What inflation rate do you use for retirement planning?

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ochotona
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What inflation rate do you use for retirement planning?

Post by ochotona » Mon May 01, 2023 7:05 am

I use the Flexible Retirement Planner. It's great. The default inflation rate is 3%. The current 5, 10, 20, and 30 year TIPS breakeven inflation rates are all below 3%. However... I just have a feeling I might just get screwed in the end by inflation. I'm tempted to bump it up to 3.5% as a hedge. Any thoughts?
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seajay
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Re: What inflation rate do you use for retirement planning?

Post by seajay » Mon May 01, 2023 7:50 am

I tend to use real input data, so no need to make estimations of inflation :)

cash/bonds/gold 1i ... inclined to broadly offset inflation (i)
stocks 2i, share prices that broadly rise with inflation, along with paying dividends on top and where those dividends might broadly compare to inflation.
PP = 1.25i

A inflation pacing asset supports 30 years of 3.33% SWR. To bolster that to a 4% SWR you need a further 1.3% (real) reward. With the PP there's a element of rebalance-benefit, that a broad assumption of 0.5% real might be assumed, reducing that 1.3% to 0.8%, or the same as if stock dividends (25% weighted) paying 3.2% ... has the PP likely supporting a 4% SWR.

Individually the assets can swing quite wildly around inflation pacing, but when you diversify across multiple wilder volatility assets the collective/combined average is more inclined to more closely align with inflation. That individual asset volatility adds to the capacity to increase rebalance benefits. If say increased to 2% rebalance benefits then that alone is enough to uplift the portfolio to support a >4% SWR even without stock dividends. Add on (reinvesting) stock dividends on top of that and 4% SWR is more inclined to end 30 years with 50% of the inflation adjusted start date portfolio value still available after 4% SWR. Add on additional factors such as high to low 1980 to 2000's interest rate transition, and even better (1980 to 2000 and even cash deposits yielded a 3% real return).

In the reverse direction, low to high interest rate transition, well those motions are more saw-tooth, short/sharp transitions from low to high, slower transition from high to low. During those short sharp transitions the PP is defensive, less inclined to endure large losses as might stocks or bonds alone, more inclined to lose relatively little.
boglerdude
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Re: What inflation rate do you use for retirement planning?

Post by boglerdude » Mon May 01, 2023 7:12 pm

Whats the inflation rate over last 20 years with deflationary items removed from the basket.

If you plan to retire in an urban core you could look at home & rent inflation there. If you're going to retire in the mojave you might see falling prices
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