Author Topic: But Aren't We Ignoring Inflation's Impact on Our Cost of Living in Retirment?  (Read 15130 times)

Eric

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It wasn't specifically mentioned above, as we seemed to get de-railed by the massive amount of misinformation presented as fact, but to the OP, the Trinity Study also included results from non-inflation adjusted withdrawals.  If you foresee decreasing (real) expenses or have an inflation adjusted pension that kicks in or something similar, it could be interesting to look at.

Again, these are non-inflation adjusted withdrawals.  This is directly from the Trinity Study authors:





As you can see, you can reasonably plan to withdrawal more than 4% if you don't plan to adjust for inflation.  Up to 7% really.  However, that's not what most people refer to when referencing the Trinity Study (or the resulting 4% rule), because as you mentioned, it'd be a special case for you to be able to endure 30 years of decreasing spending power.  Most people refer to the inflation adjusted withdrawals, because it makes sense to attempt to maintain your standard of living.  Since inflation adjusted withdrawals are higher, they require a lower withdrawal rate.

So when anyone mentions the 4% rule, they are referring to this chart:



/\ that's where the "4% rule" comes from.  At a 50/50 stock/bond ratio or higher, you have an outstanding chance to have your money last 30 years.  This is how it became a "rule".  However, looking at charts is no substitute for reading and understanding the actual study and it's methodology.


On a general note, I fully agree with DoubleDown above that every single one of you needs to understand the how and why of the safe withdrawal rate testing and how it will apply to your own situation before you stop working.  If you have questions at all, I'd highly recommend that you read the actual study.  Many of you missed this apparently, plus as you can tell from some of the curt responses, we (in general) can get a little testy when someone starts claiming things that simply aren't true, especially when it comes to withdrawal rates.

kpd905

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Mrs Pete-  the 4% rule does account for inflation.  In periods of high inflation, stocks usually keep up with inflation so you still get a positive real return.  Not always, of course, and these are the few times when a 4% withdrawal fails historically.  But as sol pointed out, are you willing to work an extra 10 years to get to that ironclad 2% WR?

I will say that I've run cfiresim numbers at a 3.5 WR and it gets the success rate up in the high 90s.  That plus the flexibility that fa mentioned should make anyone feel pretty good.
Having watched my great-grandmother, whose husband left her with a PILE of money, die broke because of inflation, I'm not buying it. 

My plan involves about 7 years more to provide an iron clad buffer.

Did she keep it in a savings account or CDs or something?  Not sure what is really meant by a pile.  20 years expenses? 50 years expenses?

RetiredAt63

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"you are saying exactly the same thing I am."
Not quite, because we do have open "variable" rate mortgages as well.  Depending on the terms, you may or may not be able to switch to a locked in rate whenever you want.  But we don't have any mortgage where the rate is locked in for the whole amortization period (unless of course you are down to 5 years or less in total), so we just don't think in those terms.  But yes, a mortgage could come up for renewal at a really bad time.

As well, principal residences are treated differently tax-wise - the mortgage interest is not tax-deductible, and the gain/loss when selling a principal residence is not taxable (or a tax deduction in case of a loss).  Primary residences are sort of outside the tax system.  What this means is no-one talks about the effect of their house on their taxes, or makes housing decisions based on taxes, because there is no relevance.  It also means that the decision on where to allocate money (mortgage or other debt or investments) has different parameters.  [Of course municipal taxes are a separate issue, they are directly based on the house valuation and the mill rate.]  Same thing for other categories, for example we do not file differently based on marital status (except a really low income spouse can be a deduction as a dependent).

What this means in practice is that a lot of general personal finance books available in Canada are written for U.S. conditions, and the specific advice is not applicable to us.  But naive readers may not realize this, any more than they realize that the law they learn from watching TV is usually American law (assuming it is accurate, which is often not the case) and Canadian law is different.  Even more so for civil law, because it is a provincial jurisdiction and varies (especially Quebec, for historical reasons).

So that would be like having to be on a variable rate mortgage at the wrong time.
you are saying exactly the same thing I am.
[/b]

Sid Hoffman

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To last 30+ years you really need to be withdrawing 2-3%. That also assumes you never make another dime/get social security.

I had originally written a huge, long message with a ton of math and case studies as well as personal accounts.  Instead I'll just say this: If you delay retirement until you can pay all your expenses on 2% of savings and assume zero from Social Security then you are saying you want to work more years for no reason at all.  If you like working, then work, but if you value your time then it's foolish to pretend Social Security doesn't exist or will pay $0 in benefits in the future.  All you're doing is working more years that you don't need to work.  Sure, you'll have more economic security, but you do so at the expense of working through prime healthy years of your life.

Bob W

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To last 30+ years you really need to be withdrawing 2-3%. That also assumes you never make another dime/get social security.

I had originally written a huge, long message with a ton of math and case studies as well as personal accounts.  Instead I'll just say this: If you delay retirement until you can pay all your expenses on 2% of savings and assume zero from Social Security then you are saying you want to work more years for no reason at all.  If you like working, then work, but if you value your time then it's foolish to pretend Social Security doesn't exist or will pay $0 in benefits in the future.  All you're doing is working more years that you don't need to work.  Sure, you'll have more economic security, but you do so at the expense of working through prime healthy years of your life.

Nice point,  I could easily live of SS alone.  So my safe withdrawal rate at this point in my life is more like --- take the number of years till 62 minus my current age and divide that into total investments.

When you add SS to the equation it is a huge difference.  Will it be there for my grandkids?   Probably not.  So that is why I will continue to work -- not for myself -- but for my grandkids.   It would be entirely embarrassing to spend 50 years in retirement jerking off only to realize my grandkids were screwed. 

In case anyone hasn't noticed the US and other western industrial powers years of economic dominance are quickly fading.   It is nice to be optimistic about the future but some realism helps IMHO. 

 

Jags4186

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To last 30+ years you really need to be withdrawing 2-3%. That also assumes you never make another dime/get social security.

I had originally written a huge, long message with a ton of math and case studies as well as personal accounts.  Instead I'll just say this: If you delay retirement until you can pay all your expenses on 2% of savings and assume zero from Social Security then you are saying you want to work more years for no reason at all.  If you like working, then work, but if you value your time then it's foolish to pretend Social Security doesn't exist or will pay $0 in benefits in the future.  All you're doing is working more years that you don't need to work.  Sure, you'll have more economic security, but you do so at the expense of working through prime healthy years of your life.

My 2 or 3% remark was based on getting a nominal return of 4% with inflation of 3%.  The OP mentioned a real return of 4% and inflation of 3% which was why I was confused.  You either have a real return of X and then it doesn't matter what inflation is or you have a nominal return of Y with Z inflation which you then need to back out.

Eric

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To last 30+ years you really need to be withdrawing 2-3%. That also assumes you never make another dime/get social security.

I had originally written a huge, long message with a ton of math and case studies as well as personal accounts.  Instead I'll just say this: If you delay retirement until you can pay all your expenses on 2% of savings and assume zero from Social Security then you are saying you want to work more years for no reason at all.  If you like working, then work, but if you value your time then it's foolish to pretend Social Security doesn't exist or will pay $0 in benefits in the future.  All you're doing is working more years that you don't need to work.  Sure, you'll have more economic security, but you do so at the expense of working through prime healthy years of your life.

Nice point,  I could easily live of SS alone.  So my safe withdrawal rate at this point in my life is more like --- take the number of years till 62 minus my current age and divide that into total investments.

When you add SS to the equation it is a huge difference.  Will it be there for my grandkids?   Probably not.  So that is why I will continue to work -- not for myself -- but for my grandkids.   It would be entirely embarrassing to spend 50 years in retirement jerking off only to realize my grandkids were screwed. 

In case anyone hasn't noticed the US and other western industrial powers years of economic dominance are quickly fading.   It is nice to be optimistic about the future but some realism helps IMHO.

So because western industrial powers are quickly fading, your grandkids won't have Social Security?  I'm not seeing the connection.  The only way Social Security is going away is if we vote to get rid of it.  Considering our aging population, the voting rates of seniors, and their attachment to Social Security, I think they're pretty safe.

Sid Hoffman

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So because western industrial powers are quickly fading, your grandkids won't have Social Security?  I'm not seeing the connection.  The only way Social Security is going away is if we vote to get rid of it.  Considering our aging population, the voting rates of seniors, and their attachment to Social Security, I think they're pretty safe.

From everything I have read, the program is being bled dry by 76 different programs that are totally unrelated to retirement benefits and that the retirement benefit is the simplest to make solvent.  They used to have a quick summary page on the actual SSA.gov website but I havn't been able to find it in the last year or so, so I'm not sure if they moved it somewhere unsearchable or what the deal is.  The bottom line is that it basically came down to: phase in higher retirement age targets or adjust the shape of the curve to bias towards paying out more at later ages, raise the wage tax cap (currently you pay no FICA on wages above $118k/year), raise the actual tax rate, and lower the maximum benefit paid out to high income earners.  Any one or some combination of all 4 will make the retirement benefit totally solvent again.  It's not going to go away, there's simply too few people who save on their own.

Bartstache

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Seems appropriate to drop this here...the headline sums up this thread perfectly:

http://www.cnbc.com/id/102165628

Good article, thanks for posting.

+1,  I hadn't read that one and enjoyed it also.

arebelspy

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Thanks sol and Eric for dispelling myths.
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Wile E. Coyote

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Agreed, thanks for taking the time to add so much detail in this thread.  I haven't yet focused on the details of these rules and this was a nice primer that made me realize that I need to spend a bit of time reading.

On a related note, I just saw this on the Vanguard Blog and thought I'd see if the experts have a view. It's a bit of marketing, but it was interesting to read.

http://vanguardblog.com/2014/11/07/the-4-spending-rule-20-years-later/