Inflation Adjustment?

[firelyve]

Fellow Mustachians who have made it to the other side...

Are your living expenses actually increasing at 2% per year, as the posted rate of inflation?  In other words, if you need say $25,000 at year 0 of your RE, are you actually going to be withdrawing approximately $31,542 in year 7 (simple calculation adjusting for 2% inflation)? 

Are you withdrawing about the same amount of money each year that you started at (in this example, $25,000)? 

Is the 2% figure about right?

Or, are you withdrawing more?  That is, your experience is that things are getting more expensive much faster than the 2% the Fed is targeting or says is occurring?

Thanks for you responses!

[Metalcat]

Not FI myself, but I work with a lot of people who are retired and the overwhelming majority spend less than they planned to. Most retirement budgets have a lot of fat in them, and most people will modulate this fat so as not to increase their spending year to year.

To answer your actual question, inflation will affect your budget more based on how much you spend on things most affected by inflation.

For example, if you are carrying a mortgage in retirement, try that will stabilize an enormous proportion of your spending relative to inflation. Gas prices also don't really fluctuate according to inflation, so if gas is a major expense, that too will deviate your spending pattern from the inflation pattern.

There's also the affect of spending choices. Overall consumer goods may be affected by a general inflation rate, but that assumes indiscriminate buying. Of you modulate your spending to take advantage of periodic dips in the cost of specific things, you won't ride the general inflation wave as much.

For example, the cost of travel may rise steadily, but if you choose to stay at a destination that's unusually cheap because the main attraction is down for maintenance, you aren't riding the same cost wave as everyone else.

Add to that that retirement budgets are designed to fluctuate. No one I've ever met spends their entire allotted yearly amount down to the penny because baked into that amount is occasional large expenses, like replacing a roof or a major car repair, ie things that don't happen every year.

Basically, your spending will rise with inflation if that's the model you choose to follow.

[MDM]

Don't know about all individuals, but our spending is "noisy" enough that determining our personal inflation rate would be an exercise in futility.

[nereo]

FWIW Micahel Kitces wrote a series of blog posts where he examined the actual spending of retirees and found that  - on average - they spent progressively less each year of retirement, and that this inflation-adjusted decline continued into the third decade of retirement.  Retirees spent progressively more each year on healthcare but that was more than offset by declines elsewhere in their budget. Affluent retirees on average had reduced their spending by ~20% (real adjusted) after 15 years of retirement.

Caveats: the population he was looking at were closer to the traditional retirement age, and generally more spendy than people on this forum. Not everyone will follow this trend.

https://www.kitces.com/blog/age-banding-by-basu-to-model-retirement-spending-needs-by-category/

[bacchi]

No, we don't see inflation. My personal spending has increased lower than the CPI for years.

Now, if a roof needed replacing, it might be obvious. I expect construction prices have exceeded inflation.

[firelyve]

Thanks everyone!  That really puts my mind at ease.  Much better to look at the types of expenditures and how they might be affected by inflation.

Of my $43,500 projected yearly budget:

$6000 Housing ($3600 for repairs, remaining $2400 taxes/insurance; no mortgage, house is only 1000sf)
$4800 Utilities ($1800 on cable/internet which we should be able to cut drastically when our current contract is up)
$5700 Car ($900 insurance, $1200 gas (could conceivably cut gas in half), $3600 repairs/new car savings)
$8400 Groceries, Personal, Household Items ($5400 groceries for 3 + $1200 Costco, $1200 clothes, $600 misc)
$8100 Healthcare ($6000 insurance for 3 w/subsidy, $75 gym memberships, $1200 vitamins/supplements)
$1200 Cell Phone (2 phones)
$1200 Entertainment (travel, eat out)
$5100 529 Plan (12 years then 0 as daughter is 8, total of $60,000 for college fund + appreciation)
$3000 Misc (even more 'fat' in budget)

I'm thinking that inflation will have minimal impact on me after this discussion.  Let me know if you think I'm off.  Thanks!

[secondcor521]

My personal rate of inflation, as measured over 10 years of Quicken data, is 0.5% per year.  A large part of that low rate is because my two largest expenses - mortgage and child support - did not increase with inflation.  Now that I've paid off my mortgage, my child support is almost done, and I'm done saving for my kids' college expenses, I spend about the same or less as I have historically but have a better standard of living.

Do note that if you believe in the 4% rule, it is based on increasing spending by the rate of inflation, typically measured by the CPI.  So if you have saved up 25 times expenses, the 4% rule says you can retire and spend that amount over the next 30 years and increase it for inflation and not run out of money 95% of the time (assuming you're invested reasonably - somewhere between 30% and 70% stocks).

[BicycleB]

I think you should prepare for normal inflation, such as 2%/year.

My experience is that some costs go up less than that, but others increase more than that. Most of your costs are ones that ordinary inflation can affect.

[Laserjet3051]

Our family's personal rate of inflation is very different than the next persons is, or for that matter, the official CPI calculation, as our "basket of goods" seems different than the official basket.

YOY, our inflation rate is far above that reported for the US due largely to the following expenditures, listed in order of their contribution:

-healthcare (we are fully exposed to ACA insurance premium costs which have had meteoric rises over the past few years, so much so, you wouldnt believe me if I told you, factor in the hefty co-pay increases YOY and we are looking at >$25K/year to cover a healthy family of 4)

-housing (as renters we have chosen to eat the annual leasing increases rather than progreessively down size every year by moving)

-energy (in CA, gasoline and electricity costs have been going up [on average] well over 2% per year).

We are neither FI nor RE.

[Prairie Stash]

In year 13, you project a drop in spending of $5100. For limited time expenses its more appropriate to say you need $60k, then its done. Its immune to inflation and not part of your core budget. If you apply the 4% rule to $43,500 you need $1,087,500. If you apply it to ($43,500-$5100) you need $960,000 plus $60,000; $1,020,000. That's a $67,500 discrepancy, not too shabby of a buffer. Its just a different perspective, plotting your budget with time and accounting for inflation leaves year 13 with over funding.

Back to inflation; CPI is the measure of everyone's inflation including spendypants and frugal types based on buying a set basket of goods. In my inflation beating way, I guarantee that electric will never outpace inflation, if it does it bolsters the case for solar panels and then I'll lock in 25 years of power; similiar to locking in mortgage costs. In fact, if panels keep decreasing, then I'll beat inflation anyhow by decreasing my electric costs. Its a perk of being rich, you have the opportunity to seize upon expensive opportunities, its a lot easier to beat inflation when you're rich. That's a single way to do it, more options exist.

Since hitting semi-retired this year I've noticed several expenses decrease. I predict that 5 years hence my total expenses will be less than last year (when I worked). Your budget is similiar to mine ($30k/year) except I broke out $5000 in education savings (limited expense), I don't have $6000 in health insurance (CDN), my utilities are $3,300 ($1500 less) and otherwise we are close.

I also put a $3000 slush fund into the system, I hate calculating too closely. The last several years I was well under $30k when I removed daycare and education savings (daycare dissipated upon retiring and the education was a simple lump sum set aside and trickled in over years for tax efficiency).