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Peak Inflation in Retirement
Old 01-27-2017, 12:27 PM   #1
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Peak Inflation in Retirement

Hopefully I word this correctly. I have been working on a simple excel spreadsheet that allows me to adjust annual contributions/growth percentages/income etc. for any given year until I am 90. Of course the contributions slowly stop as time goes on - unless I spend less in some years and have leftover money to invest. On this spreadsheet, I include retirement income with a 3% inflation rate. My initial retirement income off of withdrawals at age 44 is 120k. Moving the needle, at age 60 with inflation, my income is 192k. Now to the question.

192k is a lot of money and even with budgeting annual expenses I don't foresee needing that much. What are your thoughts on leveling out the 192k until the end? Do you "peak" inflation at any point in calculating necessary income?
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Old 01-27-2017, 12:49 PM   #2
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Since 3.something% is a long term US average I apply it for long term planning, throughout the plan period.
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Old 01-27-2017, 01:02 PM   #3
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Having lived through the painful 1970s, I would be reluctant to assume that can't happen again.The average inflation for the 70s was over 7%.
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Old 01-27-2017, 01:03 PM   #4
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Just Google and you can easily see monthly US inflation data back to 1914. Occasionally inflation "peaks" with inflation at 0% or less, but it's never lasted long. So there's no historical basis to cap inflation in your model. Obviously you can assume "next time it will be different" - but if you're wrong and there are decades after your $192K cap averaging 3% inflation, you may seriously regret your assumption. No one I know would make that assumption, but nothing to stop you.

I am assuming you're fairly young. 45 years ago there were several car models you could buy new for $3,000. If you'd told me then that the average new car would cost over $33K, I would have laughed and told you you're wrong. But I'd have been dead wrong...
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Old 01-27-2017, 01:04 PM   #5
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Originally Posted by GrayHare View Post
Since 3.something% is a long term US average I apply it for long term planning, throughout the plan period.
I totally understand that. My dilemma is that if I run 3% until I am 90, my income is $389,000. Now I know we are in some crazy times and there are lots of unknowns and variables. However, I have to believe that is a little overkill as far as income necessary in retirement.
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Old 01-27-2017, 01:16 PM   #6
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Originally Posted by jesa View Post
I totally understand that. My dilemma is that if I run 3% until I am 90, my income is $389,000. Now I know we are in some crazy times and there are lots of unknowns and variables. However, I have to believe that is a little overkill as far as income necessary in retirement.
If we have average inflation going forward, that's exactly what you'll need to maintain a constant real spend.

However, people like Bernicke and Blanchett have studies that show that real expenses taper off as we grow older - peaking in your 50s or 60s. Read those for a fuller understanding.

Those are statistical findings - your spending will obviously be unique to you. We find that our spending doesn't follow any inflation curve, but is lumpy. That is driven not only by big occasional expenses (like say a new car or roof), but just by everyday living. Some months you want to eat out more than others, or you have a more expensive vacation one year and don't travel as much the next.

For what its worth, I think modeling spreadsheets with constant returns and inflation is a great first step, but isn't much use in the real world. Tools like FIRECALC can help you figure out the impact of sequence of returns, varying CPIs etc based on historical values.
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Old 01-27-2017, 01:27 PM   #7
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I totally understand that. My dilemma is that if I run 3% until I am 90, my income is $389,000. Now I know we are in some crazy times and there are lots of unknowns and variables. However, I have to believe that is a little overkill as far as income necessary in retirement.
For the same period run 3% inflation on your spending. Suddenly your spending number will look large too. Then try 6.5% inflation on your spending for, oh, about 20 years. Can't happen? That was the average rate from 1968 to 1985.
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Old 01-27-2017, 01:31 PM   #8
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Firecalc has an option to use the Bernicke spending model. It says:
"Ty Bernicke's Reality Retirement Planning: A New Paradigm for an Old Science describes extensive research showing that most people see significant reductions in spending with age (not related to reduced assets or income). If selected, this option will reduce your inflation-adjusted yearly spending by 2-3% per year starting at age 56, and then stabilizing at age 76 to keep up with inflation. You should read his article for details if you plan to use this option."
As some examples, I could see:
- cost of gasoline goes up, but we do not drive as often
- cost of cars and car insurance goes up, but now we only need 1 car and it lasts us even longer now so we rarely buy cars
etc
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Old 01-27-2017, 01:31 PM   #9
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Inflation Calculators from InflationData.com is a good source for historical inflation and other US inflation info.
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Old 01-27-2017, 02:55 PM   #10
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Since 3.something% is a long term US average I apply it for long term planning, throughout the plan period.
+1. I do this as well. Don't level. If the inflation doesn't happen, you will have more to spend.
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Old 01-27-2017, 03:15 PM   #11
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OP - if you don't believe in inflation then you only need: $3,269.40 per year

"Wages in 1920. As is the case today, wage earners in the United States filed tax returns and paid federal tax on their wages. In 1920, the Internal Revenue Service reports, the average income was $3,269.40 per year."

Now according to SSA - The national average wage index for 2015 is 48,098.63.

So it looks like inflation is real and the numbers get incredibly huge, so keep the 3% and pray it's not too low.
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Old 01-27-2017, 06:26 PM   #12
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Definitely factor in inflation. If you do not want to see such big numbers convert ALL numbers on your spreadsheet to present value. Easier to comprehend and analyze.
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Old 01-27-2017, 07:24 PM   #13
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I just use models like FIRECALC, and if they say my current withdrawal scheme will last through all historical inflation periods, that's good enough for me.

I have done some sample runs and FIRECALC gives me both the real income and the inflation adjusted income. So I can see the numbers get real big, but also see what they would be in today's dollars.

Good enough for me.
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Old 01-27-2017, 07:56 PM   #14
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I totally understand that. My dilemma is that if I run 3% until I am 90, my income is $389,000. Now I know we are in some crazy times and there are lots of unknowns and variables. However, I have to believe that is a little overkill as far as income necessary in retirement.
The $389k at 90 buys the exactly the same stuff that you were buying with $120k at 44. I don't see any overkill

unless you want to plan for decreasing real spending in retirement. If you're thinking about that, remember that your medical care spending will almost certainly go up as you age.
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