Author Topic: How do you combat inflation throughout retirement?  (Read 3421 times)

mike50

  • 5 O'Clock Shadow
  • *
  • Posts: 3
How do you combat inflation throughout retirement?
« on: June 08, 2014, 07:47:05 PM »
Hi everyone,

I'm 44 and I plan on retiring next year with $1.2 million in my savings account. I'm single, have a paid off home in San Diego, and no debt. I can spend around $30k - $45k/year comfortably. Problem is inflation would kill my standard of living as I grow older. I need advice on what I should invest in. I don't need to beat inflation, I just want to stay on pace with it so my standard of living doesn't depreciate + my principal isn't touched. Is this possible and realistic?

Could someone break this down for me?

sol

  • Walrus Stache
  • *******
  • Posts: 8476
  • Age: 42
  • Location: Pacific Northwest
Re: How do you combat inflation throughout retirement?
« Reply #1 on: June 08, 2014, 07:55:18 PM »
The standard retirement advice is that a 4% or less withdrawal rate, taken in the first year of retirement, can be indexed for inflation every year thereafter without running out over the course of a 30 year retirement.  You're 44, and will have social security to supplement your income before your 30 years is up.

4% of 1.2m is $48k/year.  Since your expenses are only 30-45k, you're set.  Take out $45k this year, and next year take out 45k plus whatever next year's inflation number is.  For example, if next year's CPI is 3%, then next year you can safely withdraw 1.03*45k = $46,350.  This protects your standard of living because your withdrawals increase every year. 

brewer12345

  • Handlebar Stache
  • *****
  • Posts: 1386
Re: How do you combat inflation throughout retirement?
« Reply #2 on: June 08, 2014, 08:00:47 PM »
Invest in a diversified portfolio that will stay ahead of inflation.  It ain't rocket science.

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3714
  • Age: 40
  • Location: USA
Re: How do you combat inflation throughout retirement?
« Reply #3 on: June 09, 2014, 12:35:50 PM »
Invest in a diversified portfolio that will stay ahead of inflation.  It ain't rocket science.

i.e.-stocks. At least 50% stocks. 75% stocks and 25% bonds will last at least 30 years based on what sol and brewer said.

DoubleDown

  • Handlebar Stache
  • *****
  • Posts: 1989
Re: How do you combat inflation throughout retirement?
« Reply #4 on: June 09, 2014, 12:36:55 PM »
Hi Mike, and welcome.

Yeah, you're likely going to need to move a healthy portion of your $1.2M into some investments with some growth to stay ahead of inflation. If you live for another 40-50 years, inflation could really decimate your savings if you're not getting some decent returns (and clearly you will get next to zero returns in a savings account).

Also, if you literally have $1.2M in a single bank savings account, you are well over the FDIC insurance limits, so make sure to spread your money around in the (probably unlikely) event your bank fails.

It's going to be difficult for anyone to suggest what exact asset allocation you should have since that will depend so heavily on your own goals, risk tolerance, etc. I'll throw out that a pretty conservative and simple allocation that many go with is "your age in bonds, the rest in stocks." Over history, that allocation has fared very well in providing returns that survive inflation and allow your portfolio to stay intact over a long period, but with far less volatility and risk than being more heavily or completely invested in stocks.

But like Sol said, with a paid-off house, expenses lower than 4% of your savings, and likely to receive SS one day, you are set and can afford to be very conservative in your investing while keeping up with inflation. You could even invest solely in treasury insured bonds, that I believe match inflation almost exactly and are guaranteed never to go down in value. I believe they they are designed to keep pace with inflation, and nothing more, so that $1M today will be worth $1M 50 years from now.

DoubleDown

  • Handlebar Stache
  • *****
  • Posts: 1989
Re: How do you combat inflation throughout retirement?
« Reply #5 on: June 09, 2014, 12:41:19 PM »
The standard retirement advice is that a 4% or less withdrawal rate, taken in the first year of retirement, can be indexed for inflation every year thereafter without running out over the course of a 30 year retirement.  You're 44, and will have social security to supplement your income before your 30 years is up.

4% of 1.2m is $48k/year.  Since your expenses are only 30-45k, you're set.  Take out $45k this year, and next year take out 45k plus whatever next year's inflation number is.  For example, if next year's CPI is 3%, then next year you can safely withdraw 1.03*45k = $46,350.  This protects your standard of living because your withdrawals increase every year.

Sol, am I missing something in your answer? If mike withdraws 4% every year (indexed for inflation) with all his money in a savings account, he'll run out of money in less than 25 years. He'll have to invest in something to keep up with or beat inflation, no?

shotgunwilly

  • Pencil Stache
  • ****
  • Posts: 547
Re: How do you combat inflation throughout retirement?
« Reply #6 on: June 09, 2014, 02:22:20 PM »
The standard retirement advice is that a 4% or less withdrawal rate, taken in the first year of retirement, can be indexed for inflation every year thereafter without running out over the course of a 30 year retirement.  You're 44, and will have social security to supplement your income before your 30 years is up.

4% of 1.2m is $48k/year.  Since your expenses are only 30-45k, you're set.  Take out $45k this year, and next year take out 45k plus whatever next year's inflation number is.  For example, if next year's CPI is 3%, then next year you can safely withdraw 1.03*45k = $46,350.  This protects your standard of living because your withdrawals increase every year.

Sol, am I missing something in your answer? If mike withdraws 4% every year (indexed for inflation) with all his money in a savings account, he'll run out of money in less than 25 years. He'll have to invest in something to keep up with or beat inflation, no?

Yes. He missed the most important point. Have your money allocated in investments which return a decent amount above inflation.