Will You Meet/Beat Inflation in the Long Term?

[MercyMe]

Do You Plan to Meet/Beat Inflation in the Long Term?

I experimented with FireCalc and FiCalc to figure out the historical asset allocation required to match inflation. Pretty easy to do. Using a 40 year horizon, it takes an AA of 19/81/0 to get 100% success. I know that this doesn't encompass social security (incoming $) or taxes (outgoing $).

Here is a link to it.

I think few people would allocate so conservatively, though I'm close to it at 30/65/5. Based on the FiCalc output, I hope to at least match inflation and taxes with my AA. But my own financial plan, which has been criticized on every forum I've posted as being too conservative, uses an expected real return of -1% CAGR.

I dare to ask how foolish I am with this so instead I'll just ask...
What is your AA and what real return are you expecting from it in the long run?

 

[HI Bill]

I have an AA of 87/3/10.

I assume that the average market return will continue at 7% above inflation (historical average), and inflation will average 3%. I'm hoping my ER year of 2021 was lucky in terms of SORR, but only time will tell!

 

[Montecfo]

3% real

 

[Gumby]

We are retired, so, as Julius Caesar said, alea iacta est ("the die is cast"). It's going well so far. Only time will tell if we run out of money. We try to earn as much as we can without undue risk. Our current allocation is about 70/30.

 

[dmpi]

I have a 66/33 allocation and after I pay income tax on my dividends & gains I think I might barely match inflation on a good year.

 

[RetiredAt49]

My AA (excluding rentals) = 100% equities because historically speaking an all stock portfolio has had the highest returns (and has beat inflation) over all 30+ periods.

 

[luckydude]

I experimented with FireCalc and FiCalc to figure out the historical asset allocation required to match inflation. Pretty easy to do. Using a 40 year horizon, it takes an AA of 19/81/0 to get 100% success. I know that this doesn't encompass social security (incoming $) or taxes (outgoing $).

Here is a link to it.

I think few people would allocate so conservatively, though I'm close to it at 30/65/5. Based on the FiCalc output, I hope to at least match inflation and taxes with my AA. But my own financial plan, which has been criticized on every forum I've posted as being too conservative, uses an expected real return of -1% CAGR.

I dare to ask how foolish I am with this so instead I'll just ask...
What is your AA and what real return are you expecting from it in the long run?

According to your previous posts, you have $6.8 million in investments with a projected 2.1% WR (which includes .66% discretionary spending). At 46x annual expense, you can be as conservatively as you want, especially in today's attractive high interest rate environment for fixed income.

My AA is 15% equity, 5% cash, 2% alternative and 78% real estate. I have a big enough pot that I know I will never run out no matter the inflation rate or equity returns going forward, so I don't focus too much on AA other than trying to reduce my RE to make estate planning easier. I do plan to ease back into munis (via Vanguard) once the rate peaks (whenever that happens) to take advantage of the attractive rate environment.

 

[Sunset]

Seems to me, if I was going to be extremely conservative, I'd just buy actual TIPs and I-bonds.

In reality, we are about 80% stock, it's really hard to know as the handy allocation graphs at the brokerages don't seem to count bond funds as bonds, they always miss something to make it not accurate.

I track our net worth and actual buying power (inflation adjusted), both are up since retirement 9 years ago.

 

[W2R]

My planned AA has always been 45/55 (equities/fixed), since before I retired. I haven't rebalanced lately so my AA right now is 47/53. I have SS, a mini-pension, and RMDs. So far so good but who knows what the future will bring.

 

[DrRoy]

53/47

 

[racy]

We're retired, on SS with a withdrawal rate of 1.6%. Our AA is: 60 equities/31 bonds/5 real estate debt/4 cash. I'm planning/hoping for a real return of 2 - 4%.

 

[dknighd]

But my own financial plan, which has been criticized on every forum I've posted as being too conservative, uses an expected real return of -1% CAGR.

-1% real return might be too conservative. But that just means you'll likely end up with more than you need. And you'll almost certainly have enough. Notice, I said, "almost certainly". My guess is that any portfolio that has at least some stocks should deliver 0% real. i.e. meet inflation. But that is a guess!



When I retired I had about 30% in stocks. I plan to let that drift up to around 50-60%.



As you have no doubt found, the number you assume for real return matters, a lot! Actual inflation can also matter a lot. I try a few different numbers every once in a while. Even small changes can make things look great, or, could make me worry.



My current "default" assumption is 3.5% real for stocks, 0% real for the rest. That works out to be about 1.3% real for the total. 1.3% real is about what it takes for the "4% plan" to work for 30 years.


I just stuck -1% real into my spreadsheet. We'd have enough to be comfortable, but would have to cut back on discretionary expenses.

 

[marko]

Funny, I just ran an analysis a few weeks ago. We only spend/withdraw our dividends and on average, we spend 75% of those. As inflation impacts one's withdrawal amount, I'd say we should be good as we have a fairly hefty dividend "bank" built up earning 5%. Even this year, we’re going to spend 85% of last year's dividends, but that’s because we're BTD with a swimming pool installation.

Having said that, our portfolio has doubled over the past 18 years.

60/26/14..."14" is a little heavy in cash right now, usually 10.

 

[Midpack]

My AA is in my sig line on every post. There is no way to know what return or real return will be successful in the future, as history may/not repeat, so there’s no meaningful answer IMO. Available returns, sequence of returns, inflation, longevity, health, geopolitical? Having ‘won the game’ by some measure, I invest conservatively and keep our WR low. Fortunately that provides for a fairly comfortable life. I don’t see any point in targeting a real return %, if I have any positive real return ongoing I’m satisfied. Our portfolio has also doubled so we’ve had positive returns so far from 2011, and we haven’t started Soc Sec yet. Once we start Soc Sec, that along with RMDs and dividends will provide well above our spending needs for many years. What COL looks like in 20 years, who knows…

I was somewhat fixated on retirement calculators, books and other planning tools for several years before I retired. No one would have been able to convince me otherwise until I proved to myself that all retirement calculators and planners are just an axe, not a scalpel. They’re certainly useful as rough guides, but looking for a deeper right answer isn’t useful.

 

[Slim11]

My accounts are set up conservatively. Almost the same as yours 30 stocks/65 457, CDs, and 5 cash in the bank for expenses. My return rate I estimate as 4 percent. Thats just on dividands and intrest, obviously I will have to pay taxes on that. But if you have a bit saved, and only draw 4 percent off of it, it should be self sustaining in the long haul..will it beat inflation? Probably not. Is it enough for me to retire, I hope so as thats happining in a few months. I do have a pension but no SS. So everyone is in a diffrent boat. I think the idea is to not run out of money, and to be able to not worry about stuff.

 

[Montecfo]

Seems to me, if I was going to be extremely conservative, I'd just buy actual TIPs and I-bonds.

Yes. It is tempting. Especially something like 5 year TIPS. I-Bonds are great but takes a lot of time to reach critical mass.

Trouble is when you go to reinvest and rates are 1-3 percent. Stocks will likely have rallied big.

Which is why I view the great rates we have now as a bonus to my normal AA which is mostly stocks.

 

[dknighd]

I'm tempted to toss a bunch of coins in the air and see where they land. A coin toss is as good a tool as any other.

 

[marko]

IMO, the real question is not whether one beats inflation, it's how inflation will impact the life of one's retirement portfolios.

Not long ago, low inflation still threatened some underfunded or poorly invested portfolios. Now, some portfolios are seriously threatened while others could survive even 8%-10% for years.

 

[Montecfo]

Portfolios built for one specific circumstance usually fail to thrive in others.

So not sure building a portfolio designed to handle high inflation works all that well.

But I believe folks can hedge their bets with TIPS, i-bonds and perhaps a bit of exposure to selected commodities.

 

[COcheesehead]

I am similar to the OP. I have about 25% in equities, very little in cash and the rest in a tax free and a taxable bond ladder. The ladders throw off about 144% of our budget, which is pretty cushy and that does not include any social security - our only pension which we won’t take for years yet.
I don’t keep more than a month or two of expenses in cash because the tax free ladder pays every two weeks on average.
The ladders have about a 9 year duration - our plan to bridge to SS at 70.
All the tools we use show we’ll likely die with about as much as we started with in today’s dollars, so we’ll need to ramp up the blow the dough here soon.

 

[Fermion]

More worried about heart disease, cancer, and random other stuff than inflation. I can fight inflation much easier than pancreatic cancer.

 

[HI Bill]

More worried about heart disease, cancer, and random other stuff than inflation. I can fight inflation much easier than pancreatic cancer.

+1. At 57, I already have decreased stamina, and some health problems that are keeping me from diving as much as I'd like. I'm more concerned about maintaining health than inflation's eroding effects over 30-40 years. If I can't dive, I likely can't travel, and my spending will plummet.

 

[pb4uski]

I experimented with FireCalc and FiCalc to figure out the historical asset allocation required to match inflation. Pretty easy to do. Using a 40 year horizon, it takes an AA of 19/81/0 to get 100% success. I know that this doesn't encompass social security (incoming $) or taxes (outgoing $).

Here is a link to it.

I think few people would allocate so conservatively, though I'm close to it at 30/65/5. Based on the FiCalc output, I hope to at least match inflation and taxes with my AA. But my own financial plan, which has been criticized on every forum I've posted as being too conservative, uses an expected real return of -1% CAGR.

I dare to ask how foolish I am with this so instead I'll just ask...
What is your AA and what real return are you expecting from it in the long run?

19/81/0 isn't outrageous, specially since your WR is only 2.5%.

Essentially, you have won the game and don't need to play in equities any longer. You could put all your money in a TIPS ladder and you would get inflation plus whatever the fixed rate is so why would one settle for -1% real?

My AA currently is 0/97/3, but only because I'm bearish on equities in the near term (I think they are very overvalued). I will eventually get back into equities if valuations ever become sensible, but probably only 20% or so at most.

If I file for SS tomorrow, our WR will drop to about 1.25% so the goal is capital preservation and return of capital rather than return on capital... and never being a financial burden to our kids. Based on history even 0/100 will have a 100% success rate at that WR.

The annual interest on our fixed income portfolio of 47% CDs, 30% agency bonds, 14% A or better corporate bonds, 8% i-bonds and 2% IG preferreds is over 3 times what we would need from the portfolio once I start SS.

 

[audreyh1]

I don’t know about the long term, but we have beaten inflation so far since 1999 after taxes and after all our spending. I can only hope this will continue. We have around a 50/50 AA which theoretically is sufficient to keep up with inflation.

 

[Alan]

My AA is 50/40/10 but I also have enough income from pensions to cover essential spending.