Inflation simplified

[militaryman]

Good Morning All

I hope I am thinking about this correctly. In general, can I disregard inflation's effects if I also do not consider the growth effects on my 401k balance?

Example: If I have a $1,000,000 401k at retirement's start and need that account to cover an expense shortfall of $33,000/year for a 30 year projected retirement can I be assured I am probably "good to go" because.... although inflation will require greater and greater withdraws to maintain the buying power of the expense shortfall, I will also hopefully average the same or greater returns on my investments than inflation?

1,000,000/30 = 33,333

Thank you for your comments!

 

[USGrant1962]

Yes, assuming that a diversified equity/fixed income portfolio will at least match inflation is a reasonable model, but see my sig below.

 

[MichaelB]

I’d say yes, with 2 caveats. The funds need to be invested so they at least hold their real value, and the $33k withdrawal includes taxes.

 

[audreyh1]

It’s a good time to run the FIREcalc model which takes historical growth and inflation into account. You can look at different asset allocations plus take into account pension, Social Security, etc.

https://www.firecalc.com/

Taxes are on you - assumed included as part of spending.

 

[DJRR]

Good Morning All

I hope I am thinking about this correctly. In general, can I disregard inflation's effects if I also do not consider the growth effects on my 401k balance?

Example: If I have a $1,000,000 401k at retirement's start and need that account to cover an expense shortfall of $33,000/year for a 30 year projected retirement can I be assured I am probably "good to go" because.... although inflation will require greater and greater withdraws to maintain the buying power of the expense shortfall, I will also hopefully average the same or greater returns on my investments than inflation?

1,000,000/30 = 33,333

Thank you for your comments!

Yes. The theory is that you can withdraw 4% of your starting balance PLUS inflation for 30 years with a 95% probability of success.

The caveat is your ending balance can vary significantly. A "success" is ending with a $0 balance after 30 years, so you can consume all your principal if your inflation adjusted "real" return is less than 4%. If it is more then you can end up with much more than you started with.

The problem is that with no guaranteed real returns of 4% you can either take more risk or take less money. The community has settled on 4% as the sweet spot, but many advocate for less (prepare for worse than ever seen) and a few advocate for more (blow that dough).

I would personally say 3.3% is good to go, but YMMV.

 

[Gumby]

I do all my planning in current dollars, assuming that I can keep up with inflation via a portfolio of balanced mutual funds.

 

[militaryman]

Yes. The theory is that you can withdraw 4% of your starting balance PLUS inflation for 30 years with a 95% probability of success.

The caveat is your ending balance can vary significantly. A "success" is ending with a $0 balance after 30 years, so you can consume all your principal if your inflation adjusted "real" return is less than 4%. If it is more then you can end up with much more than you started with.

The problem is that with no guaranteed real returns of 4% you can either take more risk or take less money. The community has settled on 4% as the sweet spot, but many advocate for less (prepare for worse than ever seen) and a few advocate for more (blow that dough).

I would personally say 3.3% is good to go, but YMMV.

Thanks for this and the other comments folks have made. Gives me more confidence that I am on the right track. I have run FireCalc and many other calculators many many times and get good results for my estimated expenses. Just liking this simple concept of ignoring the inflation/gains and only needing to consider the time frame of years that will deplete the balance without the inflation or gains effect. Logic tells me over time that the gains should out pace the inflations effects and I can adjust my spend accordingly.

 

[Montecfo]

Yes. I assume 3% real growth of my portfolio, and use current expenses as my benchmark.

It is a lot less complicated than trying to forecast investment returns and inflation separately, both of which will be wrong.

Your real lever I think is to have a low withdrawal rate, a high level of discretionary expenses or both. Thus if something truly unexpected occurs you can make adjustments.

 

[Chuckanut]

I do all my planning in current dollars, assuming that I can keep up with inflation via a portfolio of balanced mutual funds.

+1

But, I think the OP can be very vulnerable to sequence of returns risk if he is not careful. A Big Bad Bear market early on and/or years of double digit inflation could undo his plans. My 2¢. YMMV.

I would recommend that the OP familiarize himself with Sequence of Return Risk.

I’d also like to know how his money is invested. He might be able to survive an early financial disaster. Or not.

 

[pb4uski]

^^^ But we don't know what the OPs AA is so we really don't know if SORR is a valid concern or not.

 

[mathjak107]

Good Morning All

I hope I am thinking about this correctly. In general, can I disregard inflation's effects if I also do not consider the growth effects on my 401k balance?

Example: If I have a $1,000,000 401k at retirement's start and need that account to cover an expense shortfall of $33,000/year for a 30 year projected retirement can I be assured I am probably "good to go" because.... although inflation will require greater and greater withdraws to maintain the buying power of the expense shortfall, I will also hopefully average the same or greater returns on my investments than inflation?

1,000,000/30 = 33,333

Thank you for your comments!

first off your personal cost of living can and likely is very different than the cpi .

the CPI measures price changes in the 1500 mini economies that make up this country using goods and services you may not even use .

also , studies by sun life and ty bernike show that seniors tend to not be effected by inflation as much as they think as long as they have discretionary income .

we tend to spend more during the early good years , then spending falls off a cliff as we no longer do a lot of things we did or buy a lot of things during the slow go years .

much of what we no longer spend on tends to cover the costs of what went up l

then we hit our no go years and spending ramps up on healthcare , so we tend to spend in a smile shape

 

[GenXguy]

first off your personal cost of living can and likely is very different than the cpi .

Agreed. I'm always seeing expenses/prices go up faster than the CPI figures, like my 22% increase in car insurance with no changes, claims, or tickets. I just hope that my gains can help make up for my real cost increases, so I figure everything in today's dollars, like some others have mentioned.

 

[mathjak107]

we have been retired for 8 years and our portfolios are higher today then the day we retired despite spending 6 figures a year from it

 

[MichaelB]

Let’s please not derail this thread complaining about CPI measurement vs real life experiences of some members. That topic has been discussed to death and is still ongoing in the inflation threads.

This thread is about portfolio and withdrawal rate and portfolio survival.

 

[mathjak107]

Let’s please not derail this thread complaining about CPI measurement vs real life experiences of some members. That topic has been discussed to death and is still ongoing in the inflation threads.

This thread is about portfolio and withdrawal rate and portfolio survival.

it does tie in because conventional portfolio survival is based on inflation adjusting yearly …In practice ty bernike has found that much inflation adjusting in real life as a senior is unwarranted simply because of the smile shaped spending curve.

that has a very real effect on portfolio survival

 

[militaryman]

^^^ But we don't know what the OPs AA is so we really don't know if SORR is a valid concern or not.

OK... If you really want to know all the deets

Asset allocation will probably be 50/50 FXNAX and FSKAX or some such re-balancing yearly.

Tracking my expenses for years points to needing $85K gross to equate my current comfortable standard of living (after all the retirement savings, Soc. Sec. tax, etc is backed out).

I am shooting for $100k to have plenty of flexibility.

Expenses above include $9,000 yearly for car replacement fund.

RETIREMENT INCOME STREAMS​

• FERS pension if I retire later this year @ age 57 is $41,000 No cola until Jan2031 then "diet" cola
• FERS Supplement @ 57 (pays until age 62) is $22,000 No cola
• Military Reserves retirement @ 60 = $12,000 (in today's dollars and will increase yearly like SS does until 60 then cola adjusted like SS)

• Social Security @ 70 for me is $4100/mo although I always discount that by 30% due to the rocky footing SS is on, so call it $2870/mo ($34,440 per year)
• Social Security @ 69 for DW is $1667/mo although I always discount that by 30% due to the rocky footing SS is on, so call it $1167/mo ($14,000 per year)

TSP at retirement is ~ $1,050,000 (about $200K of which is ROTH)

It can be quite difficult entering this into calculators as the fact that my FERS pension totally lacks a cola for about 6 years which greatly devalues the buying power of the $41k and then when the cola does kick in it is basically around 1% less than inflation.

Zero debt

$70K bucket for household things that pop up is in a brokerage

 

[MichaelB]

it does tie in because conventional portfolio survival is based on inflation adjusting yearly …In practice ty bernike has found that much inflation adjusting in real life as a senior is unwarranted simply because of the smile shaped spending curve.

that has a very real effect on portfolio survival

That’s not the question the OP asked and not the thread topic. As pointed out, there are other threads to discuss this, so please take your point there.

 

[audreyh1]

50/50 AA is generally good enough to keep up with inflation over long periods.

 

[mathjak107]

50/50 AA is generally good enough to keep up with inflation over long periods.

actually 50/50 has never had a down year over any 10 or 20 year period , at least in a nominal return .

so yeah it does fine ..40-60% equities is a most popular range

 

[jimbee]

50/50 AA is generally good enough to keep up with inflation over long periods.

And the math is easy.

 

[militaryman]

actually 50/50 has never had a down year over any 10 or 20 year period , at least in a nominal return .

so yeah it does fine ..40-60% equities is a most popular range

Yeah, when I play with FIREcalc and others it seems like changing the asset allocation between 70/30, 60/40 and 50/50 gives the same chance of success.

Breaking below 50/50 is when I start to see failures.

 

[Koolau]

I do all my planning in current dollars, assuming that I can keep up with inflation via a portfolio of balanced mutual funds.

This is my strategy. For retirement planning, the "divide by 30" or whatever is probably a good, quick, back of the envelope guestimate about whether you are ready or not for FIRE. FIRECalc is much better and more precise - though we mostly "measure with a micrometer, mark with chalk and cut with an ax" in reality.

NOTHING can be planned for 30 years with much certainty, so the the key (IMHO) is flexibility. Be ready to change your withdrawal based on current conditions throughout the 30 years (or whatever.) As always, YMMV.

 

[Chuckanut]

^^^ But we don't know what the OPs AA is so we really don't know if SORR is a valid concern or not.

True. That’s why I hinted at needing more information regarding how he is invested.

 

[audreyh1]

Yeah, when I play with FIREcalc and others it seems like changing the asset allocation between 70/30, 60/40 and 50/50 gives the same chance of success.

Breaking below 50/50 is when I start to see failures.

Yeah, pretty much.

 

[DrRoy]

In the long run, it has worked historically. 2022 is an example of a bad year with negative returns and higher inflation.