Hi all, when calculating my FI numbers, I'm always a bit confused when it comes to inflation. Should we include it or not, what is the best approach?
A simple example, say Dave spends 20k a year and is a firm believer in the 4% rule - so he targets an FI pot of 500k.
Based on the amount he is saving each year, he reckons he can reach FI in 5 years.
Assuming a 3% rate of inflation: in 5 years time, his spending is now £23,185 - so now he needs a pot of £579,637 ?
Even though his investments are also benefiting from inflation; since he is still accumulating, after 5 years his spending would have grown faster than his pot (relatively) and he would have a deficit?
I don't think I explained that very well, but hopefully somebody smart gets my point and can offer some wisdom.
My understanding is that after FI, then inflation would sort of cancel itself out but whilst still in the accumulation phase - I'm slightly confused.
Thanks in advance!