Author Topic: Inflation assumptions  (Read 494 times)

frugaldrummer

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Inflation assumptions
« on: November 27, 2019, 07:00:34 AM »
Since Iím getting close to retirement, I like to run estimates with various tweaks (different ages at retirement, part time work after, etc.) on the Ultimate Retirement calculator (yes, I know all about fire stim etc). I like being able to put in different estimates.

Usually I use 3% inflation  and estimate for investment growth if 6%, 3% above inflation. Today I tried 2% inflation and 5% investment growth. I thought the outcome would be similar  because thereís still a 3% spread between inflation and investment return, but it actually resulted in a $300k excess.

There are three components to my retirement:
-Social security - Iíve been estimating COLA at just 2%. If I reduce that estimate to 1% ( to maintain a 1% spread between actual inflation and SS COLA) I still come out with $130k excess.

- A sizable pension without COLA

- money in retirement accounts

My guess is that the biggest reason for the difference in estimates is that, in a low inflation environment, my pension doesnít decline in value as quickly. And that therefore experiencing low inflation in the early years of retirement would have a bigger beneficial effect for me than most?


MDM

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Re: Inflation assumptions
« Reply #1 on: November 27, 2019, 09:17:20 AM »
My guess is that the biggest reason for the difference in estimates is that, in a low inflation environment, my pension doesnít decline in value as quickly. And that therefore experiencing low inflation in the early years of retirement would have a bigger beneficial effect for me than most?
Probably a good guess.

acepedro45

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Re: Inflation assumptions
« Reply #2 on: November 27, 2019, 11:56:52 AM »
I think you're on the right track as well. As a thought experiment, imagine what happens if you have 10000% inflation. Your pension with no COLA is suddenly worthless. Elsewhere, you might find solace that your stocks and other assets have more or less gained the 10000% but for your pension you're SOL.