Author Topic: thinking about inflation  (Read 6387 times)

intently

  • 5 O'Clock Shadow
  • *
  • Posts: 22
thinking about inflation
« on: May 09, 2013, 08:23:31 PM »
So what do you folks think about inflation?  I've never seen MMM address it on the blog.

Considering the US financial picture and the ongoing 0% interest rates, it seems to me that there's a pretty strong argument for carrying as much low-interest fixed-rate debt that you can spend on investments.  Obviously credit card debt and consumer purchases are wasteful, but should mortgages and student loans with low, fixed interest rates really be paid off ASAP?

When/if inflation kicks in that debt will plummet in value while your salary and equity investments float with inflation (in theory).

spoonman

  • Handlebar Stache
  • *****
  • Posts: 2291
  • Location: PNW
Re: thinking about inflation
« Reply #1 on: May 09, 2013, 10:38:41 PM »
Inflation is an very complicated problem.  I think the best thing one can do is understand one's "relationship" to inflation and plan accordingly.  My investments (dividend paying stocks) are an excellent hedge against inflation, but beyond that things get tricky.

I haven't bothered killing my $10K student loan because the interest rate is only 1.8% and I can get a better interest rate from dividend stocks (though that's getting more challenging in today's richly valued market).  Same deal with the house.


Joet

  • Guest
Re: thinking about inflation
« Reply #2 on: May 09, 2013, 10:40:16 PM »
Looks like deflation is the bigger macro risk at this point.


arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27784
  • Age: -999
  • Location: Traveling the World
Re: thinking about inflation
« Reply #4 on: May 10, 2013, 07:04:07 AM »
Inflation is the early retiree's number one enemy, far beyond market crashes (which has been proved out historically via FIRECalc).

Inflation hurts a saver living on investments.  If you're still working, wages will rise.  If you have a fixed income, ouch.

Anyone planning on retiring early better have a darn good plan for inflation, IMO, or they'll be hitting portfolio failure hard (even as their portfolio grows in nominal dollars, it'll be shrinking in real dollars).
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

intently

  • 5 O'Clock Shadow
  • *
  • Posts: 22
Re: thinking about inflation
« Reply #5 on: May 10, 2013, 07:36:20 AM »
Inflation is the early retiree's number one enemy, far beyond market crashes (which has been proved out historically via FIRECalc).

Inflation hurts a saver living on investments.  If you're still working, wages will rise.  If you have a fixed income, ouch.

Anyone planning on retiring early better have a darn good plan for inflation, IMO, or they'll be hitting portfolio failure hard (even as their portfolio grows in nominal dollars, it'll be shrinking in real dollars).

Yeah, this is my real fear about planning for early retirement.  I think we're experiencing significant inflation right now, despite the official numbers.  There's no way that the fed raises interest rates while the government is running trillion dollar annual deficits and refinancing our national debt into short-term bonds as fast as possible.  I don't see how this doesn't lead to inflation as soon as the job market heats up.  Despite all the political "laser focus" on jobs, a significant increase in employment right now could bring on a nightmare inflation scenario.

So yes, dividends are great, and I'm fully invested in equities right now.  I'm just debating whether or not I should pay down my low-rate fixed-interest debt or not.  I'm leaning towards not.

I really don't see deflation as a big risk considering how much debt the US government has.

twinge

  • Bristles
  • ***
  • Posts: 326
Re: thinking about inflation
« Reply #6 on: May 10, 2013, 10:20:07 AM »
Quote
So yes, dividends are great, and I'm fully invested in equities right now.  I'm just debating whether or not I should pay down my low-rate fixed-interest debt or not.  I'm leaning towards not.

I'm holding onto low rate debt  and directing assets elsewhere even though I could conceivably pay it off further.  Am refinancing my house for another 30 year fixed right now even though I only have 19 years left on it now and could easily afford payments on a 15 yr mortgage.  There just seem to be better investment opportunities than paying off my 2.7 or 3.25% debt, and I'm guessing that in the not-so-distant future there will be rock solid secure bank rates giving off more than that and these low interest mortgages will be nowhere to be found.BUT I'm not so leaning that way that I'm withdrawing home equity to invest so I guess I'm hedging my bets that way.
Nonetheless, I don't think I've totally gotten a handle on an inflation plan as arebelspy describes, but I'm also in a career that I love that has a lot of flexibility so I'm not hell-bent on getting out (I more want to gain FI for my husband so we can enjoy my career flexibility)

ScubaAZ

  • 5 O'Clock Shadow
  • *
  • Posts: 62
  • Location: Phoenix, AZ
  • New Mustachian looking for FI by 40
Re: thinking about inflation
« Reply #7 on: May 10, 2013, 12:14:42 PM »
Obviously credit card debt and consumer purchases are wasteful, but should mortgages and student loans with low, fixed interest rates really be paid off ASAP?


Current student loan interest rates are not low (mine are 6.8%), which is ridiculous when other interest rates are quite low.  My plan once my credit cards are paid off is to pay off chunks of student loans with 0% offers on my credit card.  I think someone else here mentioned this the other day, if you can do it and pay it off within the special rate period.  Anyone see any problems with doing this, other than the potential for not paying it off in time?

I almost think it would be worth trying to roll it into your mortgage if you had enough equity.  I know the traditional rule is to not make unsecured debt secured, but since you really can't ever get out of student loans unless you die, it might almost be better in that you could allow the mortgage to foreclose, whereas you'll never get out of the student loans.  (I'm not advocating for strategic defaults, I'm just thinking through the possible downsides of doing this).  Its a moot point for me at this point, since the equity in my house is nowhere close to what I owe in student loans.

intently

  • 5 O'Clock Shadow
  • *
  • Posts: 22
Re: thinking about inflation
« Reply #8 on: May 10, 2013, 12:21:30 PM »
Current student loan interest rates are not low (mine are 6.8%), which is ridiculous when other interest rates are quite low.  ...

I almost think it would be worth trying to roll it into your mortgage if you had enough equity.  I know the traditional rule is to not make unsecured debt secured, but since you really can't ever get out of student loans unless you die, it might almost be better in that you could allow the mortgage to foreclose, whereas you'll never get out of the student loans.

My student loans are below 3% and fixed, so, yay for me :)

Also, I wouldn't pay off student loans with home equity.  If you die or are permanently disabled your student loans can be discharged.  If you pay them off with home equity, then your heirs will basically be stuck with your student loan bills.

ScubaAZ

  • 5 O'Clock Shadow
  • *
  • Posts: 62
  • Location: Phoenix, AZ
  • New Mustachian looking for FI by 40
Re: thinking about inflation
« Reply #9 on: May 10, 2013, 12:40:31 PM »
Ah yes, I guess thats true.  I suppose since I currently don't have heirs, I wasn't thinking about what would be in their best interest.  But as a long term strategy, that is an excellent point.  If you are permanently disabled but independently wealthy (or at least have some substantial assets), will they still discharge the loans?

tomsang

  • Handlebar Stache
  • *****
  • Posts: 1085
Re: thinking about inflation
« Reply #10 on: May 10, 2013, 06:30:52 PM »
Ah yes, I guess thats true.  I suppose since I currently don't have heirs, I wasn't thinking about what would be in their best interest.  But as a long term strategy, that is an excellent point.  If you are permanently disabled but independently wealthy (or at least have some substantial assets), will they still discharge the loans?

If you need an heir, you can sign me up:)

intently

  • 5 O'Clock Shadow
  • *
  • Posts: 22
Re: thinking about inflation
« Reply #11 on: May 13, 2013, 09:51:07 AM »
I'm the one who made the point, I get to be heir!

As for discharging a loan when you've got a lot of assets... I don't know for sure, but everything I've read implies they only care about your ability to earn.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1173
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: thinking about inflation
« Reply #12 on: May 13, 2013, 10:34:53 AM »
Yes, some loans are effectively free money, and the ratio, and where you borrow from, are portfolio issues. Even with a million net worth right now, you'd be crazy not to have a 30 year fixed mortgage IMHO.

Problem can be that people don't actually offset the debt with investments. They use the debt to increase consumption. Classic example: living in a too big and expensive house because 'rates are so low, and the interest is tax deductible'. That's bull. The house you live in is not an asset. But owning it may give you the option to borrow quite a lot of money at artificially low rates.

In the end it's all about your net asset vs liabilities, and cashflow and portfolio yield.

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 5376
  • Location: Fayetteville, NC
Re: thinking about inflation
« Reply #13 on: May 13, 2013, 10:44:17 AM »
There will almost certainly be significant inflation in the US over the next 20 years.

I see almost no chance of a Dave Ramsey style approach to paying off the national debt.  I expect it to increase instead.

Inflation allows the government to pay off the debt cheaply.  It also allows it to pay social security to the aging baby boomers, even though the larger payments will be worthless.  There will be increasing attempts to reduce the linkage between cost of living and social security payments.


footenote

  • Pencil Stache
  • ****
  • Posts: 801
  • MMMing in MN
Re: thinking about inflation
« Reply #14 on: May 14, 2013, 08:26:52 AM »
True that, Swordguy. One of the best ways the feds can cope with the retirement costs of Boomers is to inflate the dollar and pay off the obligation with cheaper dollars. Boomers heavily dependent on SS and/or pensions (particular public pensions) will experience significantly less purchasing power.

My ER planning includes hefty chunks of investments that will keep up with or outright beat the inflation I'm reasonably confident will occur.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1173
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: thinking about inflation
« Reply #15 on: May 14, 2013, 03:08:16 PM »
True that, Swordguy. One of the best ways the feds can cope with the retirement costs of Boomers is to inflate the dollar and pay off the obligation with cheaper dollars. Boomers heavily dependent on SS and/or pensions (particular public pensions) will experience significantly less purchasing power.

My ER planning includes hefty chunks of investments that will keep up with or outright beat the inflation I'm reasonably confident will occur.

One guaranteed investment to match inflation is I Bonds, from the treasury. They only hold their value against inflation, over 30 years. Limit is 10k per person per year. I wouldn't recommend them, but they are inflation proof.

http://www.dispatch.com/content/stories/business/2013/04/28/i-bonds-safe-but-hardly-lucrative.html



ScubaAZ

  • 5 O'Clock Shadow
  • *
  • Posts: 62
  • Location: Phoenix, AZ
  • New Mustachian looking for FI by 40
Re: thinking about inflation
« Reply #16 on: May 15, 2013, 04:12:53 PM »
Ah yes, I guess thats true.  I suppose since I currently don't have heirs, I wasn't thinking about what would be in their best interest.  But as a long term strategy, that is an excellent point.  If you are permanently disabled but independently wealthy (or at least have some substantial assets), will they still discharge the loans?

If you need an heir, you can sign me up:)
I'm the one who made the point, I get to be heir!

As for discharging a loan when you've got a lot of assets... I don't know for sure, but everything I've read implies they only care about your ability to earn.

Haha!  Right now, I'm about $30k away from there being anything to inherit but I'll keep you guys in mind :)