5 ms·

Inflation is challenging to model these days.

by ozten 5y ago

bruce511 5y ago
It's really not, but perhaps more importantly it shows why retirement income streams should respond to inflation and not be fixed. As someone who has lived in a country with mild inflation all my life it's not as scary to me as it seems to be to US folk. It's just another variable in the formula. (Americans seem to conflate any inflation with hyper inflation, which seems weird.) I've come to understand though that most US retirement plans are fixed-income based, so _any_ inflation results in lower real income. Because inflation didn't exist for so long retirees were sold fixed income plans. So, rather than ignore inflation, or hope it remains negligible, its better to plan with it in mind - to structure your retirement investments so they are effectively immune to inflation (ie their value gets higher as inflation exists.) Incidentally inflation has equal benefits on the other side, loans are eroded in value as inflation happens, which is (to the borowwer) a good thing (and that ultimately applies to foreign debt as well).
- sirwhinesalot 5y ago
  How can you model something for which you have no real data ;) ? I guess multiplying the government provided numbers times 3 would give a somewhat accurate estimation. Even if you trust the government numbers suddenly going from 2% inflation to 8% inflation ruins most FIRE plans which tend to have razor thin margins (so to say) on the returns they get on their investments.
  - bruce511 5y ago
    Bear in mind that there is no "real data" of the future. There is only present and past data. And modeling based on that, well, let's say there are no guarantees in life. Part of planning is understanding where the risks are, what the premises are that the model relies on and so on. Depending on inflation being 0-2% over a 30 to 40 year working-life seems optimistic. So, in planning, some diversification is appropriate. Some part of your retirement earnings should be inflation-adjusted. For example say you get rent on a property. That rent will tend to rise following inflation. Equities, especially ones chosen for dividends will also tend to follow inflation (over the long term). By contrast a fixed-yield item like say a bond returning 5% is not inflation linked, and leaves you vulnerable to inflation variances. If your model only relies on fixed-yield, and does not allow for variable amounts of inflation, then the model needs updating IMO.
    - sirwhinesalot 5y ago
      Diversifying with some real-estate (maybe a REIT) sounds like a good approach to counter inflation.

Inflation is challenging to model these days.

by ozten 5y ago

Inflation is challenging to model these days.

It's really not, but perhaps more importantly it shows why retirement income streams should respond to inflation and not be fixed. As someone who has lived in a country with mild inflation all my life it's not as scary to me as it seems to be to US folk. It's just another variable in the formula. (Americans seem to conflate any inflation with hyper inflation, which seems weird.) I've come to understand though that most US retirement plans are fixed-income based, so _any_ inflation results in lower real income. Because inflation didn't exist for so long retirees were sold fixed income plans. So, rather than ignore inflation, or hope it remains negligible, its better to plan with it in mind - to structure your retirement investments so they are effectively immune to inflation (ie their value gets higher as inflation exists.) Incidentally inflation has equal benefits on the other side, loans are eroded in value as inflation happens, which is (to the borowwer) a good thing (and that ultimately applies to foreign debt as well).

sirwhinesalot 5y ago
How can you model something for which you have no real data ;) ? I guess multiplying the government provided numbers times 3 would give a somewhat accurate estimation. Even if you trust the government numbers suddenly going from 2% inflation to 8% inflation ruins most FIRE plans which tend to have razor thin margins (so to say) on the returns they get on their investments.
- bruce511 5y ago
  Bear in mind that there is no "real data" of the future. There is only present and past data. And modeling based on that, well, let's say there are no guarantees in life. Part of planning is understanding where the risks are, what the premises are that the model relies on and so on. Depending on inflation being 0-2% over a 30 to 40 year working-life seems optimistic. So, in planning, some diversification is appropriate. Some part of your retirement earnings should be inflation-adjusted. For example say you get rent on a property. That rent will tend to rise following inflation. Equities, especially ones chosen for dividends will also tend to follow inflation (over the long term). By contrast a fixed-yield item like say a bond returning 5% is not inflation linked, and leaves you vulnerable to inflation variances. If your model only relies on fixed-yield, and does not allow for variable amounts of inflation, then the model needs updating IMO.
  - sirwhinesalot 5y ago
    Diversifying with some real-estate (maybe a REIT) sounds like a good approach to counter inflation.