Some post by members retired a decade or more highlight portfolios that are higher in nominal terms now than when they retired, withdrawal rates are holding steady or even falling, and no decline in lifestyle. This is our situation as well. While I would like to give myself a hearty “well done, lad” I wonder if something else is happening.
My sense is our lifestyle is as enjoyable now as when I retired, but our spending – the basket of goods and services we enjoy – is totally different. Our wants and needs are constantly evolving, and we are continuously adapting to changing prices in the marketplace by shifting and redirecting our consumption so easily that we hardly recognize the effort. A real life example of the substitution effect.
This leads me to wonder if we overestimate inflation in retirement, or if perhaps the CPI itself overstated as it affects us, and if we underestimate our own ability to deal with increasing prices. This is not an argument to increase the withdrawal rate, but it does raise the question of just how much portfolio risk do we need to take.
Another possibility, though, is that the BLS position that CPI is overstated is correct and over the past decade we really have seen much less inflation than has been reported, so we might be deceiving ourselves regarding our ability to maintain our lifestyle over time (and inflation) . If this is the case, a decade of real higher inflation, say in the 3-4% annual range, might do some real damage to our spending power. “All we need is a little more inflation” is mentioned so frequently now in the financial media I wonder if the inflation cure might be worse for us (retired types) than the current "war on savers" low rates / low inflation environment.
My sense is our lifestyle is as enjoyable now as when I retired, but our spending – the basket of goods and services we enjoy – is totally different. Our wants and needs are constantly evolving, and we are continuously adapting to changing prices in the marketplace by shifting and redirecting our consumption so easily that we hardly recognize the effort. A real life example of the substitution effect.
This leads me to wonder if we overestimate inflation in retirement, or if perhaps the CPI itself overstated as it affects us, and if we underestimate our own ability to deal with increasing prices. This is not an argument to increase the withdrawal rate, but it does raise the question of just how much portfolio risk do we need to take.
Another possibility, though, is that the BLS position that CPI is overstated is correct and over the past decade we really have seen much less inflation than has been reported, so we might be deceiving ourselves regarding our ability to maintain our lifestyle over time (and inflation) . If this is the case, a decade of real higher inflation, say in the 3-4% annual range, might do some real damage to our spending power. “All we need is a little more inflation” is mentioned so frequently now in the financial media I wonder if the inflation cure might be worse for us (retired types) than the current "war on savers" low rates / low inflation environment.