Author Topic: How do you factor in inflation in your future projections  (Read 2503 times)

ecmcn

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How do you factor in inflation in your future projections
« on: August 22, 2014, 11:38:39 AM »
I'm putting together a spreadsheet to estimate both my path to FI and post-retirement life, and I'm curious how others have incorporated inflation into their calculations. Do you find it more helpful to do everything in today's dollars and adjust rates of return down, or do you increment salaries, budgets, etc up with inflation? I can see advantages in both approaches, and I guess it'd be easy enough to just have a cell with the inflation rate that can toggle between the two.

Eric

tyd450

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Re: How do you factor in inflation in your future projections
« Reply #1 on: August 22, 2014, 11:41:20 AM »
I think you basically use an inflation adjusted rate for all of your earnings.  I think the number MMM typically uses is 5%.  Most people expect in the 7-8% average return based on historical models, right?  So the 5% would be a conservative inflation adjusted rate to use.

Jack

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Re: How do you factor in inflation in your future projections
« Reply #2 on: August 22, 2014, 11:43:14 AM »
I do all calculations in today's dollars and assume interest rates net of inflation.

DaKini

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Re: How do you factor in inflation in your future projections
« Reply #3 on: August 22, 2014, 12:40:32 PM »
I do it like jack. Having "the number" in todays dollar value helps me to get a feeling of the sum. Its also easier to calculate with.

shotgunwilly

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Re: How do you factor in inflation in your future projections
« Reply #4 on: August 22, 2014, 01:12:04 PM »
Long term average returns of the stock market are closer to 10% and long term inflation is around 3%.  It's impossible to know what will happen, but if you're looking at holding long term then I would say using 7% returns would be an acceptable way of factoring in inflation.

ecmcn

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Re: How do you factor in inflation in your future projections
« Reply #5 on: August 22, 2014, 02:29:20 PM »
Thanks all - today's dollars does seem like the best approach to me, too. As I get closer to FIRE it won't matter much. Which, based on some rough calculations I just did, I'll be damned if 10 years or less really does look obtainable. Imagine that.

Cottonswab

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Re: How do you factor in inflation in your future projections
« Reply #6 on: August 23, 2014, 06:31:02 AM »
IMO, it is better to calculate everything in future dollars.  Rates of inflation have historically varied widely for different things (education, healthcare, wages, CPI).  If you are serious about modeling, it will be easier to calibrate your model based on predicted vs. actual results.  If you want to see numbers in today's dollars, you can always add extra columns/rows with the converted values.