# The Money Mustache Community

## Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: ender on September 11, 2015, 05:34:27 PM

Title: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: ender on September 11, 2015, 05:34:27 PM
I am trying to do a thought experiment. What would it take to have the same standard of living from 1965 (or an arbitrary date, but let's pick 50 years ago) in 2015?

Simply using CPI has a lot of flaws for this sort of purpose, since it basically self-adjusts based on what people actually are spending and attempts to self-corrects for increased standards of living. As an example of what this effect is, look at Example 6 (http://www.bls.gov/cpi/cpihqaqanda.htm) and how the "before/after" price for a 27" CRT vs a 42" Plasma TV are effectively adjusted to be account for this.

Even though the price increased 5x for the additional quality/size, the way CPI treated it results in a slight decrease in cost (-7.1%). However had this person not chosen to upgrade (the scenario I am interested in understanding) it would have resulted in a more significant drop in CPI as CRTs basically have become free.

From an absolute perspective this means that the quality of life before (a small CRT TV) is inflated into a Plasma TV for purposes of calculating CPI. I don't "care" about this value increase in my question here - I would rather take a 27" CRT (let's pretend that was in 1965) and calculate what that TV would cost me in 2015 (or in our case probably the cheapest LCD/Plasma equivalent). And not factor in what the current best TV replacement/upgrade would cost.

CPI does the latter - its calculated, obviously, based on items people are purchasing. Using hedonic regression algorithms they attempt to weight the index based on the increases in quality when that quality comes with cost increases.

I am wondering if there is any way to effectively factor this out of the "pseudo CPI" as I am interested in to more directly answer:
• How much money (in 2015 dollars and products) would it take to live a lifestyle common during 1965?

The reasons I want to do this are to understand the interactions of calculated CPI inflation (since we can easily obtain this) and lifestyle inflation (or lack thereof) on an FIREd person.

My speculation is that by choosing to avoid lifestyle inflation, one has a much lower "personal inflation" rate than what CPI will indicate. Depending on how different, it could have significant implications on planning ER.
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: forummm on September 11, 2015, 05:45:55 PM
This is a really complicated question. Is this a thought experiment or something practical? A lot of stuff didn't exist in 1965 (cell phones, the Internet, a lot of expensive medical care and drugs, etc). Would you forgo those things in retirement? If not, then it doesn't matter what it would have cost you in 1965. You care about what you are actually spending money on today, and what you will spend money on tomorrow. I think CPI inflation is a reasonably good benchmark. If your "personal inflation" were lower, it wouldn't be lower enough to really make that much difference in your success rate if any. If your spending increases at 0.5% slower than CPI, that's the same as having a 3.99% WR instead of 4% within the first 5-10 years (the period that matters for success rates). Market sequence of returns will dictate that. If you do a 4% WR you should be fine.
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: Retire-Canada on September 11, 2015, 05:52:28 PM
Use Google and generate an itemized list of what a 1965 lifestyle looked like and what it costed then. You'll have to decide what sort of 1965 lifestyle to model. Like now there was a great deal of variation.

These numbers came from the first few links I looked at:

- avg income \$6,450/yr
- avg cost of a new car \$2,650
- gas \$0.31/gal
- avg rent \$118/month
- Candy bars like a Hershey or M&M's 5 cents
- Newspapers 5 cents for daily / 15 cents for Sunday
- A Comic Book was like 12/14 cents
- Toothpaste Crest 50 cents
- Tide Laundry Soap 59 cents
- Skippy Peanut Butter 79 cents
- Porterhouse Steak \$1.19 per pound
- Pack of chewing gum 5 cents
- Margarine 31 cents per pound
- Ice Cream 79 cents half gallon
- Ground Beef 45 cents per pound
- Gerbers baby Food 25 cents for 3
- Fast Food Hamburger 20 cents
- Cambells Soup 89 cents for 6 cans
- McDonald's hamburger
--- [1964]--15 cents
--- [1968]--18 cents
- [1964] Daily Record, Coca Cola, .27 cents, two 12 oz cans
- Nabisco's Oreo cookies [1965] 43 cents/lb

Then you can map those costs onto what they are today.

Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: bacchi on September 11, 2015, 05:59:17 PM
Use Google and generate an itemized list of what a 1965 lifestyle looked like and what it costed then. You'll have to decide what sort of 1965 lifestyle to model. Like now there was a great deal of variation.

These numbers came from the first few links I looked at:

- avg income \$6,450/yr
- avg cost of a new car \$2,650
- gas \$0.31/gal
- avg rent \$118/month

Then you can map those costs onto what they are today.

Yeah, and maybe use avg income as the multiplier.*

The average household income was \$51939 in 2013, giving us 8.05x.

Car: 2650 * 8.05 = \$21332
Rent: 118 * 8.05 = \$949
TV: 249 * 8.05 = \$2004 (!)

* If you're not using CPI, what's the best way to scale the numbers? Using the income multiplier just keeps the same percentages for each category. Is that relevant?
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: Retire-Canada on September 11, 2015, 06:19:33 PM

Yeah, and maybe use avg income as the multiplier.*

You don't need to scale the numbers you just need 1965 costs and costs in 2015 which you get from current websites. That tells you your inflation and you can compare to CPI.
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: Learner on September 11, 2015, 06:44:00 PM
I think as inflation increases we will see more separation in goods pricing.  Consider the cost for the newspaper and pack of gum.  I virtually never buy either, so I'm not current on prices, but I'd be willing to bet they didn't map exactly (partly influenced by changes in tech to make newsprint obsolete, but the general idea applies to most goods).

I'm no economist, but I suspect as the goods gap widens, there will be knock-on effects with entire industries being hit pretty hard.  May be happening now - not something I normally pay attention to, just thought about it a bit on a recent long drive.
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: ender on September 11, 2015, 06:50:46 PM
This is a really complicated question. Is this a thought experiment or something practical? A lot of stuff didn't exist in 1965 (cell phones, the Internet, a lot of expensive medical care and drugs, etc). Would you forgo those things in retirement? If not, then it doesn't matter what it would have cost you in 1965. You care about what you are actually spending money on today, and what you will spend money on tomorrow. I think CPI inflation is a reasonably good benchmark. If your "personal inflation" were lower, it wouldn't be lower enough to really make that much difference in your success rate if any. If your spending increases at 0.5% slower than CPI, that's the same as having a 3.99% WR instead of 4% within the first 5-10 years (the period that matters for success rates). Market sequence of returns will dictate that. If you do a 4% WR you should be fine.

Maybe I'm misunderstanding this.

Somewhat simplifying, if CPI calculated inflation is 2.5%, with a SWR of 4% I need market returns of roughly 6.5% a year average to sustain my portfolio.

If my effective inflation is say 2%, then I only need 6% average returns.

Am I misapplying that?

Use Google and generate an itemized list of what a 1965 lifestyle looked like and what it costed then. You'll have to decide what sort of 1965 lifestyle to model. Like now there was a great deal of variation.

Hmmm. Maybe I could take what I buy now and try to go backwards to get prices then. If I did this with enough things I could get a rough estimate of this..
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: bacchi on September 11, 2015, 06:56:00 PM

Yeah, and maybe use avg income as the multiplier.*

You don't need to scale the numbers you just need 1965 costs and costs in 2015 which you get from current websites. That tells you your inflation and you can compare to CPI.

So compare what you spent in 2015 and what you would've spent in 1965? A VW beetle cost ~\$1500 in 1965, new. Compare that to what you would've spent in 2014. Let's say a Yaris at \$15000.

There's still some hedonism there, though. Speed, safety, and comfort are all in favor of the Yaris.
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: beltim on September 11, 2015, 07:09:23 PM
I would use categories that have not changed very much, and calculate as a percentage of salary.  For example, food represented 17.5% of spending in 1960, but just 9.6% in 2007: http://www.npr.org/sections/thesalt/2015/03/02/389578089/your-grandparents-spent-more-of-their-money-on-food-than-you-do

Or clothes, which took up 10.4% of household spending in 1960 but just 4.2% of household spending in 2002: http://www.bls.gov/opub/uscs/
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: Eric on September 11, 2015, 07:33:07 PM
My speculation is that by choosing to avoid lifestyle inflation, one has a much lower "personal inflation" rate than what CPI will indicate. Depending on how different, it could have significant implications on planning ER.

I have no idea how to calculate it either, but I also had this same suspicion.  I felt like my own personal inflation number will be less than the official inflation, because whatever I buy is carefully shopped for now (and will be even more so in FIRE) and I'm pretty good at doing without if necessary.  So if the CPI says computers increased from \$900 to \$1000 over the last year, that has to be an average number of all computers sold.  If I wait and buy my computer on sale at \$925, my inflation was lower than the official measure.  I assume this is what you're getting at, right?

However, others around here (BrooklynGuy I think) have argued the opposite.  That if your spending is very low, most of it is on necessities, that makes you more susceptible to inflation because if your health insurance goes up by 10%, that's 20% of your budget where for a spendypants it'd only be 5%.  (or whatever)  So the inflation of necessities could affect you more than the official amount while the inflation of luxuries could affect you less.

So I'm guessing that it will mostly even out.  I hope we can come up with a way to make this more than just a guess.
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: forummm on September 11, 2015, 08:20:14 PM
This is a really complicated question. Is this a thought experiment or something practical? A lot of stuff didn't exist in 1965 (cell phones, the Internet, a lot of expensive medical care and drugs, etc). Would you forgo those things in retirement? If not, then it doesn't matter what it would have cost you in 1965. You care about what you are actually spending money on today, and what you will spend money on tomorrow. I think CPI inflation is a reasonably good benchmark. If your "personal inflation" were lower, it wouldn't be lower enough to really make that much difference in your success rate if any. If your spending increases at 0.5% slower than CPI, that's the same as having a 3.99% WR instead of 4% within the first 5-10 years (the period that matters for success rates). Market sequence of returns will dictate that. If you do a 4% WR you should be fine.

Maybe I'm misunderstanding this.

Somewhat simplifying, if CPI calculated inflation is 2.5%, with a SWR of 4% I need market returns of roughly 6.5% a year average to sustain my portfolio.

If my effective inflation is say 2%, then I only need 6% average returns.

Am I misapplying that?
Let's say Person A is spending \$100 in year one and CPI is 2.5%. In year 2 it's \$102.5 with CPI. Let's say Person B has a different inflation rate that's 2%. So in year 2 they are spending \$102. That's only 0.5% more money total. If the stash was \$2562.50, Person A would have a 4% WR for year 2. And Person B would have a 3.98% WR for year 2. Over a really long time that would make more of a difference. But over a really long time your portfolio success is already baked in as a result of the early retirement market returns.
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: Thegoblinchief on September 11, 2015, 08:27:50 PM
Interesting discussion.

Worth adding to the already complicated consideration that there are "success" years in the Trinity Study where, after 30 years of 4% SWR the portfolio wasn't "preserved", it was merely a value above zero. For early retirees with periods exceeding 30 years you need to outpace inflation by a bit higher margin than a traditional retiree.

But I suppose no one wants another "4% Rule" derailment.
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: forummm on September 12, 2015, 06:03:56 AM
Interesting discussion.

Worth adding to the already complicated consideration that there are "success" years in the Trinity Study where, after 30 years of 4% SWR the portfolio wasn't "preserved", it was merely a value above zero. For early retirees with periods exceeding 30 years you need to outpace inflation by a bit higher margin than a traditional retiree.

But I suppose no one wants another "4% Rule" derailment.
It depends. For us, SS will probably cover our expenses, and we'll have around 30 years post RE until we get there. And the 4% rule assumes you don't make any changes along the way to react to the market fluctuations (which is not how I would live) and don't make any other income (which I would be surprised if I never made any money again ever just for fun). I think it's plenty conservative. And it's only in some very rare cases where the portfolio is exhausted, and the early market returns (first 5 or 10 years) will let you know if you're on one of those likely to fail or exhaust the portfolio cycles so you can make course corrections much earlier.
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: ender on September 12, 2015, 08:02:35 AM
Interesting discussion.

Worth adding to the already complicated consideration that there are "success" years in the Trinity Study where, after 30 years of 4% SWR the portfolio wasn't "preserved", it was merely a value above zero. For early retirees with periods exceeding 30 years you need to outpace inflation by a bit higher margin than a traditional retiree.

But I suppose no one wants another "4% Rule" derailment.

This is kind of what I was wondering.

It's not so much the short term implication of next year, but longer term implication because of cumulative inflation.

A personal inflation rate of 2% vs a CPI rate of 2.5% seems like that you have about 16% more buying power at the end of your 30 years (1.025^30 / 1.02^30), ignoring any additional money you'd have from non-spent money during that time.

Or perhaps a different way to think of it is if you imagine inflation as a yearly expense against your portfolio:

• \$1,000,000 * 0.025 = \$25,000 / year
• \$1,000,000 * 0.020  = \$20,000 / year

If you are only spending \$30,000 a year to start, that means the net loss to your portfolio in terms of purchasing power would be \$50k vs \$55k.
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: NorCal on September 12, 2015, 08:09:42 AM
For long-term cost of living comparisons, percent of income calculations are best.

For example, in 1965, the average household spent x% on food and y% on housing and z% on clothes compared with those ratios for today.
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: forummm on September 12, 2015, 11:55:54 AM
Interesting discussion.

Worth adding to the already complicated consideration that there are "success" years in the Trinity Study where, after 30 years of 4% SWR the portfolio wasn't "preserved", it was merely a value above zero. For early retirees with periods exceeding 30 years you need to outpace inflation by a bit higher margin than a traditional retiree.

But I suppose no one wants another "4% Rule" derailment.

This is kind of what I was wondering.

It's not so much the short term implication of next year, but longer term implication because of cumulative inflation.

A personal inflation rate of 2% vs a CPI rate of 2.5% seems like that you have about 16% more buying power at the end of your 30 years (1.025^30 / 1.02^30), ignoring any additional money you'd have from non-spent money during that time.

Or perhaps a different way to think of it is if you imagine inflation as a yearly expense against your portfolio:

• \$1,000,000 * 0.025 = \$25,000 / year
• \$1,000,000 * 0.020  = \$20,000 / year

If you are only spending \$30,000 a year to start, that means the net loss to your portfolio in terms of purchasing power would be \$50k vs \$55k.
The inflation only occurs as a percent of your actual spending--not as a percent of your total portfolio. So even if you went 30 years out, using the 2.5% and 2% inflation estimates, and a 40k initial spend, your total spending is only 15% different at \$81k vs \$71k (comparable to a 4% and a 3.4% WR), but by 30 years out, you've already won the game.
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: Paul der Krake on September 12, 2015, 12:01:06 PM
Trying to precisely calculate inflation is pointless as there is no perfect basket of goods that perfectly reflects the unique necessities, tastes, preferences, and evolving circumstances of people's lives.
Title: Re: What ways (not CPI) can compare the costs for living a 1965 lifestyle, in 2015?
Post by: ender on September 12, 2015, 12:40:59 PM
I believe the inflation rate is held down in part by a flood of cheap manufactured "stuff" that's imported. If you're spendy, you're probably buying more of those consumer goods. But I find myself buying less and less stuff as I get older and have accumulated possessions already. So I'm stuck spending most of my money on things that inflate faster and are harder to avoid: food, medical care, etc.

From what I've looked up, many food items are very comparable if not cheaper today than the CPI calculated inflation puts them at.

CPI has about a 6.5x multiplier for income in 1967 to today, so prices from then should be about that much higher:

 Item 1967 Price 2015 estimated Gallon of milk \$1.10 \$7.15 Gallon of gas \$0.35 \$2.28 Dozen eggs \$0.62 \$4.03 Loaf of bread \$0.20 \$1.30 Pound of pork chops \$1.03 \$6.70 six pack of pepsi \$0.59 \$3.84 5 Pounds sugar \$0.63 \$4.10 pound of chicken \$0.37 \$2.41 Pound ground beef \$0.45 \$2.93 Pound margarine \$0.31 \$2.02 1/2 Gallon Ice Cream \$0.79 \$5.14 New car \$2650.00 \$17225.00

Everything there is either cheaper today, considerably better quality (such as cars), or same price. I'm not sure what "loaf of bread" means but you can definitely get cheap loaves of bread for that price now. Not a fancy loaf though.

The inflation only occurs as a percent of your actual spending--not as a percent of your total portfolio. So even if you went 30 years out, using the 2.5% and 2% inflation estimates, and a 40k initial spend, your total spending is only 15% different at \$81k vs \$71k (comparable to a 4% and a 3.4% WR), but by 30 years out, you've already won the game.