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Financial experts tell us we should increase our annual withdrawal each year from our retirement accounts to match inflation. Seems logical, but after 30 years of retirement I still struggle trying to figure out what inflation actually is. In the 21st Century, the offical consumer price index has been averaging a 3% increase each year. But most people I know say their personal actual inflation is close to a 5% increase each year.
How much of an inflation increase did you account for when you update your retirement fund distribution for 2014 and 2015? How about 2016?
Our inflation rate is unknown as our spending patterns and habits change. Dietary wants change, transportation wants change as does recreation etc. our income goes up and so does our spending. Eight years into retirement things are different than when we started and that is a good thing. We know eggs are more and our food consumption pattern has changed.
I'm not retired but am at the phase in my life best described as the retirement planning zone.
I personally have used a 2% inflation rate and I use a 4% rate of return rate on retirement investment funds.
Some have told me the 2% is too low and it may be. I think what really matters is the spread between rate of return and inflation; in my case it's 2%. That's what the focus should be in my opinion. You'd be surprised how many people I come across who have a ton of money doing nothing for them. They're comfortable having a ton of cash and savings sitting in their favorite banks to whom they are so loyal, afraid to invest it because of fear they might lose it because of stock market volatility. To them I say, have you every considered inflation risk?
Inflation can be expressed as an overall percentage but actually there are many components to it and the inflation rates of those components will vary significantly. Health care costs for example, will certainly be more than 2% or 3% unless you are covered by a very good post-retirement health insurance plan like is the case with government retirees.
I'll focus on the spread and strive for it to be at least 2% as in my above example.
The best approach might be to calculate the annual rate of change of the local cost of living index for, say the past 5 year period, and then redo the calculation every few years and adjust your deposits. But then you should also do the same on the rate of return-side for your portfolio, do both in one calculation using a real annual rate of interest = (1+ annual rate of return on investment(r))/(1+ annual rate of inflation) and apply it to your portfolio. For low rates in the denominator, this is approximately(p) = r-p, but why approximate?
Financial experts tell us we should increase our annual withdrawal each year from our retirement accounts to match inflation. Seems logical, but after 30 years of retirement I still struggle trying to figure out what inflation actually is. In the 21st Century, the offical consumer price index has been averaging a 3% increase each year. But most people I know say their personal actual inflation is close to a 5% increase each year.
How much of an inflation increase did you account for when you update your retirement fund distribution for 2014 and 2015? How about 2016?
I assume you are referring to the safe withdrawal studies. The inflation rate would be for the USA and probably close to the 3% you mentioned.
no , that is only the price changes on a basket of goods and services based on 1500 mini economy's in this country .
what he was looking for is an actual personal cost of living approximation which can be totally different from the cpi .
remember , the cpi does not know which of those products you buy , how many times you buy it and the level of quality of goods you buy . the more above the basic and thebetter the quality the higher the price increases on that item . everyone rents in the cpi calculations an no one owns a home either .
but the problem with what the op is asking is retirees tend to spend in a smile shape always changing the amount of inflation adjusting as they age .
in the beginning there may be lots of inflation adjusting needed but as you age you do less and spend less so the things you no longer do or buy cover the increases in the things you do use .
then later in your 80's the pattern picks up again as healthcare costs rise and gifting picks up .
the wild card though has been medical insurance costs and that has in some cases been eating up the shift in spending so each persons insurance situation can impact the amount of inflation adjusting needed in a big way .
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