I'm curious as to how this works in real life. Of course we're all aware of the Trinity Study methodology of withdrawing a set amount increasing by inflation each year. Are you following this method? If so, do you simply look up CPI stats each year? And which CPI? Or do you track your local prices and adjust accordingly? Or maybe you haven't taken an inflation adjustment yet.
I realize that with this raging bull market it's probably not super important, but at some point it may be. Tell me about your plans and how you make (or plan to make) your inflation adjustments.
So no one actually calculates inflation? Or has a mechanism to adjust for it? That's a bit surprising to me, considering that inflation adjustments seem to be a cornerstone of just about every type of withdrawal plan.
That doesn't surprise me. People are not spending a fixed amount each year like robots and I bet most people set a high theoretical spending level for a safety margin so they'd have a fair while after FIREing before inflation caught up with their actual spending. Add some ongoing cost optimization and inflation effects are moot for many years.
I'm not surprised that people aren't spending the exact same thing every year. I'm surprised that no one seems to even have a mechanism to record and assess inflation. I was expecting to see a few different plans, but so far I'm not really seeing anything resembling a plan at all. Of course it doesn't matter much if inflation continues to be low, but that could certainly change. Or having a 2% or lower WR could certainly play into it too, but I'm definitely not working that long.
I was attempting to poll people to figure out my own plan, but it appears that I'll need to do all of my own research on this issue. Dammit.
Even if I don't use it to make adjustments to yearly spending, at the very least I'll want to know how inflation has affected my initial portfolio value after 5, 10, or 20 years. Even low inflation sneaks up on you on a long time frame. I certainly don't want to be stuck viewing my portfolio in 2017 dollars. And I think this is something that's inherently hard for humans to grasp. Ask any old person about what things should cost.
There's two sides to this issue, and a potential third issue is that you might possibly be overthinking it.
The first issue: applying national numbers to individuals. Actuaries can predict the length of a cohort's lifespan, but nobody can predict when an individual will die. In the same metaphor, the CPI has nothing to do with your personal inflation.
We started our FI 15 years ago with a retirement budget, and the first thing that happened was all of our expenses dropped. Our budget was based on history (with a conservative buffer) so it was higher than it needed to be. Of course our commuting expenses disappeared, and our driving expenses went down. In FI we took a victory lap but then overhauled all of our utility bills, insurance policies, and other non-discretionary expenses. We also changed some lifestyle like cooking more meals and eating less takeout.
We kept tracking our expenses (and updating the budget) but nothing turned into an inflationary budget-buster. Some years our expenses would be way up for travel (because we planned more travel) and other years we'd have a lumpy expense (like a home renovation) but overall our spending was less than inflation. (Our airline spending actually dropped because of travel hacking and having the time for slow travel during shoulder seasons.) Our electric bill could have grown with inflation but we bought a photovoltaic array and produce more than we use. (It had a five-year payback and is now "free electricity" for life.) Our phone bill could have grown but we ditched our landline for a smartphone.
The only bills that have reliably gone up have been property taxes, cable TV, and water/sewer. The first two haven't risen enough to make a difference (because Hawaii property taxes are low and so is our cable bill) and the third is caused by replacing Oahu's rotting sewage infrastructure.
Around 2015 (which included five months of overseas travel) we stopped tracking our spending. I still track our assets in Personal Capital, and I can look at our credit-card spending (we rarely use cash). Our spending has not risen with inflation, although it's gone up a bit since 2015. Our assets have risen faster than inflation.
Humans are not robots. Even if you withdraw 4% + CPI for a few years, you'll probably slow that down when your checking account balance keeps rising. If you run into a recession then you might even cut spending, although technically the studies say that's not necessary. Variable spending will save your ass(ets) and keep your portfolio from failing.
The second issue: asset allocation. If you're concerned about inflation, then invest in assets which can keep up with inflation.
Because of my military pension, we have a >90% asset allocation to equities. Our investment portfolio has actually grown faster than inflation (and faster than my pension COLA) despite starting our retirement in 2002 and riding out both that recession and 2008-09. In other words, no brilliant market timing took place or was even necessary. I can see that in another 5-10 years the dividends will cover the expense gap between my pension and our spending, and we'll no longer be touching the principle.
Not everyone wants an aggressive asset allocation, but there are plenty of blue-chip equity dividend funds whose dividends grow faster than inflation. Bond asset allocations can be invested in I bonds (although the investor limits mean that it takes a while) or TIPS. Retirees can buy a bare-bones inflation-adjusted annuity, or start with a SPIA to get through the first decade or two. The SPIA will erode with inflation but after two decades the sequence-of-returns risk will be darn near zero.
The possible third issue: you might be rethinking parameters that are already handled by the Trinity Study and the 4% SWR. Both of those account for historical inflation. If you insist on doing your own research dammit then you could replicate a lot of that with a Monte Carlo algorithm. (Monte Carlo tends to be more conservative than historical data, but you can synthesize a lot more data runs with MC.) Even despite inflation and robotic spending of the 4% SWR, at least 80% of the time your portfolio survived for at least 30 years.
You could watch your expenses and inflation for the first decade of FI's sequence-of-returns risk. However you could also compare your portfolio withdrawal rate over that decade, and you'll probably see that the %% is dropping as the portfolio grows faster than your spending (and faster than your personal CPI). By the time you get past the first decade, you may have a withdrawal rate that's below 3%-- and all of the research says that's sustainable for at least 50 years.
Here's a net-worth chart indexed to our FI=100%. Today, 18 years later, we're well over 200% and growing.
http://the-military-guide.com/hey-nords-hows-net-worth/