3 Yrs to Go said:
Hmmmm. Is it true that everyone's personal rate of inflation is higher than CPI?
No it isnt, but it IS true that people who dont read the whole thread fail to notice that I said very clearly, several times, that some peoples personal rates are lower and some are higher.
d said:
By definition, I think it is that; however, it is not likely a cost-of-living neutral return.
It is CPI neutral (not inflation neutral), to the extent that CPI measures inflation, and it is a general/average neutral, not a regional or individual specific neutral. It is definitely not a cost of living neutral. Way too many differences in peoples COL to ever do that.
If anyone is still champing at the bit to "prove me wrong", we're only disagreeing if you agree with the following statement.
"CPI = inflation, and the purchase of "inflation protected" government securities or CPI indexed bonds gives me an inflation neutral investment that produces a predictable and real return that allows me to completely or nearly completely remove inflations effects from my long term retirement planning. For everyone else too."
If you agree with the following statement, then we're in agreement.
"CPI is not exactly equal to inflation for most people. Some will find CPI to be a higher measure than their personal rate of inflation, some lower, a very small number exact. CPI indexed securities are good ideas in times of very high inflation because few other options would pay as well as a CPI security should we see double digit inflation. CPI indexed securities at coupons below 3% for tips and 2% for ibonds are not very good investments when the CPI is in the low single digits. In any case, the ownership of these securities does not full eliminate the factoring of inflation into your personal retirement planning."
My big two points are that CPI <> inflation (and I dont hear a lot of disagreement on that), and that "inflation protected" investment products are perhaps a bit misleading in that they do not truly protect each investor from the effects of inflation.
I thought about this a lot more yesterday and the upshot of it is that I wonder if inflation doesnt have a far more profound effect on the ER than the average person. Heck, the hit from healthcare alone might be a bigger bite than the 3-5% of your total annual budget that CPI claims is the inflation rate.
The odd thing is that for me, inflation should have a lower bite. We dont eat out much, I dont pay for many services choosing to do most maintenance and repairs myself. Healthcare is paid through my wifes part time job.
Yet when I take our year on year spending, cull out unusual expenditures (like the sudden appearance of these mysterious "baby expenses") until I get it to basic core living costs...i'm seeing approximately a 6% growth year on year over the past 3 years. We havent made any conscious decisions to live a different lifestyle nor do I feel like we've 'turned up the knob' in any significant manner. Further, as I've outlined in posts on "invisible inflation",I see quality and quantity reductions regularly in the products and services that I buy. Customer service has been reduced to a joke at most companies. Food portions are smaller. "Extras" you used to get for free now cost extra.
For some, perhaps a lot of people, particularly living away from the coasts and in more rural, low-growth areas and living simply might be see CPI as extravagant. In my area, more urban, near the california coast, in a high growth area...I think CPI is grossly understating the effects of inflation.
I think this bears the ER or prospective ER needing to very closely examine their personal rates of inflation and not just relying on an average or a passing plug of the CPI into the retirement calculator.
To heck with stock market valuations, average rates of return, portfolio diversification and all that. It isnt going to mean squat if you're using a 3-3.5% long term average of CPI in your 40 year calculations and you're off by 2-3% a year.
Up until this point, I was ready to flag on anyone with a seven figure portfolio and no debt to zap their jobs and move forward to ER. Now I think a closer look at the influence of inflation on their lifestyles, long term, particularly around some highly ER enhanced items like health care and educational costs for ER parents, is very well warranted.
In fact, excepting people living away from high growth areas near the coast and people with pretty large sized portfolios, I'm thinking you better have at least a small income stream of some kind in place. Investment gains from a reasonable portfolio simply may not be enough.
As far as cherry picking a few items and looking at their relative cost factors, make sure you look at housing, college costs and health care costs before bothering to dip into piddlers like gas and electricity. Both of which have been kept low by artificially low oil and coal prices.
Hell...even the six million dollar man turned into the six billion dollar man in just 30 years...
http://www.guardian.co.uk/science/story/0,,1754356,00.html