Inflation risk

Inflation Risk For Early Retiree Part 3b – Personal Inflation Rate Calculator

This week I have a special Guest Post appearing on Friday… so more details later in the week – but I think you’re gonna like it!

However in the meantime here is a short post that provides the calculator to produce your own personal inflation rates that I described in Part 3 of inflation risk for early retirees.

Inflation Risk for Early Retirees

We all know that our spending pattern will change going from working to retirement. You won’t have commuting costs for a start; but some costs may go down, and others might go up. Physician on FIRE has written about this issue, and those crazy-cats at the Society of Actuaries have a 40 page pdf on the subject.

[Incidentally this SoA report contains considerable data from the infamous Society of Actuaries’ focus groups. There are a number of quotations from focus group members that are absolutely hilarious. But disturbingly, most of the quotations are totally incomprehensible. Here is one of my favorites:

“Do I really need that ice cream cone, that $2.50 cone? Is it really worth it or can I just go home and eat the
gallon of ice cream I bought for $1.99? I think as you mature and get older you just don’t need as much.”
—Male, Kitchener, ON

So as a special challenge to my readers I am inviting you to try and join one of the SoA focus groups. Your goal is to infiltrate the focus group and then come and report back to the AoF Blog. In return I will buy you a slap-up dinner and you will have some wild stories to relay to your grandchildren in your dotage.]

Personal Inflation Rates

I got a bit side-tracked there, but my point is that changing spending patterns is a well trodden path. An alternative path that needs hacking through the undergrowth is around changing inflation rates. So yes, your spending pattern changes, but your personal inflation rate changes too.

And why is that important? 

Because your investments need to keep pace with inflation, and ideally outpace it. So if you become more/less exposed to price inflation then you need an investment strategy with more/less real return exposure. Which is just a fancy way of saying that if you have a high inflation rate then you better have more stocks and fewer bonds.

Calculating Your Personal Inflation Rate

If you read Part 3 then you will have seen that I calculated the personal inflation rates for I, Vigilante and Steve from Think Save Retire.

The data underlying my calculations was from the Bureau of Labor Statistics and it has the inflation rates for separate categories. They don’t explain a whole lot what is exactly in the categories so you just have to guess and do the best you can to fit your current spending into their buckets. In my spreadsheet I have also added another category called “Nominal Fixed”. This is the proportion of your spending that has no price inflation, and might typically be a mortgage or loan repayment.

See below for a screenshot of the tool. You can see that you enter your spending in column B. The top chart on the right shows the annual changes in prices comparing the standard basket of good from the DoL and your entry.

The lower right hand chart shows how the spending power of $100 will decline over time. Again comparing the standard basket of good with your entries.

Finally in the center is a summary of the average annual rate.

Inflation Risk for Early Retirees
Inflation Risk for Early Retirees

Once you enter your spending the charts update dynamically. See below for a groovy GIF.

Inflation Risk for Early Retirees
Inflation Risk for Early Retirees

I bet you want a copy of this tool? Am I right?

In that case simply sign up for email updates for this blog and I will send you a copy of this spreadsheet and any others – for FREE! Existing subscribers should already have received a copy – check your email.

Stay tuned for my Guest Post later this week, and let me know below if you have any questions on this tool or personal inflation rates in general.

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