What is your Spreadsheet INFLATION assumption?

[MarcJoli]

Now that inflation is coming down, what are your Spreadsheet Inflation assumptions for inflation in the coming year, rest of the decade, and long term?

In my opinion, we are not likely to go back to the lowflation from the last decade due to structural changes in our economy the last few years:

• Raises in minimum wages
• Labor union actions
• Reshoring of some supply chains
• Geopolitical split between the G10 and the BRICS reversing previous globalization trends.
• demographic changes in China and Japan (fewer workers)
• Labor hoarding (no layoffs)
• Low unemployment, hard to find good workers.
• Red Sea and Panama Canal shipping and general security at sea. Will the US be willing to provide security for all?

This chart shows the decade of the 70's and how there were big cycles in inflation in the the 70's that averaged 7% over that period.

https://twitter.com/x/status/1737952531072831932

So, if our inflation will stabilize at a new level, what level will that be? What do you plug into your spreadsheets? What are your guesstimates? Here are my guesses:

End of 2024: 2.0%

Rest of the Decade: 3.5%

Avg for the 2030's decade: 4.0%


Please share what numbers are you using and why?

 

[audreyh1]

I don’t worry about it. I just use models that use historical inflation and generally calculate things in today’s dollars.

Inflationdata.com has some good average inflation by decade graphs.

 

[SecondCor521]

I use 3%.

My assumptions policy is to use the longest term average I can find that is from a source I deem reliable. And I use that regardless of what the current number is for whatever.

So I have used 3% for inflation since about 1997, even as we have varied from ~9% recently to risks of deflation back in 2008 I think it was.

I have similarly used 10.7% as my assumption for stock returns, even as the actual returns have gone from maybe -20% to +20% from year to year.

Ditto for bond returns, college cost inflations, SS COLAs, IRMAA adjustments, and a number of other things.

Why?

1. I doubt any more sophisticated analysis would be any more likely to come up with a better set of assumptions.
2. Trying to model varying rates of returns and inflation complicates my spreadsheets, which is a definite increase in complexity (and therefore risk of Excel errors) for a dubious increase in accuracy of prediction.
3. I tend to use FIREcalc to do sensitivity analysis type stuff; I consider it's dataset good enough for me.
4. I have plenty of margin in my plan now; I don't need to predict very accurately except to hope for no zombies or asteroids or total world economic collapse.

 

[Finance Dave]

I just use 3.5% for everything/all times. Trying to predict or model it any more accurately is not going to result in any benefit IMO.

 

[FLSUnFIRE]

For me it's more the ratio of returns to inflation that matters. I'm pretty conservative in my assumptions (I hope) and currently have a real return on 1.5% in the spreadsheet that I use to plan my cash flow with returns at 6.5% and inflation at 5%. It's all a bunch of assumptions anyway and only worth what I paid for it (spending is probably pretty accurate except for the known and unknown unknowns -primarily health or other possible catastrophic losses). It goes out decades but in reality, only the next year or two matter and have any useful fidelity.


I should probably mention/point out that I've got a long horizon and still subject to SORR so by building in a sort of worst case, I won't be mentally crushed if it comes to pass as I planned on it. Sometimes for fun I'll boost the returns and imagine all that Dough To Blow!

 

[DrRoy]

3%

 

[LateToFIRE]

I use 2.5% to 3.0% depending on the purpose (i.e. budget inflator, SS COLA, present value calc).

 

[target2019]

Inflation Average - 3.0%.

 

[CRLLS]

I haven't updated the premises used in my Spreadsheet over the last 6 years or so. I also don't really use it for forecasting as our annual expenses are well below*our income. I do perform a yearly expense and income estimate and do review the results at the end of the year to help build next year's estimates.

Right or wrong, when I built my Spreadsheet I set the following numbers:

SS COLA 2.50%
Medical Cola 6.50%
Inflation 3.75%

 

[NanoSour]

2.47% for core inflation. It's the perfect number don't you think?

 

[jebmke]

I don't do analysis any more but when I did, I always did it in real dollars. Trying to predict inflation just adds additional forecast error. I reduced my forecast error to zero by stopping forecasts

 

[youbet]

How are folks accounting for sequencing?

 

[youbet]

I don't do analysis any more but when I did, I always did it in real dollars. Trying to predict inflation just adds additional forecast error. I reduced my forecast error to zero by stopping forecasts

I think you meant to say you used ”nominal” dollars. Using “real” dollars would mean you took inflation into account.

 

[Rustic23]

FireCalc. Ok, I really don't put it into my spread sheet. But, it makes just as much since as a single inlation rate for a 30 year retirement. 3.5% is the somewhat excepted figure for US inflation. (in the 90's when I was doing commercial appraising, 4.0% was the number we used, however, we also only did 10 year cash flow analysis)

I don't know, however, many here that don't adjust their spending/savings based on their current financial condition, forecast for several years. ie. I'm going to take out 4% plus 18% actual inflation even though I will be broke! and my 30 year 3.5% inflation says I will still have several million.

So how did I treat inflation. I put it in as 3.5%. My savings would triple in in 30 years, It made me feel good and we retired. I then started to rely on current actual spending and a future 1 to 2 year forecast based on actual spending and income. My original spreadsheet did not include 0% SS increases, or 8%. But when I was making the one year more decision, FIRECALC said I was good, and 3.5% was OK. I can also admit I have learned more about my spending habits after retireing.

 

[HarveyS]

I use 3.64% for annual inflation. According to the note in my spreadsheet, that was the average for the last 64 years (in 2013).

 

[OldShooter]

This kind of modeling tends strongly towards "Garbage in, gospel out. There are too many parameters whose future values are completely unknown. So I pay little attention to models.

I deal with future inflation by holding very serious six figures in TIPS and a strong equity position.

 

[rk911]

Somewhere around 5-yrs pre-retirement I created a spreadsheet consisting of 3 or 4 yrs worth of spending and the expected monthly income from pensions and SS. Once created I projected expenses out to a particular age (don't recall what age...likely 80 or so which would have been 25-yrs post retirement). I used. 5% for inflation and 0% for pensions and SS (worst case. our pensions have a 3% increase on base number each year). That just looked at income and spending...not investments...but convinced us to actually pull our plugs at age 55. Since then we don't track or worry about inflation....other than post Germany WW1 hyper inflation and there's not much we can do about that. My buddy is stockpiling food. He says you can't eat gold.

 

[G-Man]

SS COLA 2.50%
Healthcare Inflation 5.0%
General Inflation 3.50%

 

[Exchme]

Unless you have a non-COLA pension, I suspect it doesn't matter too much in the way that people first think. SS benefits and parts of the tax code are indexed for inflation.

The big issue is increases in inflation greatly reduce the value of your current bond holdings as we re-discovered in 2022. Since that wealth confiscation may also make it a poor investment environment, that can hurt stocks, as we also re-discovered in 2022.

It's impossible to predict when the next eruption of inflation will be o how bad it will be.

 

[jebmke]

I think you meant to say you used ”nominal” dollars. Using “real” dollars would mean you took inflation into account.

actually, the opposite. Real dollars assumes that they always have the same purchasing power. But a moot point, I don't forecast anything, including the weather. I'm guaranteed to be wrong and it doesn't change what I do.

One of my proudest achievements working for a $5 billion multinational was to convince senior management that forecasting was a waste of time.

 

[SecondCor521]

How are folks accounting for sequencing?

I use FIREcalc and a sub-1% net WR.

 

[MichaelB]

Please share what numbers are you using and why?

I don’t project inflation and don’t see any purpose or reason to do so. I also think core economic variables cannot be projected that far ahead, they are too policy dependent and there are too many unknowns.

 

[GravitySucks]

Haven’t pulled up the spreadsheet in years.
I used 3% back when I put it together in 2012.
I think it will be higher over the next decade due to reshoreing and financing wars on credit.

 

[karen1972]

I put in a default 3%, but honestly my personal inflation rate has been basically flat from 2016-2023

 

[ERD50]

This kind of modeling tends strongly towards "Garbage in, gospel out. There are too many parameters whose future values are completely unknown. So I pay little attention to models.

I deal with future inflation by holding very serious six figures in TIPS and a strong equity position.

+1

The WORST 30 year period since 1926 for the S&P was a compound annual growth rate, (CAGR) of 7.8%. So $100 grew to $952.

Inflation over that time means it took $1.70 to buy $1 of goods, so $952 adjusts to $560.

And 1966 ( a very bad year per FIRECalc) looks to be a bit better than 10% CAGR, so $100 grew to $1,745. Inflation was MUCH higher, and it took $4.84 to buy $1 of goods, so $1,745 adjusts to $360. So there was still inflation adjusted growth (but not quite enough to support a 4% inflation adjusted WR!).

The point is, very different inflation numbers, very different market returns. Averages don't mean much at all.

https://awealthofcommonsense.com/2023/02/deconstructing-10-20-30-year-stock-market-returns/

https://www.usinflationcalculator.com/


That said, before I saw anything like FIRECalc, I did a back of the envelope calculation, figured a conservative 8% annual for stocks, 4% annual for bonds, so 7% with some reasonable AA, and 3% inflation means I could draw 4% inflation adjusted.

No SORR in that calculation, but pretty reasonable, since I knew there'd be some pension and SS down the line.

-ERD50