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Puzzling over inflation in the next 30 yrs.
Old 12-12-2016, 10:30 AM   #1
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Puzzling over inflation in the next 30 yrs.

If one of y'all got that crystal ball, bring it out.

I fear the specter of high inflation worse than I do the potential ups-and-downs of markets in the next 30 years. I am 58 years old and as I caution my younger friends (40s & below) about the impact of high inflation, they sort of stare at me like I've got a 3rd eyeball in my forehead. When I tell them my first house had a 15.5% mortgage rate for a 30 year loan (1981), they think I must be the stupidest guy around. (This is neither proved nor disproved by the previous statement).

I am looking at the historical causes of periods or high inflation. I am not sure commodities are going to go up in an uncontrolled manner. We've shown that we can achieve productivity gains without commensurate increases in wages. Healthcare I get - will the market continue to spiral up so that it moves the needle? Tell me what is going to cause high/runaway inflation?

I am sure I am missing something obvious...... TIA for your comments.
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Old 12-12-2016, 10:51 AM   #2
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I am 59 and feel the same way. Inflation. But I do not think we will see a near 20 year run of ridiculous inflation a la the 70's/80's. Nobody liked it back then, nobody will like it now, and steps will be taken to ameliorate it if it comes back. I know some will argue that and I don't mind. I also believe "Anything can happen." But I think they will let it run so far.... things get uncomfortable... they reach that point of "enough is enough/we've reached a balance point" ..... then act to rein it in.

I was just doing some Firecalc and Future Value annuity runs last week involving 5% average inflation and no return on investment with no Social Security increases. Yes, I know. Perhaps a bit too extreme and probably not even possible but it was a stress test.
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Old 12-12-2016, 11:09 AM   #3
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Don't know the causes for inflation, or much care really, but it is the biggest danger to retirement that I can think of and it does happen from time to time.

I just ran FIRECalc with 8% inflation forever, and it says that I would need to cut back on spending by an amount that would be tough, but possible. In reality I doubt that inflation would be that severe for too many years.

Perhaps our investment earnings would go up and at least partly compensate for inflation.

I remember that back in the inflationary times of the 70's-80's, people would borrow money to cope with it, for example taking on a mortgage. Interest rates were high. Still, within a few years the payments had become fairly trivial because money couldn't buy as much. Don't know if I could bring myself to do that, though.
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Old 12-12-2016, 11:16 AM   #4
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As retired people inflation will vary greatly for all of us. Can always travel stateside instead of world travel. No business clothing , Use 1 car instead of 3,house long paid for, easy choices if necessary. I think most of us will be fine.
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Old 12-12-2016, 11:16 AM   #5
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Originally Posted by LRDave View Post
I fear the specter of high inflation worse than I do the potential ups-and-downs of markets in the next 30 years. I am 58 years old and as I caution my younger friends (40s & below) about the impact of high inflation, they sort of stare at me like I've got a 3rd eyeball in my forehead. When I tell them my first house had a 15.5% mortgage rate for a 30 year loan (1981), they think I must be the stupidest guy around. (This is neither proved nor disproved by the previous statement)...
I am a bit older, and my mortgage was 14% in 1980. When the rate climbed further, I patted myself on the back for getting in "early".

As I understand, the high inflation then was caused by the long-running Vietnam war, the Cold War, and the energy crisis by the oil embargo. We don't have the same problems now.

Anyway, who knows what the future will bring. All I can do is to prepare for some belt tightening, if that proves necessary. In the meantime, I will enjoy what I can have now.
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Old 12-12-2016, 11:19 AM   #6
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Old 12-12-2016, 12:08 PM   #7
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I feel like inflation is one of those 'dirty topics' that never gets mentioned. Especially for some of the folks that are making plans to retire at age 40.

In my mind, there are a few things that can offset the negative effects of inflation.

Carrying debt at a fixed interest rate allows you to repay dollars in the future using inflated dollars. Leaving money in the market when the returns have been great has been a good move vs. paying off a 3% mortgage early. (This works until the market tanks...)

COLA pensions and SS. One of the arguments for delaying SS is that you have a larger monthly payment that is COLA adjusted. Longevity insurance also. (This works until the rules are changed. SS rules can be modified, some COLA pensions are at risk when states or pension entities go bankrupt. And most of us are not going to go back to work to establish a COLA'd pension, if such a thing still exists.)

Assets that continue to generate revenue or maintain value. The challenge with these if that it takes a crystal ball to figure out what will hang in there. Plus the whole market timing issue. And working for a living cuts into my free time.
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Old 12-12-2016, 12:10 PM   #8
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When the subject of inflation comes up, I think it's best to try to figure out which categories of personal expenses (and income) might be subject to it and which are immune. For the last decade or two, if I recall correctly, education and healthcare are the two categories of things that have gone up much more than the general rate.

As somebody who does have a mortgage (multiple actually), I don't worry about it as they're all 30 year fixed.

Food and gas are a small part of my overall spending. Thus healthcare is my personal big concern, followed by property taxes.
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Old 12-12-2016, 12:38 PM   #9
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Originally Posted by NW-Bound View Post
I am a bit older, and my mortgage was 14% in 1980. When the rate climbed further, I patted myself on the back for getting in "early".
I remember being overjoyed to get that 10% mortgage rate when I bought my first home in 1979.

I'm most concerned about inflation on the medical front. I've been watching the premium increases roll in for my company's retiree medical lately with a nervous eye. I'll be looking at about 5 years of full premiums before it becomes a supplemental policy at Medicare age.

I've read a bit about "personal rate of inflation" and spend much time pondering the methods one might employ to minimize it. Example: Someone who gardens and/or raises chickens could be less impacted by rising food prices than someone who buys all their food at the grocery store. A beer lover could switch to a cheaper brand or take up home brewing. Or a person could just respond to increasing prices by curtailing travel or other discretionary spending.
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Old 12-12-2016, 12:53 PM   #10
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In 1981, at a time of high inflation, one of my friends had a mortgage at 17% and I had a CD that was earning 14%. I could certainly live with somewhat higher prices for goods if I could get a guaranteed rate of return on invested assets of 14% or even 10%.
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Old 12-12-2016, 01:10 PM   #11
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While during the past decade the Fed built up the money supply inflation remained tame because money velocity remained low. Many things can cause the velocity to increase, including higher energy prices, large scale wars, and even the expectation of inflation ahead.
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Old 12-12-2016, 01:17 PM   #12
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I feel very fortunate with this topic. 3 properties with low fixed rate mortgages, 3 (DW and I combined) COLA pensions, both still working (DW @45, me @ 51), military healthcare, multiple streams of income (rentals, sports officiating, equities) and lastly we live on Chesapeake Bay so fish, crab and whitetail deer nearby. We don't garden now but may in the future as time permits. Realistically could live on 60% of current but choose not to. I have done some back of the napkin with vehicles and all other discretionary buys (eating out, First/Business class/frequency of travel/5 star hotel, etc...) and we could easily cut back if we had to. If we had to rely on only our stash, we would pad the heck out of it as an inflation hedge.
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Old 12-12-2016, 01:20 PM   #13
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Since FIRECALC models run through all historical inflation data, the models take the prior worst case scenario. So, if based on all the runs, my portfolio will survive with my planned withdrawal rate and AA, I'm not going to worry about future inflation because it's already built into the model.
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Old 12-12-2016, 01:25 PM   #14
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Tell me what is going to cause high/runaway inflation?
As far as I know, it's a monetary policy thing. The federal reserve controls the money supply, and the money supply directly affects inflation, together with the money velocity.

Money velocity can bounce around hard, and there is a delay between money printing and inflation in real life.
https://www.stlouisfed.org/On-The-Ec...tion-in-the-US

So as long as inflation gets targeted at roughly 2% and no other factor overrides that mandate, the US fed should do a pretty nice job keeping it in the realm of 'ok'.

Since it is 'common knowledge' now that bad things happen when inflation becomes unstable (very high or low), it's a reasonably safe bet the fed will keep up the mandate. But not a 100% safe bet by any stretch.
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Old 12-12-2016, 01:26 PM   #15
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Originally Posted by audreyh1 View Post
Since FIRECALC models run through all historical inflation data, the models take the prior worst case scenario. So, if based on all the runs, my portfolio will survive with my planned withdrawal rate and AA, I'm not going to worry about future inflation because it's already built into the model.
+1

Don't waste your life worrying about inflation when you can waste it in far more enjoyable ways!
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Old 12-12-2016, 01:30 PM   #16
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In 1981, at a time of high inflation, one of my friends had a mortgage at 17% and I had a CD that was earning 14%. I could certainly live with somewhat higher prices for goods if I could get a guaranteed rate of return on invested assets of 14% or even 10%.
My thoughts as well. Doesn't seem that long ago (1997) when my BOA savings account was paying 6% interest.
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Old 12-12-2016, 01:50 PM   #17
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In 1981, at a time of high inflation, one of my friends had a mortgage at 17% and I had a CD that was earning 14%. I could certainly live with somewhat higher prices for goods if I could get a guaranteed rate of return on invested assets of 14% or even 10%.
But the rate of return would not really be 10% or 14%.

In 1981, the US CPI inflation rate was 11.83%. So, if you had a 14% CD, you were really earning just 2.27% real return, which is actually lower than the historic average real return on 1 year CDs. Sure, if a person had advance knowledge that inflation would be going down, locking in a high long-term CD rate would be great. But in 1980-1981, there was quite a bit of uncertainty about future inflation.
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Old 12-12-2016, 01:55 PM   #18
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I don't have a crystal ball for 3 months much less 30 years. I'd worry about nuclear war before inflation . . . .
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Old 12-12-2016, 02:10 PM   #19
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In 1981, at a time of high inflation, one of my friends had a mortgage at 17% and I had a CD that was earning 14%. I could certainly live with somewhat higher prices for goods if I could get a guaranteed rate of return on invested assets of 14% or even 10%.
+1. If inflation increases, so do CD rates and SS benefits. Both positively affecting my income.

Yes, costs go up. But as I get older, I feel my costs do not get affected as much. Mortgage is paid off, so my primary cost of housing is fixed (other than property taxes). Cost of clothing goes up but I am more than happy with my 5 pairs of jeans and T-shirts. Cost of groceries go up, but we eat mostly chicken which is so cheap it does not matter if the price quadruples. Gasoline goes up, but we fill the cars infrequently and do not really need 2 cars. And so on.

It seems like the primary rising costs that affect us in a big way are medical, travel and restaurants/entertainment. Medical costs are out of control but I think that is currently rising independent of high inflation. And I certainly hope it somehow gets under control. Travel and entertainment will increase but those are discretionary and could always be scaled back.
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Old 12-12-2016, 02:10 PM   #20
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Tell me what is going to cause high/runaway inflation?
The highest two episodes of inflation in the US in the last 65 years were 1974 (11%) and 1980 (13.5%). Both were caused primarily by OPEC oil embargoes. OPEC no longer has the ability to control the price of oil in the way that they did then, and oil is a smaller portion of our overall energy usage then it was then. Ergo, those worst episodes cannot be repeated. The high interest rates of those past times were deliberate actions by the Federal Reserve to crush the inflation, with the resulting dampening of economic activity being part of the effect.

It is possible that some other world economic event could generate a new bout of inflation, but we cannot predict that.
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