old 07-28-2017, 06:22 AM   #9
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The G'vt inflation rate doesn't include certain things (I'm not sure but I think they exclude oil prices).

The inflation rate I look as is what I spent last year for my basics (food, shelter, utilities/energy, taxes, travel etc) vs what I paid this year. I exclude luxuries, emergency and one off costs. That number has been fairly flat over the past 2 years.

In answer to the question, I use a 2.5% inflation rate for long term projections. Sometimes I'll goose it to 3.5% in order to get an aggressive number.
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Old 07-28-2017, 06:37 AM   #10
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Quote:
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The G'vt inflation rate doesn't include certain things (I'm not sure but I think they exclude oil prices).

The inflation rate I look as is what I spent last year for my basics (food, shelter, utilities/energy, taxes, travel etc) vs what I paid this year. I exclude luxuries, emergency and one off costs. That number has been fairly flat over the past 2 years.

In answer to the question, I use a 2.5% inflation rate for long term projections. Sometimes I'll goose it to 3.5% in order to get an aggressive number.
The primary inflation calculation does include all consumer prices, including food and energy. You're thinking of the "core inflation", which excludes food and energy. This is the preferred measure of the Fed when setting monetary policy, because it is less volatile. All inflation indexed calculations, such as TIPs or SS, are based on the full CPI.
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Old 07-28-2017, 06:47 AM   #11
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The figure used for Social Security and military retirement pay COLAs is the CPI-W (Urban Wage Earners and Clerical Workers). It tracks prices paid by that part of the population instead of the total, which is CPI-U.
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Old 07-28-2017, 07:23 AM   #12
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The figure used for Social Security and military retirement pay COLAs is the CPI-W (Urban Wage Earners and Clerical Workers). It tracks prices paid by that part of the population instead of the total, which is CPI-U.
Right, I should have made that distinction in my post. I think the Fed may not be using core CPI any longer as well, IIRC they changed to another measure.

As I recall, over time the different series are expected to show very similar rates of inflation.
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