Author Topic: FIREd people and inflation rate concerns?  (Read 2490 times)

blue_green_sparks

  • Stubble
  • **
  • Posts: 115
FIREd people and inflation rate concerns?
« on: December 12, 2019, 07:10:38 AM »
I did a search and see alot of this.....

Inflation is the #1 enemy of early retirees, much more important than poor returns.


If you are unemployed, carry little or zero debt and have less expenses than most and can switch over to less risky fixed income investments that naturally pace inflation.... it seems like a steady/modest rise of the dreaded inflation rates could benefit FIREd people.

Need some experts to set me straight. I can see how paying off debt with a inflated dollars would help the unfrugal.
« Last Edit: December 12, 2019, 07:13:31 AM by blue_green_sparks »

RWD

  • Magnum Stache
  • ******
  • Posts: 4102
  • Location: Mississippi
Re: FIREd people and inflation rate concerns?
« Reply #1 on: December 12, 2019, 07:29:46 AM »
I wouldn't say inflation benefits FIREd people but it is expected over the long term for investments to outpace inflation (it is one of the variables considered in the 4% rule). Though I see you mention switching to fixed income investments that pace inflation. Over long periods of time just pacing inflation is not good enough because you are also spending down your stash. It is okay for it to be part of your portfolio (preferably less than 50%, depending on your situation) but you need the more aggressive investments as well or inflation really will become your #1 enemy.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3482
  • Age: 38
  • Location: South Carolina
Re: FIREd people and inflation rate concerns?
« Reply #2 on: December 12, 2019, 07:33:21 AM »
Not really, I own stocks, which represent partial ownership in businesses.

I'm agnostic to the inflation rate, if money is worth less they earn more.

ysette9

  • Walrus Stache
  • *******
  • Posts: 6724
  • Location: Bay Area, CA
    • The Best Is Yet To Come
Re: FIREd people and inflation rate concerns?
« Reply #3 on: December 12, 2019, 08:08:07 AM »
This may seem counterintuitive at first, but the biggest risk for an early FIRE-ee is inflation, so the best hedge against that is to NOT hold a bunch of money in “safe” investments like bonds. Having a healthy dose of equities is critical for portfolio longevity.

Go play around with cFIREsim and simulation  50-year retirements. See which are more successful: those with more bonds or those with less.

sui generis

  • Handlebar Stache
  • *****
  • Posts: 1524
Re: FIREd people and inflation rate concerns?
« Reply #4 on: December 12, 2019, 12:50:24 PM »
Good input above, but my first reaction to this post's title was on the expense side rather than investment.  Now I never did the careful analysis and selection of Big ERNs withdrawal rates...so far in my second year of ER, I've just been bumping my budget by approximately inflation.  The problem is, the official inflation rate is built off of a selection of goods which....do not necessarily represent the selection of goods (especially nowadays) that the average person buys.  I'd read this before, some study of how much a typical consumer budget's inflation does not track the official inflation rate, and is usually much higher, because the things in each basket are pretty widely divergent.

Even for FIRE folks, our budgets may diverge a lot, too.  I know my budget diverges a lot given the proportion allocated to travel and health care.  Two things that absolutely do not stick near the official inflation rate.  Luckily, travel is very discretionary and by the time I'm 90 I might not be able to spend a lot on it anyway, so won't mind it having been significantly devalued.  But healthcare certainly worries me.  In fact, I have significantly overbudgeted my health care category early in my ER in order to avoid ruinous devaluation/ inflation I can't keep up with.  It makes my budget now a bit artificial, and I have carryovers of one time money each year that I'm still deciding how to most effectively handle, but it's important to me not to have to worry about how I'm going to take my budget from like $500 per year to $20k per year in a few decades only growing my withdrawal rate on the official inflation rate.

Sorry, I know that's pretty divergent from the thread topic but I do think the answer to inflation in investments is pretty simple, whereas people should be more worried about in respect of their expenses and how they can stick within whatever SWR they've selected if they hope to hope not to outlive their money. My expenses 20 years ago bear little resemblance to what they are now, so hoping I can just use my expenses today for the next 40-50 years, and just grow it by inflation each year seems like a fools' errand and not a topic I often see discussed in the blogs or forums.

joe189man

  • 5 O'Clock Shadow
  • *
  • Posts: 55
Re: FIREd people and inflation rate concerns?
« Reply #5 on: December 13, 2019, 12:53:53 PM »
i accounted for inflation in my planning work ( i am not FIRE) , see the below link

i would check your numbers assuming a few variations of inflation to make sure you are comfortable

i found inflation can have a startling effect on withdrawls in a decade or two, and the longevity of your stash if not planned for

https://forum.mrmoneymustache.com/investor-alley/how-are-you-calculating-your-fire-number-accounting-for-inflation-and-returns/

Mighty Eyebrows

  • 5 O'Clock Shadow
  • *
  • Posts: 56
  • Location: Vancouver Island, Canada
Re: FIREd people and inflation rate concerns?
« Reply #6 on: December 13, 2019, 02:08:43 PM »
I did a search and see alot of this.....

Inflation is the #1 enemy of early retirees, much more important than poor returns.


This is mainly because of the common advice for older retirees to put more into fixed-income investments, which (generally) barely match inflation. This reduces volatility but also returns. It really comes down to psychology and how willing you are to spend down your capital. Many investors are terrified of paper losses and so the comfort of less-volatile investments outweighs the fact that they get eroded by inflation. They "feel" safer.

So yes, inflation is the enemy of standard retiree behavior. Mustachians may or may not fit this profile at all...

bacchi

  • Magnum Stache
  • ******
  • Posts: 4637
Re: FIREd people and inflation rate concerns?
« Reply #7 on: December 13, 2019, 05:40:31 PM »
Stock returns often lag high inflation. This is why there are Trinity failures in the late 1960s 30 year spans.

TIPS held directly would help but they hurt returns during regular 2-3% inflation years. Having debt helps but not immediately. Not sure how to plan for a 70s staglation period except by cutting spending.