What are we all using for inflation/investment return rates?

[FIREd]

I do not use forecasts. All I know is that we need at least a 0% real return.

 

[aaronc879]

Agreed, some don't need forecasting, those that do should note that actuarial ruin in retirement generally causes one of the following:

4) live in a tent down by the river

(paraphrased from the book)

I was planning to live in a VAN down by the river. I guess I better start saving.

 

[Danmar]

Ok I can see there may be tax reasons. My portfolio is entirely in taxable accounts so this doesn't affect me. Hard to see why someone would reduce their spending based on a forecast though unless the actuals precipitated the change in outlook? Maybe we're discussing semantics?

 

[foxfirev5]

It looks like 0 real will pay the bills. I'll wing it with the rest.

 

[Whisper66]

Hard to see why someone would reduce their spending based on a forecast though unless the actuals precipitated the change in outlook? Maybe we're discussing semantics?

I think we are talking semantics. Our entire decision that we could retire included our assumptions (i.e. Forecasts) of expected expenses, rate of returns, dividends received, tax rates, inflation, etc. Our plan on how much we can spend will be based on similar estimates.


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[JustCurious]

Thanks. Is that inflation as measured by the CPI?

Yes, that is the CPI-U for all urban consumers. Note that is different than the CPI-W which is used for Social Security.

 

[23window]

In my spreadsheet I assign separate inflation rates for medical expenses (10%) and all other expenses (3%). For my investments, I assign different rates of return for each bond fund, and a separate number of cents per share via dividends and cap gains in my stock funds.

This seems like a reasonable assumption to me. But it makes me wonder who is getting advantage of a 10% inflation rate? Insurance companies, pharmaceutical, US government (medicare), doctors, etc? Is there an investment that will help hedge against the higher inflation rate for medical care?

 

[Big_Hitter]

I was planning to live in a VAN down by the river. I guess I better start saving.

you can get those pretty cheap on CL

 

[Big_Hitter]

This seems like a reasonable assumption to me. But it makes me wonder who is getting advantage of a 10% inflation rate? Insurance companies, pharmaceutical, US government (medicare), doctors, etc? Is there an investment that will help hedge against the higher inflation rate for medical care?

no way medical inflation stays a flat 10%, otherwise medical expenses would overtake the gdp at some point - google Getzen trend model

 

[ERD50]

"What are we all using for inflation/investment return rates?"

Can't speak for 'all', but I don't use any numbers for these. I let a tool like FIRECalc use the actual historical data. Markets and inflation do not provide a steady "x%", so why pretend they do? And they won't listen to you anyhow! Sequence of returns have an effect.

But as a gut-check, FIRECalc reports that a 3.34% spending rate is 100% historically safe for a 40 year period. You can run that backwards and come up with the historically worst real return.

As a reference point, and easy math, a zero real return (and no variation), would allow spending at 1/40 = 2.5%. So the worst period in history provided something better than average zero real returns. (I'm not sure you can just subtract them to come up with a 0.84% historical real return, or if you need to look at compounding, as I'm on my first cuppa).

-ERD50

 

[Big_Hitter]

Can't speak for 'all', but I don't use any numbers for these. I let a tool like FIRECalc use the actual historical data.

google ASOP 27 on selecting economic assumptions and you will see why no one uses 100% historical data for future projections

 

[ERD50]

Originally Posted by ERD50 View Post
Can't speak for 'all', but I don't use any numbers for these. I let a tool like FIRECalc use the actual historical data.

google ASOP 27 on selecting economic assumptions and you will see why no one uses 100% historical data for future projections

Thanks, I may look at that a bit later, but it appears to be somewhat irrelevant. I'm not using historical data to to tell me the future, it's just a data point for reference. At any rate, any look at future spending against the portfolio has to involve "future projections".

Even a zero return calculation assumes your portfolio keeps up with inflation. That might be considered a safe assumption, but it is an assumption none-the-less. Dang future!

-ERD50

 

[Big_Hitter]

Thanks, I may look at that a bit later, but it appears to be somewhat irrelevant. I'm not using historical data to to tell me the future, it's just a data point for reference. At any rate, any look at future spending against the portfolio has to involve "future projections".

Even a zero return calculation assumes your portfolio keeps up with inflation. That might be considered a safe assumption, but it is an assumption none-the-less. Dang future!

-ERD50

it's fairly short and extremely relevant, IMO - it's guidance on how professional guessers select assumptions for things like future inflation, asset returns, wage growth, etc.

 

[COcheesehead]

if you don't you may run the risk of actuarial ruin

I think this is a must read - https://www.amazon.com/Money-Life-Lifetime-Retirement-Paycheck/dp/0985384603

I've read about half of it and it's outstanding.

Some of the reviews say the book is simplistic and steers you towards annuities. Is that true?

 

[Big_Hitter]

Some of the reviews say the book is simplistic and steers you towards annuities. Is that true?

it's somewhat simplistic but I think it's a good read - not sure it "steers" one towards annuities but honestly everyone should at least consider them as part of the total retirement income package, IMO, especially those that don't have DB and SS income, which unfortunately may be the majority of retirees after 10 years or so

systematic withdrawals are one if the 3 RIGs (retirement income generators one can get from a sample portfolio) in the book, the other two being investment income and the third annuities

he goes over the pros and cons of each, including hybrid approaches; he also talks about the huge con of SW being market risk, which can be a huge risk as we all know, especially if you take a significant hickey right after you retire with that big lump sum distribution

I think this is great book for everyone to read (even those of us that think they know it all.)

 

[COcheesehead]

Is anyone using the target date income funds as a replacement for annuities? They would seem to address the lack of liquidity of an annuity. Any success stories?

 

[imoldernu]

Investments... such as they are, calculated at the bottom guaranteed return rate 4%. Don't calculate inflation as investments follow inflation for the most part.
Actually, don't calculate either when doing the annual "where we stand" review.
Ultra conservative. Only plan ahead for 10 years.

 

[UpAnchor]

Is anyone using the target date income funds as a replacement for annuities? They would seem to address the lack of liquidity of an annuity. Any success stories?

I do carry a meaningful percentage of my portfolio in Vanguard's Target Retirement Income Fund. But as it's just a fund of funds (stock & bond, mostly index), yes it offers liquidity but I don't consider it an annuity replacement. So far that job belongs to my SS being delayed 'till 70.