What is your Spreadsheet INFLATION assumption?

[Montecfo]

Thanks to those who contributed to this thread.

I find it helpful to hear that many are using something around 3.5-3.7% as an average number.

I am 5-7 yrs away from ER so I currently have no cushion in case we have some bad years that erodes our spending power. If I was forced to retire early due to a job layoff today, I would be very worried about future inflation!!

Since inflation goes up and down in multiple month cycles, I may add cyclicality to my spreadsheet math. I will show it dropping this year, then stable in 2025, then rising back up in 2026. Make a few guesses on where it will peak again in 2028 before down trending once again.

I don't know if this precision provides a better forecast or not but I want to know what is the worst case with respect to my current expenses in 2030 dollars when I hope to retire.

Some sensitivity analysis is probably more valuable than trying to dial in the perfect inflation assumption (to your point).

One thing you definitely want to have is for example:

A low withdrawal rate
High discretionary expenses
Conservative "real" investment assumptions.

These five you buttons to push if we have a bad run of market returns or extended high inflation.

Having said that, if you do all 3 you might end up working too long!

It's all about balance.

 

[Montecfo]

In my RMD prediction worksheet, I use nominal dollars because (a) I'm trying to [-]predict[/-] guess over a 35 year period, and (b) I think things will inflate at different rates - investment returns, inflation, and IRMAA premiums.

The different rates of return/inflation/adjustment can make things wildly diverge over that long of a time frame. I still do my Roth conversions based on what it says, but I also am slowly accepting the fact that it is mostly just a SWAG anyways.

I hear you. But lots of inflation assumptions can provide a veneer of perceived "precision" that does not actually exist.

I wonder who correctly modelled 7-9% inflation for 2022?

But if you look back the last decade including 2022 you will find that inflation averaged a bit under 3% as I recall.

 

[brett]

We met a British couple at a Thai beach resort five years ago. Like us, they were independent travelers passing away the winter months, moving from one spot to another.

He was 79. We were in our mid 60's. My spouse still corresponds with them. And yes...they are both still traveling independently in Europe and in SE Asia.

I guess no one told them about the go slow or the no go years!

 

[SecondCor521]

I hear you. But lots of inflation assumptions can provide a veneer of perceived "precision" that does not actually exist.

Absolutely. That's exactly why I jokingly/seriously crossed out "predict" and replaced it with "guess".

I wonder who correctly modelled 7-9% inflation for 2022?

But if you look back the last decade including 2022 you will find that inflation averaged a bit under 3% as I recall.

And this is why I just use long term averages and ignore near term fluctuations. As far as how I handle actually living financially as a retired person, I (a) leave lots of margin, probably too much, (b) keep an eye on things and update my planning spreadsheets, (c) have contingency plans if needed. Probably like 99.999% of other people on this forum.

 

[BlueberryPie]

That is correct. $4 real dollars buys a gallon of milk today and in 20 years.
$4 nominal dollars buys a gallon of milk today, but it may require $20 nominal dollars in 20 years

 

[orbops]

I use 25% every 10 years - so 2.5% per year. My spreadsheet is slightly simplified, so I just increase inflation in 10 year increments to my SWAG.

 

[azxracer]

I use 2% for SS income, 0% for our pensions (no COLA) and 5% for our investments.


For expenses, I use 3% for most general expenses, 4% for all food related expenses and 5% for all medical related expenses including insurance coverage.

 

[BlueberryPie]

For expenses, I use 3% for most general expenses, 4% for all food related expenses and 5% for all medical related expenses including insurance coverage.

LOL I don't model any of these as separate items, I use 3%, and I make sure that some of my investments are inflation-protected (TIPs, I-Bonds, and enough equities)

 

[brett]

What is important to me is the spread between my ROI and my inflation rate. That is my reality.

Plugging in an inflation rate in a spreadsheet that is out of sync with ROI is delusional.

 

[Niuatoputapu]

I like to keep it simple,


SS increase at 2.6% with no 2034 reduction
Wife's pension is COL with 2% floor, so I use 2%
All expenses 3% - if components have higher inflation, it means cut-back other expenses

Investment return on 65/35 portfolio 5%, low return to compensate for SORR

 

[Koolau]

Absolutely. That's exactly why I jokingly/seriously crossed out "predict" and replaced it with "guess".



And this is why I just use long term averages and ignore near term fluctuations. As far as how I handle actually living financially as a retired person, I (a) leave lots of margin, probably too much, (b) keep an eye on things and update my planning spreadsheets, (c) have contingency plans if needed. Probably like 99.999% of other people on this forum.

Yeah, most of us here seem to "measure with a micrometer, mark with chalk and cut with an ax." I would say the key (for those not yet retired) is to "save too much!" Then inflation is much more manageable. That's what I have found though YMMV.

 

[TickTock]

I use real instead of nominal $$ whenever possible, so inflation is baked into the real returns. My father taught me that way of thinking a long time ago, kudos to him.

One place this is not possible is for a non-COLA'd pension. Here I use 3%. But it will be whatever it will be.