Sensitivity to inflation

[Ken11]

In a recent thread a number of us stated the base assumtions we use for inlflation and nominal returns in our deterministic plan.

In the past, Ive played with my plans sensitivity to inflation while holding real returns constant ( at 2.5%). I found that any change from my base assumption of 3% inflation and 5.5% returns hurt my plan.
Lower inflation hit my returns more thatn it improved my future expenses.
More inflation hit my expenses more than it helped my $ returns.
The plan didnt fall off a cliff- but it did take a modest hit.
I thought it was strange that my base assumption happened to hit this "optimal inflation level".

Obviously many details are involved in the puts/takes and every plan could react differently.

Has anyone else looked at this? What have you found?

 

[MichaelB]

I used to do more projections with varying inflation rates to see the impact on my portfolio, but no longer do so because the CPI numbers do not relate at all to the inflation we feel. I'm not doubting the CPI, but our budget has such a different composition, with much heavier percentages of health care, food and personal expenses, that the CPI isn't useful.

It is clear to me however that even in an era of low inflation we need a substantial return in order to maintain our standard of living.

 

[Mulligan]

I used to do more projections with varying inflation rates to see the impact on my portfolio, but no longer do so because the CPI numbers do not relate at all to the inflation we feel. I'm not doubting the CPI, but our budget has such a different composition, with much heavier percentages of health care, food and personal expenses, that the CPI isn't useful.

It is clear to me however that even in an era of low inflation we need a substantial return in order to maintain our standard of living.

I agree the CPI may have little meaning on an individual basis. I received a $100 after tax increase COLA this year, and no way did my monthly expenses increase anywhere near that over the past year. But in a different year I imagine the complete opposite could occur depending on specifically where the inflation is at.

 

[W2R]

I, too, find it hard to relate the CPI to my personal inflation rate. I expect it may average out to be the same eventually, though. Also I don't expect my portfolio to completely compensate for inflation during highly inflationary periods. But in recent years when there has been little inflation, it surpasses that inflation so hopefully in the long run it will outdo inflation by a decent amount.

I expect that in the long term my equity investments will help in combatting inflation. I am confident that this is a better inflation-fighting strategy than stashing my money under the mattress.