Official ER Forum January Inflation Report

[TromboneAl]

Many of us are, or will be, basing our spending on the inflation rate (e.g. 4% withdrawal plus inflation). We generally agree that the government's reported inflation report often isn't appropriate for us, so perhaps each January we should come up with our own number.

Also, it doesn't have to be just one number. We could have different estimates for different lifestyles (frequent travelers, RVers, etc.).

 

[larry]

How about the price of Bush's beans from your local grocer? (or will I get the price of rice in China?)

 

[mickeyd]

Interesting that you should bring up this topic. I was reading Humberto Cruz's article yesterday and this is his take on it;


http://www.sun-sentinel.com/business/columnists/sfl-zsave03.1jan03,0,676369.column

Your "personal" inflation rate also will depend on many other factors, including whether you have children and, if you do, whether you send them to public or private school, where costs often rise faster than overall inflation. It will depend on whether you have your meals mostly at home or eat out frequently (the rate of inflation for meals eaten away from home is about twice that of meals at home).

After reading this I was not inspired to try to calculate my personal inflation rate as I think that my rate would not vary that much from the CPI-U and I'm not that sure that my figures would be that accurate. I think I'll defer to the government's figures for now.

If I were in my distribution phase of investing and I was adding inflation to my 4% SWR rate annually, I may be singing a different tune.

 

[wabmester]

Many of us are, or will be, basing our spending on the inflation rate (e.g. 4% withdrawal plus inflation).

We talk a lot about a 4% inflation-adjusted withdrawal rate here, but my guess is that the number of ER's who actually implement such a scheme is pretty close to zero.

I spend what I spend, and the amount varies considerably from year to year, both up and down. If my net worth were to stop rising, I'd probably take a closer look at both spending and investments.

 

[sgeeeee]

We talk a lot about a 4% inflation-adjusted withdrawal rate here, but my guess is that the number of ER's who actually implement such a scheme is pretty close to zero.

I spend what I spend, and the amount varies considerably from year to year, both up and down. If my net worth were to stop rising, I'd probably take a closer look at both spending and investments.

I agree. I don't know anyway to compute a personal inflation rate if I wanted to. I don't buy the same thing year to year. In any given year I may have none or several purchases that do not occur regularly or even annualy. I spend what I spend based on what I want to do. The fluctuations in my annual spending is more than 30% of my average spending.

For me the 4% rule with an inflation indexed spending model is simply a proof-of-concept that retirement can work to provide an acceptable lifestyle for an extended period of time provided I have somewhere north of 25X my initial annual spending, a reasonably diversified portfolio, and that I don't pay too much in fees.

 

[donheff]

Many of us are, or will be, basing our spending on the inflation rate (e.g. 4% withdrawal plus inflation). We generally agree that the government's reported inflation report often isn't appropriate for us, so perhaps each January we should come up with our own number.

I don't think academics arriving a SWR rates indexed to inflation intend us to apply our own personal inflation rate to the calculations. Firecalc and most other calculators use CPI, don't they? As of now, our plan is to use a SWR rate at or slightly above 4% with CPI inflation and Guyton adjustments as soon as DW retires. For CPI, we will use the figure my Fed pension goes up each year. We will not need the entire withdrawal to meet living expenses - we plan to invest the excess in a slush fund to cover extended bear markets. After a decade or so we will evaluate our circumstances and either continue the same or, if past is prologue, go on a binge.

 

[cute fuzzy bunny]

I would imagine that you could make this as simple as can be. Your personal inflation rate is whatever difference between last years and this years spending. You paid higher or lower prices on items, made your own "basket substitutions" and probably employed a number of solid rationalizations as to the quality benefits of buying something newer.

So if you spent 5% more this year than last year, your PRI is 5%.

Aside from that I think most know my personal opinion on the matter. Any ER's finding their personal rate of inflation equivalent to an urban worker who doesnt pay for health care (among other things) is probably coincidental at best.

 

[Nords]

Any ER's finding their personal rate of inflation equivalent to an urban worker who doesnt pay for health care (among other things) is probably coincidental at best.

It's like saying that stocks have returned an average 10% APY for the last 80 years.

While that's true, they've rarely returned 10% in any single year...

 

[sgeeeee]

I would imagine that you could make this as simple as can be. Your personal inflation rate is whatever difference between last years and this years spending. You paid higher or lower prices on items, made your own "basket substitutions" and probably employed a number of solid rationalizations as to the quality benefits of buying something newer.

So if you spent 5% more this year than last year, your PRI is 5%.

. . .

Base on this, I had a -9% personal inflation rate last year. Wooohooo.

 

[SteveR]

Hold onto your hat. With the recent freezing weather in the CA farming areas produce prices are expected to go through the roof if you can even find any after the warehoused stuff is gone. 75% of the citrus crop is gone as is much of the brocolli and related vegies. That is going to be a very nasty hit to the average market basket prices on a month to month and year to year basis. Especially in the Western US. If Florida has a similar hit it could have ripple effects in the economy as bad as the gasoline "shortage" last year.

 

[Cut-Throat]

I ran some numbers last year for items that were non-discetionary types. Food, Heating, Gasoline Electricity, Water Bill, Property Taxes, - I may have had about 10 categories for the last 4 years. In these categories my personal rate of inflation was actually flat and in some cases negative. Like shopping at Costco vs. the high-end grocery store.

Very hard to measure, because we don't have commuting costs any more. Gas is up, but mileage is down - Net effect is less spent on Gas.

But I do tend to believe the CPI is as good a number as you'll probably get.

 

[cute fuzzy bunny]

Base on this, I had a -9% personal inflation rate last year. Wooohooo.

Hows it for the last ten years running?

produce prices are expected to go through the roof if you can even find any after the warehoused stuff is gone.

Hmm, what the hell are the underpaid farm workers going to rub the e-coli on if the produce is gone?

But I do tend to believe the CPI is as good a number as you'll probably get.

Perhaps in your situation. Given that i'm retired and living in rural farm america, the CPI for urban working people isnt particularly close to my inflation rate. Housing is up more than 50% in the last few years (and it was worse than that up until the recent slide). Gas was double what it was a few years ago and is still more than half again more expensive. Meat is up about 30% over the last few years. Milk is up 25% over 3 years ago.

While I shop smarter and offset some of the increases, many people cant or wont spend the time.

 

[wabmester]

Housing is up more than 50% in the last few years (and it was worse than that up until the recent slide).

I guess that would be a bad thing if you didn't already own a house, eh? Kind of like stock price inflation -- not too many complain about that around here.

 

[cute fuzzy bunny]

Not as easy as it sounds. If I were to sell my current house and buy a new one of similar size and qualities, I'd pay about $2500-3000 more a year in property taxes just for the lateral transfer. Fortunately prop 13 keeps those flat for the existing home.

With the jump in home prices, my insurance company has also jacked up the replacement cost and my rates with it.

Not a lot of relief for renters, first time home buyers, or people who move in from outside the area either.

 

[wabmester]

With the jump in home prices, my insurance company has also jacked up the replacement cost and my rates with it.

So you're saying the proper way to capture this housing inflation would be via something like owner's-equivalent-rent a la CPI-U?

 

[SteveR]

Not as easy as it sounds. If I were to sell my current house and buy a new one of similar size and qualities, I'd pay about $2500-3000 more a year in property taxes just for the lateral transfer. Fortunately prop 13 keeps those flat for the existing home.

So what if Prop 13 went away and folks had to actually pay a flat tax rate on their homes assessed value each year (like most of the rest of us)?

I would venture a guess that the outcry would be so great that the tax rates would have to go down...or the housing prices would because folks would have to sell to avoid the tax bill. It would appear that the CA government is acually allowing the RE bubble to grow even bigger with this tactic. Eventually, something has to give.

 

[Gone4Good]

Adopting the 4% withdrawal rate and then ignoring the expense constraints imbedded in the calculation sounds like a recipe for failure.

 

[cute fuzzy bunny]

So you're saying the proper way to capture this housing inflation would be via something like owner's-equivalent-rent a la CPI-U?

Hey, help a fella out. I'm looking for the special adjustment in the CPI-U that kicks in a little extra for california homeowners...or the part where they make the adjustment for areas like mine where rents didnt follow home prices...oh darnit, thats right...it doesnt do that!

But I guess if what you're saying is that people should presume the nationwide urban worker figures are more than adequate to determine an early retirees own personal rate of inflation and that trying to get a handle on that for oneself is a waste of time, gosh I just cant argue with that sensible logic.



The daffy duck is apropos...

 

[wabmester]

But I guess if what you're saying is that people should presume the nationwide urban worker figures are more than adequate to determine an early retirees own personal rate of inflation and that trying to get a handle on that for oneself is a waste of time, gosh I just cant argue with that sensible logic.

What I'm saying is that the BLS methodology looks kosher to me. CPI-U was never meant to track your personal rate of inflation. And, as you correctly surmise, there is no way to generalize the personal rate of inflation. It's, erhm, personal.

We spend what we spend. I use 4% of liquid net worth as a sanity check. I use CPI-U as a sanity check. I try to avoid insane pursuits.

 

[cute fuzzy bunny]

Then I guess I missed the entire point of this thread!

(Hint: see the first post)

 

[wabmester]

Then I guess I missed the entire point of this thread!

Or we could agree that this thread is pointless.

 

[lowflyer]

So as I continue to think about inflation and its effects, it looks like inflation effects us all in different ways. We can look at the overall CPI, but my actual inflation rate is different from yours, which is different from the next person, etc. As was mentioned, if gas is up, but I drive less, then the amount I spend on gas probably decreases. If the cost of eating out is up, but I decide to start eating at home more often, then I've had a dramatic effect on my overall food costs.

I'm in the process of transfering my home and auto insurance to another company (after 25 years) and will save nearly 30% on my overall insurance costs with the same coverage. Is this just wise shopping or is it something that will directly effect my "personal inflation rate?" Probably both. I guess I still just look at all of this as simply "budget management."

 

[ESRBob]

I like CFB's notion of simply calculating your own spending each year and seeing how much it goes up (or down) and using that as your inflation gauge. That incorporates all the nuances, belt tightening, splurges, tradeoffs, local conditions, housing costs whether renter or buyer etc into one number. Sort of like the equivalent of studying Cash Flow instead of looking at income statements.

But I know that people following the 'set a spending level at the beginning of ER and adjust it up for inflation each year' method need a number. Another reason I like the 'Take 4% of portfolio and live on it' approach -- simple and never needs a government number (or your own personal inflation rate, for that matter) to make it work or know if you're on track.

 

[cute fuzzy bunny]

Or we could agree that this thread is pointless.

Ah but is it?

You would propose that its pointless for the intrepid early retiree to analyze and comprehend the effects of their actual experienced inflation rate on their attempts to remain gainfully unemployed? With Al's stated intention to get together and determine if ones overall lifestyle might influence the MOST IMPORTANT ASPECT OF THEIR FINANCIAL PICTURE, HOPEFULLY RIGHT BEHIND THEIR INVESTMENTS RATE OF RETURN?

Or were you proposing that we as a group bite off what some agency spits out as a composite nationwide number appropriate for urban workers as "good enough...just dont worry about it"?

Someone once said about me that I didnt like being portrayed in a negative light. But then I suppose, who would?

The reality of it was that I was disappointed in myself for allowing lesser men to draw me into discussions where I might be perceived in such a light.

While I could speculate on the motivations for such endeavors, perhaps its enough to say that they arent particularly worthy of my engagement?

Hmmm...this looks like one of those times!

As a successful early retiree, I would highly recommend that anyone thinking of or engaged in the activity of 'making their money without working' pay careful attention to determining the actual influence of inflation (that being the actual increased cost of living over time) on their lifestyle, location and any and all other pertinent details.

Factor that in, act suspicious when people talk about "real" returns (real for whom?) and make sure you're making enough money over the long haul to counteract the effects of inflation on your personal lifestyle.

 

[wabmester]

While I could speculate on the motivations for such endeavors, perhaps its enough to say that they arent particularly worthy of my engagement?

Honorable Mr. Bunny, I relish your insults. Really, I do. I enjoy reading your posts almost as much as I enjoy reading my own.

Let us agree on a couple things. 1) We would both like to know the future. 2) We can't.

We both understand the underlying assumptions of the 4% SWR and the CPI-U, right? Can we improve these metrics? Maybe, but isn't that sort of using a micrometer to measure and an axe to cut?

The future is unknown. If you can calculate a personal inflation rate and successfully extrapolate that to your SWR, I think that's great. If you can further generalize those results to others here, I think that is FANTASTIC. Really. How to do so is beyond my meager abilities, so I'll yield the thread to you, and I'll continue to swing away with my 4%+CPI axe.