Inflation/cost of living messing with my head!

[tooqk4u22]

I am struggling to wrap my brain around inflation and go forward impact....wage spiral specifically.  We all know that inflation has running hot these past couple years and see it everywhere. Some of it was supply chain driven and most is too much money in the system.

I think about MMM 2011 when he had spending of $25K (or $40k including assumed mortgage of paid off house) that would be $35k ($56k) today...but that is not what is really bothering me.

My issue is I see all these new labor contracts ($190k for UPS truck driver anyone) and UAW strikes wanting 40% increases and so on....but I just saw that Bank of America was increasing its corporate minimum wage to $23/hour. A lot of retailers are in the high teens.

Anyway if effective (not government) minimum is now almost $50k then how does that work out for FIRE, especially for those that were lean fire.   Even fatFIRE gets leaner if minimum wage is $50k.

Also, these wage increase will wither push inflation higher or compress margins, neither are good for returns. 

Kind of ranting but also curious to thoughts.....

[index]

the economic conditions that caused that inflation lead to a return of 12.5% a year in the market. MMM living on 35k had a 875k stacked. today given 4% withdrawal, he has 2.3M and is withdrawing 92k per year.  Your are asking is the 4% rule safe if another form.

[GilesMM]

The doomsday scenario is Stagflation where the economy and markets crash while inflation soars.  Your savings are pummeled but your expenses shoot up.  Could be rough!

[Paper Chaser]

My issue is I see all these new labor contracts ($190k for UPS truck driver anyone)

Just for clarity, UPS drivers will make about $170k in total compensation by the end of the current 5 year contract (by 2028). Around $100k of that will be wages.

https://www.cbsnews.com/news/ups-drivers-170000-pay-benefits-compensation/

That's good money in Des Moines, and pretty average in Miami.

We've seen this before, and the economy didn't collapse. It lead to a thriving middle class. My ex's grandfather was a truck driver for a pharma company in the 60s and 70s. He was the sole income for a family of 7. They had a modest home and lived frugally, but spent their weekends at their local lake house, and spent their summers at their other lake house out of state. He retired with a full pension after a long career.

[nereo]

Anyway if effective (not government) minimum is now almost $50k then how does that work out for FIRE, especially for those that were lean fire.   Even fatFIRE gets leaner if minimum wage is $50k.

Also, these wage increase will wither push inflation higher or compress margins, neither are good for returns. 

First, earnings are not spending, and someone else’s wage increase does not require your spending to increase, and certainly not by a comparable amount. 

Second, the assumption that wage increases will lead to an inflation spiral or compress corporate returns isn’t a foregone conclusion, and isn’t reflected in other wage increases in the last several decades at the federal, state or corporate levels.  That’s partially because wages are are only part of a businesses costs, partly because -through efficiencies fewer workers are able to do the same amount of work (especially true in the shipping industry) and because having more workers move into the middle class improves macroeconomic lines across the board, from disposable income to reduced spending on welfare to a larger tax base. 

It’s certainly not limitless - we probably couldn’t triple the federal minimum wage overnight without some serious economic turmoil, but your assumption that these wage increases will somehow make your chances of being comfortably FIREed simply aren’t supported by any hard data that I’m aware of.

[tooqk4u22]

the economic conditions that caused that inflation lead to a return of 12.5% a year in the market. MMM living on 35k had a 875k stacked. today given 4% withdrawal, he has 2.3M and is withdrawing 92k per year.  Your are asking is the 4% rule safe if another form.

Maybe it is, but that wasn't my intent.   Bank of America raised its minimum to $15/ in 2017 so at $23/ in 2023 is well ahead of reported inflation.....it would be $19/ at inflation and other employers have/are doing same (banks certainly have heard mentality).

It just adds to rates having to go higher for longer, which won't be good for anyone whether it be economy, markets or individuals and their jobs.

I don't think society will collapse or the markets will be permanently impaired, mostly bc as margins get squeezed companies will do layoffs and economy will go in the dumpster for a bit then recover.  But in that process millions of people that thought they were doing better for some period of time will end up fairing far worse with extended unemployment and decreased opportunities. 

We all should want to get to a point of slower / normal growth in wages for stability to avoid the buzz saw around the corner.

And if I were to be worried about the 4% rule then my thoughts would be oriented to late 60s/early 70s when 4% failed in a out of control inflationary environment.   MMM had the opposite...just out of great recession so markets had reset, going into a further declining and low interest rate environment with little to no inflation until post pandemic...that was a great time to pull the plug.

[nereo]

[

Maybe it is, but that wasn't my intent.   Bank of America raised its minimum to $15/ in 2017 so at $23/ in 2023 is well ahead of reported inflation.....it would be $19/ at inflation and other employers have/are doing same (banks certainly have heard mentality).

It just adds to rates having to go higher for longer, which won't be good for anyone whether it be economy, markets or individuals and their jobs.

Don’t confuse raising the mInimum within a company with the average increase in wages across that company.  In he case of BofA, very, very few of their workers were earning sub-$20/hr anyway, because anyone with a decent head can make considerably more in the finance sector.  MOST of  BofAs labor costs come from workers who are being paid a crap-ton more (they have literally tens-of-thousands of employees that earn six figures).

For them, “raising” their mInimum wage was as much about PR as it was about helping their workers (or, more accurately, retaining their most junior positions who could get better pay elsewhere).

[tooqk4u22]

[

Maybe it is, but that wasn't my intent.   Bank of America raised its minimum to $15/ in 2017 so at $23/ in 2023 is well ahead of reported inflation.....it would be $19/ at inflation and other employers have/are doing same (banks certainly have heard mentality).

It just adds to rates having to go higher for longer, which won't be good for anyone whether it be economy, markets or individuals and their jobs.

Don’t confuse raising the mInimum within a company with the average increase in wages across that company.  In he case of BofA, very, very few of their workers were earning sub-$20/hr anyway, because anyone with a decent head can make considerably more in the finance sector.  MOST of  BofAs labor costs come from workers who are being paid a crap-ton more (they have literally tens-of-thousands of employees that earn six figures).

For them, “raising” their mInimum wage was as much about PR as it was about helping their workers (or, more accurately, retaining their most junior positions who could get better pay elsewhere).

That's a good point.   But there are still effects upstream....the less junior person who was making $23+/- per hour will certainly want more than the newbie minimum, and when they get bumped to $25 then the next senior or manager will ask for a bit more.....nobody wants to or will accept not seeing their pay increase at some rate.

And I used BoA just bc it popped up yesterday but those types of blurbs were very frequent over the last couple years out of the pandemic, which is fine, but they don't seem to be slowing down. 

[Ron Scott]

The OP is asking complex questions and simple answers will likely be wrong.

4 thoughts:

1. In the early phase of the current inflation period prices were rising because of increased demand for goods and breakdowns in the manufacturing supply chains of the world. Some on this forum proudly proclaimed they were “beating inflation“ by delaying purchases and substituting products. But it becomes very difficult to beat inflation when price increases become truly cost-based with widespread increases in wages. Inflation ripples throughout the economy and there are fewer “substitution products”.

2. On the far right, we have culture warriors. These people are fools. On the far left we have class warriors. They are fools too.  To the class warrior, income inequality is the major problem, and taxing the extremely rich is a feel good political solution they frequently pedal. The total increase in taxes collected doesn’t amount to much when spread across the rest of the population, so the effect of their solution is more about penalizing wealthy people without providing much benefit to others.

A broad based increase in the wages of the working class, however, hits the nail on the head. Income inequality is attacked from the bottom up. This approach does generate more inflation, but it gives the working class the funds to deal with it more effectively.

3. As Index points out earlier in this thread, we must balance inflation with real rates of return to get a better picture of its impact. Unfortunately, people of modest means typically do not own sufficient equities to ward off the long term affects of inflation on their spending needs.

4. The job of tackling high inflation has been delegated to the federal reserve. They can raise interest rates by using their tools to reduce the supply of money and credit in the economy. This makes it more expensive to borrow money, which can discourage spending and investment. The cure for inflation can cause a recession. Unfortunately, high interest rates and recessions hurt the working class the most, especially when unemployment rises as the economy slows.

Bottom line: Inflation is like many things in life. The more money you have the easier it is to cope.

[index]

the economic conditions that caused that inflation lead to a return of 12.5% a year in the market. MMM living on 35k had a 875k stacked. today given 4% withdrawal, he has 2.3M and is withdrawing 92k per year.  Your are asking is the 4% rule safe if another form.

Maybe it is, but that wasn't my intent.   Bank of America raised its minimum to $15/ in 2017 so at $23/ in 2023 is well ahead of reported inflation.....it would be $19/ at inflation and other employers have/are doing same (banks certainly have heard mentality).

It just adds to rates having to go higher for longer, which won't be good for anyone whether it be economy, markets or individuals and their jobs.

I don't think society will collapse or the markets will be permanently impaired, mostly bc as margins get squeezed companies will do layoffs and economy will go in the dumpster for a bit then recover.  But in that process millions of people that thought they were doing better for some period of time will end up fairing far worse with extended unemployment and decreased opportunities. 

We all should want to get to a point of slower / normal growth in wages for stability to avoid the buzz saw around the corner.

And if I were to be worried about the 4% rule then my thoughts would be oriented to late 60s/early 70s when 4% failed in a out of control inflationary environment.   MMM had the opposite...just out of great recession so markets had reset, going into a further declining and low interest rate environment with little to no inflation until post pandemic...that was a great time to pull the plug.

The increase in wages will be more significant at the bottom a shrinks as you move upward with many in the upper half with six figure salaries receiving a nominal cut in pay. I don't believe there is anything wrong with bringing the bottom up. On a larger scale, when costs go up and profit margins go down, you are effectively taking money out of the owners pocket and giving it to the workers. Those of us with big investment portfolios are the owners so naturally we are going to complain about it. We might even have a recession while the economy figures out the new normal and yes a recession is hardest for those at the bottom, but those at the top bear the brunt of the losses. The other side of the coin is to keep wages low and continue to keep the party going for company owners - us - which eventually results in unrest and quite often with the forced redistribution of wealth which isn't palatable either.

The practice of living on a fraction of your income and saving a lot of money affords you flexibility to deal with inflation and recession. The worst scenario is going back to work because your safe withdrawal rate isn't  keeping up. You can avoid this by decreasing your withdrawal rate which mean you need to work longer to save more money. In both cases - you are working more years. If you are in a fast moving career that is hard to break into, maybe it makes sense to work a bit longer. If you are in a career where it's easy to job hop, it probably makes sense to roll the dice and go back later if you need to. 

[sonofsven]

I heard a bit on the radio the other day referencing the strike against the auto makers.
They played a clip of the CEO complaining that the wages demanded by the union were "unsustainable" to their business model .
That CEO makes over $20,000,000 per year.

[Just Joe]

That would be Mary Barra from GM.

https://en.wikipedia.org/wiki/Mary_Barra

She points out that she makes a smaller salary and then the rest of the money is in the form of non-cash performance based income. It was funny b/c to me she rushed through that part of her of her statement perhaps to gloss over the details.

[sonofsven]

That would be Mary Barra from GM.

https://en.wikipedia.org/wiki/Mary_Barra

She points out that she makes a smaller salary and then the rest of the money is in the form of non-cash performance based income. It was funny b/c to me she rushed through that part of her of her statement perhaps to gloss over the details.

Actually I think it was the Ford guy . It was definitely a guy.

[Michael in ABQ]

I heard a bit on the radio the other day referencing the strike against the auto makers.
They played a clip of the CEO complaining that the wages demanded by the union were "unsustainable" to their business model .
That CEO makes over $20,000,000 per year.

GM has 167,000 workers. Spreading her compensation of $20M across all of them would be $119/year - or approximately $0.06 per hour (assuming 40 hours a week).

I'm fairly certain the workers/union are asking for more than a $0.06 per hour raise. Even $1 per hour across that many employees would be $334 million. $3 per hour would put it right around $1 Billion. For a company with a 6% net profit margin - the $20 million CEO compensation is not really going to move the needle.

"The UAW is pushing for a roughly 40% general wage increase for its members, over the length of a four-year contract, pointing to automakers' recent profits. Collectively, the three companies posted a profit of $21 billion in just the first half of this year.

So far, the companies have offered pay raises of approximately 20% — a jump from their opening bids, but still only half of what the union sees as adequate."

https://www.npr.org/2023/09/20/1200357955/uaw-big-3-strike-auto-shawn-fain

[Blackeagle]

They played a clip of the CEO complaining that the wages demanded by the union were "unsustainable" to their business model .
That CEO makes over $20,000,000 per year.

If you divide that $20 million among Ford’s 186,000 workers, each employee’s share would come to a whopping $107.53.  The CEO’s salary is not what’s keeping the automakers from giving the workers the kind of raise they want.

[sonofsven]

The point is not dissolving the ridiculous salary of the CEO into the wages of the average worker to increase their salary, its that the ceo with the ridiculous salary is complaining about sustainability.
Also, what is the percentage difference in average salary vs the ceo, and what was it, say sixty years ago when the US had a much more thriving middle class?
Hint: it was a lot lower.

[index]

They played a clip of the CEO complaining that the wages demanded by the union were "unsustainable" to their business model .
That CEO makes over $20,000,000 per year.

If you divide that $20 million among Ford’s 186,000 workers, each employee’s share would come to a whopping $107.53.  The CEO’s salary is not what’s keeping the automakers from giving the workers the kind of raise they want.

Mary Barra's salary was $28M last year. The top 4 executives made $62M combined. The top pay for a line worker is about $85k with overtime; so a tenured line worker has to work 2.8 years to make what their average executive makes in a day. They have to work over 5 years to make what Mary Barra makes in a day.

GM made over $11B last year in operating profit. What % of that should be paid to the workers versus given to the owners?

[nereo]

Folks are debating two connected but different issues.
One is whether its appropriate for a CEO to receive such high compensation packages when their workers are alleging decades-long erosion of purchasing power at their salary.

The second is whether that executive level compensation moves the needle when it comes to total labor costs for the broader company.

It's entirely possible the answer is "yes" to the first while being "no" to the second. 

[Paper Chaser]

The UAW's message on CEO pay is tied to their demand for a 40% pay increase. The UAW's current contract was enacted in 2019. Since then, the CEO compensation of the "Big Three" automakers has climbed around 40% thanks to incentives for strong performance. The union's contention is that if company performance has been good enough for CEO compensation to climb 40% since the contract was ratified, then their compensation should also increase 40%. They're not wanting to distribute the CEO's pay among the workforce. They're asking for raises at an equal rate to what the CEOs have gotten.

https://www.fox2detroit.com/news/uaws-argument-about-pay-raises-and-how-much-detroits-big-three-ceos-make

[index]

To get back to the topic at hand. First we had inflation in goods due to supply chain and lots of cheap dollars chasing those goods. Now labor is asking for a bump to afford the increase in living expenses. The wage increases are going to be bigger as a % for those at the bottom decreasing as you move up the ladder. The pie is getting smaller, dollars have been sucked out of the economy and debt has gotten more expensive. We are seeing some redistribution from those in the 50-90% to those in the 50%. Those in the top 10% and especially the top 5% are continuing to rake in more money as businesses adapt by raising prices. Once the CPI print comes down to 2-3% things should go back to normal with those in the middle gaining over the bottom 50% and the top 10% will continue to collect assets at a faster pace further concentrating wealth.

I still view this as a 4% rule question and the answer remains the same - you will either plan to work longer or you *may* be forced to go back to work if this ends in a 70s scenario. Thus far I haven't seen a broad wage spiral where companies have to offer 10%+ salary increases to retain employees in the middle.

[Scandium]

I heard a bit on the radio the other day referencing the strike against the auto makers.
They played a clip of the CEO complaining that the wages demanded by the union were "unsustainable" to their business model .
That CEO makes over $20,000,000 per year.

GM has 167,000 workers. Spreading her compensation of $20M across all of them would be $119/year - or approximately $0.06 per hour (assuming 40 hours a week).

I'm fairly certain the workers/union are asking for more than a $0.06 per hour raise. Even $1 per hour across that many employees would be $334 million. $3 per hour would put it right around $1 Billion. For a company with a 6% net profit margin - the $20 million CEO compensation is not really going to move the needle.

"The UAW is pushing for a roughly 40% general wage increase for its members, over the length of a four-year contract, pointing to automakers' recent profits. Collectively, the three companies posted a profit of $21 billion in just the first half of this year.

So far, the companies have offered pay raises of approximately 20% — a jump from their opening bids, but still only half of what the union sees as adequate."

https://www.npr.org/2023/09/20/1200357955/uaw-big-3-strike-auto-shawn-fain

GM has also spent over $3 billion last year on stock buybacks (up to $5B this year), which is just a hidden way to enrich the largest shareholders (and used to be illegal market manipulation). So clearly they do have some cash laying around.
https://www.cnbc.com/2022/08/19/gm-to-reinstate-quarterly-dividend-ups-share-buybacks-to-5-billion.html

[ChpBstrd]

Thoughts:

1) I'm hearing a lot less talk about people's "FIRE number" and early retirement in general. That's because our costs have risen so fast over the past 3 years that our 25X or 28X FIRE numbers are rising at a pace that is faster than even the most hardass Mustachian can save. E.g. if your household spent $40k per year a couple years ago, and your expenses have risen 20% since then, your 25X FIRE number just went from $1M to $1.2M. If you kicked absolute ass and managed to sock away $200,000 in the past 3 years, then you only managed to keep up. The path to FIRE is exactly as far away as it was 3 years ago, and that's demoralizing. See the "treading water" thread.

2) The Fed will eventually be successful at getting wage inflation down, but it could take "higher for longer" interest rates to keep inflation down. That is to say, the neutral rate of interest, at which inflation stays steady in the ideal range around 2%, is probably higher now than it was in the 20-teens when inflation failed to rise despite a 0.25% federal funds rate. Maybe it's now 4-5%? The neutral rate could stay higher for another decade, and the Fed might keep rates high for a long time to ensure inflation is actually dead and we don't repeat the 1970s yoyo experience. This means stocks, long-duration bonds, and RE may be overpriced. Perhaps instead of chasing these things - which everybody is talking about - we should be jumping on the opportunity to earn positive real interest rates in safer instruments for the first time in many years.

3) The bright side is we no longer have to gamble on the timing of our retirements to reliably replace our incomes. To me, this really feels like a time when "don't lose money" is a bigger goal than chasing riskier returns. Annuities paying out 6.2% are something to seriously consider. Also, we might need to rethink the 4% rule and our ideas of optimal asset allocation in a world where the positive real returns from fixed income challenge the real returns we expect from stocks.

4) Times of rapid inflation are also times when it does not pay to stick with one employer. Job hoppers are capturing almost all the gains from wage inflation, while many employers (mine included!) have not been willing or able to keep up. If you are feeling squeezed between rising costs and stagnant wages, now is the time to dust off the resume.

5) People are comparing the union workers obtaining large multi-year contracts with their own annual raises. Actually the union workers are locking in their pay for the next several years with these contracts, and the news sites quoting numbers are often reporting the highest wage that will be available at the end of the contract, not now. So a 20% raise doesn't mean as much if it's over 5 years. Do you hope to be earning 20% more in 5 years? That would only be an increase of 4.6% per year. Also not reported is the fact that their last multi-year contract probably didn't anticipate a sudden outbreak of inflation, and so the workers' wages have not been keeping up with inflation for a long time now. Their employers were able to raise prices while the union workers had to wait for their next contract negotiation opportunity. Additionally, the wages for drivers and train crews and airline pilots are often for jobs that require constant overnight travel, long hours, and significant risk of bodily harm or disability. Quite frankly, these jobs are not comparable to the work done by an office analyst, customer service rep, or administrative supervisor. One reason these jobs are unionized is because they are so hard that workers demand additional wages.

6) Decisions to fix costs such as by owning one's home or buying solar panels are looking good in a world of inflation risk. These reduce the inflation exposure of one's annual spending. My solar panels only yield about 6% against the cost of their 2022 installation, and my 3.25%-mortgaged home is a maintenance pit, but without them I'd have to worry about rising electricity costs, housing costs, and rents. Similary, a WFH job can insulate a person from rising automotive and fuel expenses, and a habit of NOT eating at restaurants can knock one of the fastest inflation growth categories out of one's budget. I'd be interested to hear about it if anyone can think of more opportunities to lock in a future cost.

[EchoStache]

Thoughts:

1) I'm hearing a lot less talk about people's "FIRE number" and early retirement in general. That's because our costs have risen so fast over the past 3 years that our 25X or 28X FIRE numbers are rising at a pace that is faster than even the most hardass Mustachian can save. E.g. if your household spent $40k per year a couple years ago, and your expenses have risen 20% since then, your 25X FIRE number just went from $1M to $1.2M. If you kicked absolute ass and managed to sock away $200,000 in the past 3 years, then you only managed to keep up. The path to FIRE is exactly as far away as it was 3 years ago, and that's demoralizing. See the "treading water" thread.

2) The Fed will eventually be successful at getting wage inflation down, but it could take "higher for longer" interest rates to keep inflation down. That is to say, the neutral rate of interest, at which inflation stays steady in the ideal range around 2%, is probably higher now than it was in the 20-teens when inflation failed to rise despite a 0.25% federal funds rate. Maybe it's now 4-5%? The neutral rate could stay higher for another decade, and the Fed might keep rates high for a long time to ensure inflation is actually dead and we don't repeat the 1970s yoyo experience. This means stocks, long-duration bonds, and RE may be overpriced. Perhaps instead of chasing these things - which everybody is talking about - we should be jumping on the opportunity to earn positive real interest rates in safer instruments for the first time in many years.

3) The bright side is we no longer have to gamble on the timing of our retirements to reliably replace our incomes. To me, this really feels like a time when "don't lose money" is a bigger goal than chasing riskier returns. Annuities paying out 6.2% are something to seriously consider. Also, we might need to rethink the 4% rule and our ideas of optimal asset allocation in a world where the positive real returns from fixed income challenge the real returns we expect from stocks.

4) Times of rapid inflation are also times when it does not pay to stick with one employer. Job hoppers are capturing almost all the gains from wage inflation, while many employers (mine included!) have not been willing or able to keep up. If you are feeling squeezed between rising costs and stagnant wages, now is the time to dust off the resume.

5) People are comparing the union workers obtaining large multi-year contracts with their own annual raises. Actually the union workers are locking in their pay for the next several years with these contracts, and the news sites quoting numbers are often reporting the highest wage that will be available at the end of the contract, not now. So a 20% raise doesn't mean as much if it's over 5 years. Do you hope to be earning 20% more in 5 years? That would only be an increase of 4.6% per year. Also not reported is the fact that their last multi-year contract probably didn't anticipate a sudden outbreak of inflation, and so the workers' wages have not been keeping up with inflation for a long time now. Their employers were able to raise prices while the union workers had to wait for their next contract negotiation opportunity. Additionally, the wages for drivers and train crews and airline pilots are often for jobs that require constant overnight travel, long hours, and significant risk of bodily harm or disability. Quite frankly, these jobs are not comparable to the work done by an office analyst, customer service rep, or administrative supervisor. One reason these jobs are unionized is because they are so hard that workers demand additional wages.

6) Decisions to fix costs such as by owning one's home or buying solar panels are looking good in a world of inflation risk. These reduce the inflation exposure of one's annual spending. My solar panels only yield about 6% against the cost of their 2022 installation, and my 3.25%-mortgaged home is a maintenance pit, but without them I'd have to worry about rising electricity costs, housing costs, and rents. Similary, a WFH job can insulate a person from rising automotive and fuel expenses, and a habit of NOT eating at restaurants can knock one of the fastest inflation growth categories out of one's budget. I'd be interested to hear about it if anyone can think of more opportunities to lock in a future cost.

To expand on your idea of solar panels, an EV or PHEV certainly expands the inflation lock one gets with solar panels by covering fuel cost for driving as well.  My daughter's PHEV gets 50-60 mpg in hybrid mode.  For the same $3.75 she would spend for that gallon of gas, she can drive ~240 miles in EV mode....a drastic increase even compared to one of the most fuel efficient vehicles in existence.  Her EV range covers her daily commute 100%.  Also less maintenance and good for the planet!

New and used EV's and PHEV's can be purchased for quite the bargain prices especially considering federal and state incentives.

[Villanelle]

Thoughts:

1) I'm hearing a lot less talk about people's "FIRE number" and early retirement in general. That's because our costs have risen so fast over the past 3 years that our 25X or 28X FIRE numbers are rising at a pace that is faster than even the most hardass Mustachian can save. E.g. if your household spent $40k per year a couple years ago, and your expenses have risen 20% since then, your 25X FIRE number just went from $1M to $1.2M. If you kicked absolute ass and managed to sock away $200,000 in the past 3 years, then you only managed to keep up. The path to FIRE is exactly as far away as it was 3 years ago, and that's demoralizing. See the "treading water" thread.

2) The Fed will eventually be successful at getting wage inflation down, but it could take "higher for longer" interest rates to keep inflation down. That is to say, the neutral rate of interest, at which inflation stays steady in the ideal range around 2%, is probably higher now than it was in the 20-teens when inflation failed to rise despite a 0.25% federal funds rate. Maybe it's now 4-5%? The neutral rate could stay higher for another decade, and the Fed might keep rates high for a long time to ensure inflation is actually dead and we don't repeat the 1970s yoyo experience. This means stocks, long-duration bonds, and RE may be overpriced. Perhaps instead of chasing these things - which everybody is talking about - we should be jumping on the opportunity to earn positive real interest rates in safer instruments for the first time in many years.

3) The bright side is we no longer have to gamble on the timing of our retirements to reliably replace our incomes. To me, this really feels like a time when "don't lose money" is a bigger goal than chasing riskier returns. Annuities paying out 6.2% are something to seriously consider. Also, we might need to rethink the 4% rule and our ideas of optimal asset allocation in a world where the positive real returns from fixed income challenge the real returns we expect from stocks.

4) Times of rapid inflation are also times when it does not pay to stick with one employer. Job hoppers are capturing almost all the gains from wage inflation, while many employers (mine included!) have not been willing or able to keep up. If you are feeling squeezed between rising costs and stagnant wages, now is the time to dust off the resume.

5) People are comparing the union workers obtaining large multi-year contracts with their own annual raises. Actually the union workers are locking in their pay for the next several years with these contracts, and the news sites quoting numbers are often reporting the highest wage that will be available at the end of the contract, not now. So a 20% raise doesn't mean as much if it's over 5 years. Do you hope to be earning 20% more in 5 years? That would only be an increase of 4.6% per year. Also not reported is the fact that their last multi-year contract probably didn't anticipate a sudden outbreak of inflation, and so the workers' wages have not been keeping up with inflation for a long time now. Their employers were able to raise prices while the union workers had to wait for their next contract negotiation opportunity. Additionally, the wages for drivers and train crews and airline pilots are often for jobs that require constant overnight travel, long hours, and significant risk of bodily harm or disability. Quite frankly, these jobs are not comparable to the work done by an office analyst, customer service rep, or administrative supervisor. One reason these jobs are unionized is because they are so hard that workers demand additional wages.

6) Decisions to fix costs such as by owning one's home or buying solar panels are looking good in a world of inflation risk. These reduce the inflation exposure of one's annual spending. My solar panels only yield about 6% against the cost of their 2022 installation, and my 3.25%-mortgaged home is a maintenance pit, but without them I'd have to worry about rising electricity costs, housing costs, and rents. Similary, a WFH job can insulate a person from rising automotive and fuel expenses, and a habit of NOT eating at restaurants can knock one of the fastest inflation growth categories out of one's budget. I'd be interested to hear about it if anyone can think of more opportunities to lock in a future cost.

I'd love to see a thread on this. 

My spouse thinks I'm crazy for absolutely wanting solar panels when we move, wherever we move.  (I know, some places are better for solar than others.)  Locking in (most) future costs is one of several reasons why it's a priority for me. 

[nereo]

1) I'm hearing a lot less talk about people's "FIRE number" and early retirement in general. That's because our costs have risen so fast over the past 3 years that our 25X or 28X FIRE numbers are rising at a pace that is faster than even the most hardass Mustachian can save. E.g. if your household spent $40k per year a couple years ago, and your expenses have risen 20% since then, your 25X FIRE number just went from $1M to $1.2M. If you kicked absolute ass and managed to sock away $200,000 in the past 3 years, then you only managed to keep up. The path to FIRE is exactly as far away as it was 3 years ago, and that's demoralizing. See the "treading water" thread.

If you are just starting out, this can certainly seem like a demoralizing time, butFor people well on their way towards FIRE with considerable savings the last three years have looked totally different. If you had $500k in an SP500 fund three years ago, you are sitting on over $665k without even adding to it. Even after adjusting for the huge bump in inflation and the corresponding increase in the "FIRE number" we've come out way ahead, and those of us who capitalized on the super-low interest debt of the past decade are experiencing far lower personal inflation than the mean.

[tooqk4u22]

1) I'm hearing a lot less talk about people's "FIRE number" and early retirement in general. That's because our costs have risen so fast over the past 3 years that our 25X or 28X FIRE numbers are rising at a pace that is faster than even the most hardass Mustachian can save. E.g. if your household spent $40k per year a couple years ago, and your expenses have risen 20% since then, your 25X FIRE number just went from $1M to $1.2M. If you kicked absolute ass and managed to sock away $200,000 in the past 3 years, then you only managed to keep up. The path to FIRE is exactly as far away as it was 3 years ago, and that's demoralizing. See the "treading water" thread.

If you are just starting out, this can certainly seem like a demoralizing time, butFor people well on their way towards FIRE with considerable savings the last three years have looked totally different. If you had $500k in an SP500 fund three years ago, you are sitting on over $665k without even adding to it. Even after adjusting for the huge bump in inflation and the corresponding increase in the "FIRE number" we've come out way ahead, and those of us who capitalized on the super-low interest debt of the past decade are experiencing far lower personal inflation than the mean.

If 100% sp 500 one would have beat inflation by about 3% per year including dividends, that's good but not great.

If one a had a balanced AA 60% sp 500 /40% total bond then one would be flat in nominal terms and lost to inflation by about 3.5% per year including divs/int.   That's awful and not great for SORR.   

[sonofsven]

Thoughts:

1) I'm hearing a lot less talk about people's "FIRE number" and early retirement in general. That's because our costs have risen so fast over the past 3 years that our 25X or 28X FIRE numbers are rising at a pace that is faster than even the most hardass Mustachian can save. E.g. if your household spent $40k per year a couple years ago, and your expenses have risen 20% since then, your 25X FIRE number just went from $1M to $1.2M. If you kicked absolute ass and managed to sock away $200,000 in the past 3 years, then you only managed to keep up. The path to FIRE is exactly as far away as it was 3 years ago, and that's demoralizing. See the "treading water" thread.

2) The Fed will eventually be successful at getting wage inflation down, but it could take "higher for longer" interest rates to keep inflation down. That is to say, the neutral rate of interest, at which inflation stays steady in the ideal range around 2%, is probably higher now than it was in the 20-teens when inflation failed to rise despite a 0.25% federal funds rate. Maybe it's now 4-5%? The neutral rate could stay higher for another decade, and the Fed might keep rates high for a long time to ensure inflation is actually dead and we don't repeat the 1970s yoyo experience. This means stocks, long-duration bonds, and RE may be overpriced. Perhaps instead of chasing these things - which everybody is talking about - we should be jumping on the opportunity to earn positive real interest rates in safer instruments for the first time in many years.

3) The bright side is we no longer have to gamble on the timing of our retirements to reliably replace our incomes. To me, this really feels like a time when "don't lose money" is a bigger goal than chasing riskier returns. Annuities paying out 6.2% are something to seriously consider. Also, we might need to rethink the 4% rule and our ideas of optimal asset allocation in a world where the positive real returns from fixed income challenge the real returns we expect from stocks.

4) Times of rapid inflation are also times when it does not pay to stick with one employer. Job hoppers are capturing almost all the gains from wage inflation, while many employers (mine included!) have not been willing or able to keep up. If you are feeling squeezed between rising costs and stagnant wages, now is the time to dust off the resume.

5) People are comparing the union workers obtaining large multi-year contracts with their own annual raises. Actually the union workers are locking in their pay for the next several years with these contracts, and the news sites quoting numbers are often reporting the highest wage that will be available at the end of the contract, not now. So a 20% raise doesn't mean as much if it's over 5 years. Do you hope to be earning 20% more in 5 years? That would only be an increase of 4.6% per year. Also not reported is the fact that their last multi-year contract probably didn't anticipate a sudden outbreak of inflation, and so the workers' wages have not been keeping up with inflation for a long time now. Their employers were able to raise prices while the union workers had to wait for their next contract negotiation opportunity. Additionally, the wages for drivers and train crews and airline pilots are often for jobs that require constant overnight travel, long hours, and significant risk of bodily harm or disability. Quite frankly, these jobs are not comparable to the work done by an office analyst, customer service rep, or administrative supervisor. One reason these jobs are unionized is because they are so hard that workers demand additional wages.

6) Decisions to fix costs such as by owning one's home or buying solar panels are looking good in a world of inflation risk. These reduce the inflation exposure of one's annual spending. My solar panels only yield about 6% against the cost of their 2022 installation, and my 3.25%-mortgaged home is a maintenance pit, but without them I'd have to worry about rising electricity costs, housing costs, and rents. Similary, a WFH job can insulate a person from rising automotive and fuel expenses, and a habit of NOT eating at restaurants can knock one of the fastest inflation growth categories out of one's budget. I'd be interested to hear about it if anyone can think of more opportunities to lock in a future cost.

I'd love to see a thread on this. 

My spouse thinks I'm crazy for absolutely wanting solar panels when we move, wherever we move.  (I know, some places are better for solar than others.)  Locking in (most) future costs is one of several reasons why it's a priority for me.

This is my approach to firewood, lol.
Solar panels are still a possible future investment for me, but only if I were to drastically increase my electricity consumption.

[Scandium]

1) I'm hearing a lot less talk about people's "FIRE number" and early retirement in general. That's because our costs have risen so fast over the past 3 years that our 25X or 28X FIRE numbers are rising at a pace that is faster than even the most hardass Mustachian can save. E.g. if your household spent $40k per year a couple years ago, and your expenses have risen 20% since then, your 25X FIRE number just went from $1M to $1.2M. If you kicked absolute ass and managed to sock away $200,000 in the past 3 years, then you only managed to keep up. The path to FIRE is exactly as far away as it was 3 years ago, and that's demoralizing. See the "treading water" thread.

If you are just starting out, this can certainly seem like a demoralizing time, butFor people well on their way towards FIRE with considerable savings the last three years have looked totally different. If you had $500k in an SP500 fund three years ago, you are sitting on over $665k without even adding to it. Even after adjusting for the huge bump in inflation and the corresponding increase in the "FIRE number" we've come out way ahead, and those of us who capitalized on the super-low interest debt of the past decade are experiencing far lower personal inflation than the mean.

Also considering that the market jumps like crazy if Powel so much has a dream about halting rate increases, I have hopes that in 1-2 years when they get to lowering rates Wall street will instantly bust a load in their Armani pants. And we'll see strong market growth for a while (justified or not). Not that I'll change anything, but it's extra motivation for accumulating as much as possible now. And since my FIRE target it ~5 years out  this might time out perfectly.. *fingers crossed.

[Cranky]

Honestly, the big things that inflation has hit - travel and restaurants- don’t matter to me. I’m not interested in buying a new car. My housing costs are fairly fixed. My utilities are low. I feel like food inflation has settled down.

[nereo]

If you are just starting out, this can certainly seem like a demoralizing time, butFor people well on their way towards FIRE with considerable savings the last three years have looked totally different. If you had $500k in an SP500 fund three years ago, you are sitting on over $665k without even adding to it. Even after adjusting for the huge bump in inflation and the corresponding increase in the "FIRE number" we've come out way ahead, and those of us who capitalized on the super-low interest debt of the past decade are experiencing far lower personal inflation than the mean.

If 100% sp 500 one would have beat inflation by about 3% per year including dividends, that's good but not great.

If one a had a balanced AA 60% sp 500 /40% total bond then one would be flat in nominal terms and lost to inflation by about 3.5% per year including divs/int.   That's awful and not great for SORR.

I think you and I have very different views on what "awful" means for a three year period. Looking at other periods over the last century or so this one is pretty close to average. There are numerous periods of similar length which were far worse for investors. If that causes a lot of stress you might want to rethink your asset strategy.

I'm also questioning where you are getting your numbers. I'm seeing SP500 returns in the previous 36 months at about 5.5% with dividends reinvested. Slightly positive with a large bond allocation.

[tooqk4u22]

If you are just starting out, this can certainly seem like a demoralizing time, butFor people well on their way towards FIRE with considerable savings the last three years have looked totally different. If you had $500k in an SP500 fund three years ago, you are sitting on over $665k without even adding to it. Even after adjusting for the huge bump in inflation and the corresponding increase in the "FIRE number" we've come out way ahead, and those of us who capitalized on the super-low interest debt of the past decade are experiencing far lower personal inflation than the mean.

If 100% sp 500 one would have beat inflation by about 3% per year including dividends, that's good but not great.

If one a had a balanced AA 60% sp 500 /40% total bond then one would be flat in nominal terms and lost to inflation by about 3.5% per year including divs/int.   That's awful and not great for SORR.

I think you and I have very different views on what "awful" means for a three year period. Looking at other periods over the last century or so this one is pretty close to average. There are numerous periods of similar length which were far worse for investors. If that causes a lot of stress you might want to rethink your asset strategy.

I'm also questioning where you are getting your numbers. I'm seeing SP500 returns in the previous 36 months at about 5.5% with dividends reinvested. Slightly positive with a large bond allocation.

Mine are inflation adjusted and when compared to 10% average historical returns (before inflation) which is like 7% after historical inflation a 3% return is not great. 

Just because it's not the worst few times in history doesn't make it good returns. 

[nereo]

I still don’t understand how you came up with 3%. What inflation metrics are you using and what time period are you referencing.

My point is less that it’s been better than the worst periods on record and more that it’s firmly in the inner quartile range. In other words, it’s not abnormally bad, but pretty normal.

[GilesMM]

My spouse thinks I'm crazy for absolutely wanting solar panels when we move, wherever we move.  (I know, some places are better for solar than others.)  Locking in (most) future costs is one of several reasons why it's a priority for me.

Good point.  We installed solar last year at great cost.  I don't fancy moving and starting the process anew.  Good news is in states like California nearly half the homes already have solar, so filtering on them doesn't hurt the search too much.  Texas at 3% solar is a different story...

[afox]

could a shortage of humans be influencing wages and thus costs to subsist? birth rates are much lower than the replacement rates needed to maintain the same size population in the US and in most of the world (human populations are shrinking or will shrink).

[curious_george]

While I have admittedly had some similar thoughts as OP, I'm not particularly worried about it.

It is ultimately not a matter of how much I make or have or what society does that ensures my safety and lifestyle, so long as society doesn't completely fall apart. And I have a certain amount of faith that society won't simply fall apart, because regardless of how crazy some people are, we are all collectively selfish creatures, and realize we rely on each other at the end of the day, so people will always organize into some sort of social structure and generally protect the stability of the social structure to ensure their own self interests.

At the end of the day it is more about what I can offer other people, and how much I can do for others, that ensures my survival and prosperity. It is also about my ability to learn things and grow as a human being, something which pretty much anyone with a certain amount of drive and motivation can achieve.

It is also about my relationships with other people, specifically trustworthy people, who I have relied on in good times and bad times, as they have relied on me as well.

People are worth more than money.

I also don't consume or ask much from other people or society in general. I consume far less than the average person because I don't require the validation of other people to choose how to live my life, I have few material needs or desires, and I don't derive my self worth from my perceived standing or status in society.

So - none of this ever bothered me much. In fact I don't even view the inflation fluctuations that much differently than I view the stock market fluctuations. We live in a dynamic, ever evolving financial and social system these days that is responding to real world events. I expect things to always change.

I also have faith that the federal reserve will stabilize inflation over time.

[mistymoney]

I've kind of been struggling with how much money is these days. What seems like a lot doesn't go as far as I'm thinking it should!

While the market has recovered quite a bit from the drop, it does Not seem to be interested in a real bull run to new heights.

Fortunately - or perhaps unfortunately - my saving grace is my continued employment. and if the salary increases, savings and investments rates, etc. aren't really "cutting it" in terms of advancing FIRE

At least I'm getting closer to, and a bigger pay out from, social security.....which is nice and kind of sad....on a month to month basis...

[TMB]

Thoughts:

...

6) Decisions to fix costs such as by owning one's home or buying solar panels are looking good in a world of inflation risk. These reduce the inflation exposure of one's annual spending. My solar panels only yield about 6% against the cost of their 2022 installation, and my 3.25%-mortgaged home is a maintenance pit, but without them I'd have to worry about rising electricity costs, housing costs, and rents. Similary, a WFH job can insulate a person from rising automotive and fuel expenses, and a habit of NOT eating at restaurants can knock one of the fastest inflation growth categories out of one's budget. I'd be interested to hear about it if anyone can think of more opportunities to lock in a future cost.

I'd love to see a thread on this. 

My spouse thinks I'm crazy for absolutely wanting solar panels when we move, wherever we move.  (I know, some places are better for solar than others.)  Locking in (most) future costs is one of several reasons why it's a priority for me.

For California residents (or a warning for those who are in very blue states) California recently passed a law allowing for utilities to charge partial flat fees based on income versus actual consumption.

https://calmatters.org/california-divide/2023/07/electricity-bills/

Still a great idea to try to decrease future costs (or lock in costs at current prices if you think inflation will be worse off than equity increases) but always good to be cognizant on how things can always change.

[Cassie]

My Dil is from Poland and her parents who live there are experiencing 20% inflation. We have it much better here in that regard.

[GilesMM]

My Dil is from Poland and her parents who live there are experiencing 20% inflation. We have it much better here in that regard.

Venezuela has routinely had rates exceeding 1000% for years. I have a couple friends living there and they find it challenging.

[tooqk4u22]

My Dil is from Poland and her parents who live there are experiencing 20% inflation. We have it much better here in that regard.

Venezuela has routinely had rates exceeding 1000% for years. I have a couple friends living there and they find it challenging.

How do you even wrap your head around that!?

Inflation if prolonged and higher is a killer.   I don't think that is happening but we're not out of the woods yet, and it has happened in the US before and certainly elsewhere.   

The base effect is also real like compounding - its up 20% in 3 years and if we are still running 4%+/- that's on top of the 20% this year.   

Fed's target is 2% but if we can just get to 3% for a while it should workout ok.

[Cassie]

My Dil is from Poland and her parents who live there are experiencing 20% inflation. We have it much better here in that regard.

Venezuela has routinely had rates exceeding 1000% for years. I have a couple friends living there and they find it challenging.

How do you even wrap your head around that!?

Inflation if prolonged and higher is a killer.   I don't think that is happening but we're not out of the woods yet, and it has happened in the US before and certainly elsewhere.   

The base effect is also real like compounding - its up 20% in 3 years and if we are still running 4%+/- that's on top of the 20% this year.   

Fed's target is 2% but if we can just get to 3% for a while it should workout ok.

Her parents are retired and are 71. They have always been thrifty and have a big garden. They have come here to visit twice but now vacation closer to home.  For myself I have returned to part time consulting which I enjoy. I like earning some money and not having to use my savings for unexpected expenses.  2 of my friends have dog sitting businesses at 80 and 91. Our local COL skyrocketed as Californians have flooded in because Nevada is cheaper. Our housing is now more expensive than Sacramento.

[tooqk4u22]

My Dil is from Poland and her parents who live there are experiencing 20% inflation. We have it much better here in that regard.

Venezuela has routinely had rates exceeding 1000% for years. I have a couple friends living there and they find it challenging.

How do you even wrap your head around that!?

Inflation if prolonged and higher is a killer.   I don't think that is happening but we're not out of the woods yet, and it has happened in the US before and certainly elsewhere.   

The base effect is also real like compounding - its up 20% in 3 years and if we are still running 4%+/- that's on top of the 20% this year.   

Fed's target is 2% but if we can just get to 3% for a while it should workout ok.

Her parents are retired and are 71. They have always been thrifty and have a big garden. They have come here to visit twice but now vacation closer to home.  For myself I have returned to part time consulting which I enjoy. I like earning some money and not having to use my savings for unexpected expenses.  2 of my friends have dog sitting businesses at 80 and 91. Our local COL skyrocketed as Californians have flooded in because Nevada is cheaper. Our housing is now more expensive than Sacramento.

I wonder if that will reverse, and possibly significantly, with return to work mandates happening.  There have been several articles about that and people selling for a loss and return to work being a primary reason for selling in recent months.....3% mortgage won't save you from that.

[Tigerpine]

How do you even wrap your head around that!?

Here's how one Southerner described it after the US Civil War:

"Before the war, I went to market with money in my pocket and brought back my purchases in a basket:  now I take my money in a basket and bring home the things in my pocket."

source:  G.C. Eggleston, A Rebel's Recollections (1875)
https://docsouth.unc.edu/fpn/eggleston/eggleston.html

[Cassie]

My Dil is from Poland and her parents who live there are experiencing 20% inflation. We have it much better here in that regard.

Venezuela has routinely had rates exceeding 1000% for years. I have a couple friends living there and they find it challenging.

How do you even wrap your head around that!?

Inflation if prolonged and higher is a killer.   I don't think that is happening but we're not out of the woods yet, and it has happened in the US before and certainly elsewhere.   

The base effect is also real like compounding - its up 20% in 3 years and if we are still running 4%+/- that's on top of the 20% this year.   

Fed's target is 2% but if we can just get to 3% for a while it should workout ok.

Her parents are retired and are 71. They have always been thrifty and have a big garden. They have come here to visit twice but now vacation closer to home.  For myself I have returned to part time consulting which I enjoy. I like earning some money and not having to use my savings for unexpected expenses.  2 of my friends have dog sitting businesses at 80 and 91. Our local COL skyrocketed as Californians have flooded in because Nevada is cheaper. Our housing is now more expensive than Sacramento.

I wonder if that will reverse, and possibly significantly, with return to work mandates happening.  There have been several articles about that and people selling for a loss and return to work being a primary reason for selling in recent months.....3% mortgage won't save you from that.

I don’t think working from home had anything to do with our COL skyrocketing. Reno is a very desirable place to live and the population has doubled in the 26 years that I’ve lived here. You can live in the valley with a very mild winter yet be in the mountains, Lake Tahoe and skiing in 45 minutes. Plus no state income tax and low property taxes make it desirable especially for California retirees.

[Must_ache]

If you had $500k in an SP500 fund three years ago, you are sitting on over $665k without even adding to it. Even after adjusting for the huge bump in inflation and the corresponding increase in the "FIRE number" we've come out way ahead.

Inflation was 4.7% in 2021, 8.0% in 2022, and should end up around 4.0% in 2023.  That's a compounded total of 17.6%, so inflation eroded half of those gains.

[Must_ache]

I'm also questioning where you are getting your numbers. I'm seeing SP500 returns in the previous 36 months at about 5.5% with dividends reinvested. Slightly positive with a large bond allocation.

The S&P was at 3,298 three years ago and is 4,326 now. 
That's a return of 4,326/3,298 - 1 = 31.2%
That's an annualized return of 1.312 ^ (1/3) - 1 = 9.5%

If your information is based on data ending January 1, 2023 it would only be 8.1% but you would need a very different time period to get 5.5%.

[nereo]

If you had $500k in an SP500 fund three years ago, you are sitting on over $665k without even adding to it. Even after adjusting for the huge bump in inflation and the corresponding increase in the "FIRE number" we've come out way ahead.

Inflation was 4.7% in 2021, 8.0% in 2022, and should end up around 4.0% in 2023.  That's a compounded total of 17.6%, so inflation eroded half of those gains.

Exactly. Even after you adjust for the impacts of inflation the last three years have been net-positives for the SP500.

The S&P was at 3,298 three years ago and is 4,326 now. 
That's a return of 4,326/3,298 - 1 = 31.2%
That's an annualized return of 1.312 ^ (1/3) - 1 = 9.5%

Yes, plus dividends (reinvested).  Subtract inflation and you get the 'real' rate of return of... 5.5% (rounded to nearest tenth of a percent).

[the lorax]

Is there a general rule of thumb people use when planning for investment returns versus withdrawals re the inflation - eg do you expect markets to generally beat inflation by X% as a long term average? I've been reviewing our numbers a lot recently so have been trying to find average returns and average inflation online - I know it will vary from country to country but keen to know if people have a rough expectation of real returns.

[Ron Scott]

Is there a general rule of thumb people use when planning for investment returns versus withdrawals re the inflation - eg do you expect markets to generally beat inflation by X% as a long term average? I've been reviewing our numbers a lot recently so have been trying to find average returns and average inflation online - I know it will vary from country to country but keen to know if people have a rough expectation of real returns.

I think it’s fair to say there’s no rule of thumb in use today, at least in America. Maybe half of people between 55 and 65 have NO retirement savings at all, so there’s that. Some people may tell you the rule of thumb is the 4% Withdrawal Rate Rule, but it’s clear that most retirees do something else, either by choice or necessity.

There are some people, mostly those who read financial forum posts, retirement books, and may work with financial analysts, who conclude the upcoming decades will have similar real returns as we’ve had in the past. I see no reason to adopt this religion, but it’s out there. These people, in general, believe returns will beat inflation in the long term by a couple points and that they can spend 4% of their invested assets and have their money last 30 years. Some FIRE enthusiasts believe that same withdrawal rate can last even longer—like 40 years or more. But there’s no proof that any of these time periods will work as advertised.

If you are willing to take the leap of faith that returns will at least keep pace with inflation (assuming the political pressure on government will be too intense if it does not) then you can divide your invested assets by the number of years you think you’ll be in retirement to come up with an annual spend. This is loosely what I do…then I spend less.

In general, retirees spend a relatively small amount of their invested assets and may die with assets left to heirs, so they are not planning to spend their last dollar before they kick the coffin. Some retirees live on SS and their interest/dividends. Everybody’s different and has different beliefs and strategies.

Bottom line is we don’t know. And if people tell you you’re fine assuming positive real rates of return during your retirement period, they don’t know what they’re talking about.

We live with unknowns and we do our best.

[ChpBstrd]

Is there a general rule of thumb people use when planning for investment returns versus withdrawals re the inflation - eg do you expect markets to generally beat inflation by X% as a long term average? I've been reviewing our numbers a lot recently so have been trying to find average returns and average inflation online - I know it will vary from country to country but keen to know if people have a rough expectation of real returns.

Treasury bond markets are kinda the basis of every other market because they set a baseline that represents investors' expectations about the future. According to theory, if new information suggests higher inflation in the future, treasury bond markets will price bonds lower because they anticipate higher-yielding bonds will be available soon. Vice versa for information suggesting lower inflation.

Lower treasury prices = higher treasury yields, and higher yields will tempt some investors to peel off some of their assets from riskier places to take these higher risk-free yields. That means corporate bonds and stocks fall too.

One can use the spread between TIPS and regular treasuries to derive an average market expectation for future inflation. For example, the current 5-year breakeven inflation rate is 2.2%.   

However it would be an error to assume the bond markets' predictions about inflation are right, or even consistently close. Historically, the real return on 10 year treasuries has been all over the place, as shown below.   



On a longer timeframe, we can salivate over the 3-4% real returns on treasuries that were available in the 1980s and 1990s, but keep in mind investors back then had no idea inflation would keep falling. The best they could do was guess based on past performance.

Moving on to the real return on stocks, you have an utterly unpredictable long-term inflation component plus a very-hard-to-predict long term earnings growth component. On top of these factors, investors demand a risk premium to invest in riskier assets, and this risk premium expands and contracts with the mood of the market.

At some point, predicting the alignment of all these factors and nailing down an expected real return rivals the difficulty of predicting the weather a month out! Stock investors certainly expect to beat inflation, and we can calculate each of the components of their valuation model. However, their best guesses are only educated guesses. The volatility of stocks illustrates how sensitive these guesses are to changes in the trickle of information.

Nominal total returns from the stock market have averaged around 10% long-term, so investors have historically beaten inflation by 6-7%. This tells us little to nothing about the future, but illustrates what people might be expecting. Those 6-7% real returns are a combination of the earnings growth premium and the risk premium.