Is inflation bad...

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BanquetBeer
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Is inflation bad...

Post by BanquetBeer »

I’ve been reading a lot of posts on retirement boards saying that they feel sorry for the youngins who are still working and saving. But thinking about it: the people most hurt by inflation would seem to be 1) those spending down investments and 2) those with substantial assets in non-inflation protected bonds.
My thought process being: stocks (diversified index funds) will eventually catch up to inflation because the price of products they sell will go up. As long as you don’t need to sell during the transition where stocks may be behind the inflation curve, your investments:economy ratio should be around the same before/after an inflation event.
As for bonds, locking into a 4% corporate bond if interest rates and inflation rise should be self explanatory.

So my question is: does this sound right or am I missing something here? Assuming I have at least 10 working years left and I expect inflation to normalize before then... also basically <10% bonds due to timeline and low yields. (Also because I am young and could easily work 10 additional years if need be)
alex_686
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Re: Is inflation bad...

Post by alex_686 »

Inflation increases the price if things. Assets are a thing. Since equities are a claim on real economic productive assets, equities have been a excellent hedge against inflation.

You do want to step back and think why we are having inflation. The OPEC oil embargo caused both inflation and a economic recession. Equities only hedged against one of those risk factors.

What is going to cause the next bout of inflation? I would guess we are going to have a 1 time spike as we exit COVID. There is a lot of money sitting in bank accounts and lots if pent up demand. This should fatten some companies bottom line.
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Re: Is inflation bad...

Post by whereskyle »

BanquetBeer wrote: Thu May 13, 2021 7:32 am I’ve been reading a lot of posts on retirement boards saying that they feel sorry for the youngins who are still working and saving. But thinking about it: the people most hurt by inflation would seem to be 1) those spending down investments and 2) those with substantial assets in non-inflation protected bonds.
My thought process being: stocks (diversified index funds) will eventually catch up to inflation because the price of products they sell will go up. As long as you don’t need to sell during the transition where stocks may be behind the inflation curve, your investments:economy ratio should be around the same before/after an inflation event.
As for bonds, locking into a 4% corporate bond if interest rates and inflation rise should be self explanatory.

So my question is: does this sound right or am I missing something here? Assuming I have at least 10 working years left and I expect inflation to normalize before then... also basically <10% bonds due to timeline and low yields. (Also because I am young and could easily work 10 additional years if need be)
Seems like you understand the basics to me.

As for predicting the inflation rate or where interest rates will go for the purpose of timing the bond market, I think that's a terrible idea. Market timers are worse at predicting interest rates than at predicting stock prices, and they're awful at that to begin with:

https://www.advisorperspectives.com/art ... bout-bonds

I think it makes sense to gradually build a bond position over time well in advance of retirement. If you hit your target number early, you can accelerate the transition. Even in the worst times for bonds (the 70s and early 80s), shorts and intermediates performed admirably and respectably respectively, nearly keeping up with runaway inflation and recovering small losses within a year or so. By contrast, it wouldn't be fun to be on the eve of retirement and then have your all-equity portfolio crash 50%.
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David Jay
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Re: Is inflation bad...

Post by David Jay »

Several analyses have shown that the times where 4% SWR has failed occurred when retiring into sustained periods of high inflation, not the proverbial “40% drop in the market”.
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Re: Is inflation bad...

Post by carolinaman »

Equities usually provide protection against inflation over the long term. Your employment for the next 10 years should be your best protection as wages tend to keep up with inflation. Keep in mind that only 10% in bonds as you near retirement gives you great exposure to the Sequence of Return risk.

Inflation seems to be the current hot topic but is not the only risk investors and retirees need to worry about. Your investment plan should consider all of those risks, notably extended bear market, sequence of return, bond bear market, recessions and inflation.
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BanquetBeer
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Re: Is inflation bad...

Post by BanquetBeer »

As for bonds, I plan to ramp up bonds to something like a 70/30 portfolio. There is considerable cushion in my plan (3.5% SWR and maybe 50% over current spend to protect against risk of divorce) but I can do that with combo of living well below our means. I expect in about 5 years to swap contributions and dividends into bonds.


I am just thinking that inflation mostly hits those with large non-equity, non-inflation protected assets and those who need to sell in the short term.

From the responses so far, that sounds like there isn’t any major gaps in my logic.
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Re: Is inflation bad...

Post by Robot Monster »

One thing to understand is that depressed interest rates are helping prop up the stock market. Many people shy away from bonds and cash because of this, and feel forced into stocks. Now consider what might happen if inflation bubbles up in a surprising way. (See below for what this might look like.) It's possible that the Fed will have to jack rates up above inflation, magnificently increasing the appeal of bonds and cash and offering newfound competition to stocks which could hurt stock prices. This is not a reason to get out of stocks. There are many moving parts, and this is just one aspect of things.

***

Larry Summers has been warning about inflation, saying "saying risks resemble those seen in the 1970s" source and Jeremy Siegel believes "we're going to have much more inflation than the Fed is predicting, 4 or 5%, and that may go on for two to three years." source
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simas
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Re: Is inflation bad...

Post by simas »

alex_686 wrote: Thu May 13, 2021 7:45 am Inflation increases the price if things. Assets are a thing. Since equities are a claim on real economic productive assets, equities have been a excellent hedge against inflation.
or another way to look at it - it is a symptom of loss of value in whatever unit of measurement you are using (dollar in our case). dollar being debased => you see various inflation(s) (housing inflation, crypto inflation, anything inflation).

I come from former Soviet Union and was around in the late 80s. When population start demanding things that government just cant pay for [political comment removed by Moderator Misenplace], it can work once, twice, however eventually this comes crushing down, hard.

Russia learned its hard lesson by losing decade of development, losing territories (former 'republics' who inherited everything for free from the SU but refused to pay any of its obligations whatsoever), and massive social unrest in the 90.. After learning the lesson they run both trade and fiscal surplus (unlike us). We did not learn anything and busy 'transforming'
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Re: Is inflation bad...

Post by nisiprius »

It's bad for creditors and good for debtors.

Or rather, inflation that is higher than expected when the debt was incurred is bad for creditors and good for debtors.

Young people at the start of their career are typically debtors.

Retirees with retirement savings are typically creditor.

As I understand it, the current thinking is that there is a "right amount" of inflation, not zero, and that most central banks have an explicit target--they are trying to keep inflation at a specific, stable, lowish number. For the United States it is 2%. For an explanation, Why does the Federal Reserve aim for inflation of 2%?
Last edited by nisiprius on Thu May 13, 2021 9:30 am, edited 2 times in total.
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Re: Is inflation bad...

Post by leemalk »

The issue for the consumer is that wages don't reflect inflation as quickly as everything else they buy. I don't expect many employers to be handing out 4-5% COL increases this year. Most companies only budgeted in their overheads for the usual 1-2%. Unless the rest of their P&L is overperforming, they can't afford it. If you have a high level of disposable income, you can absorb this without changing your lifestyle. But if not, you will need to cut back on consumption (or just fund your lifestyle through debt).
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Re: Is inflation bad...

Post by bottlecap »

It hurts everyone except those that get to spend the newly created money first - typically the wealthy who are most credit-worthy or politically connected.

Those deep in debt may eventually get some benefit - if their wages keep pace with inflation. But that's not always the case.

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willthrill81
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Re: Is inflation bad...

Post by willthrill81 »

David Jay wrote: Thu May 13, 2021 7:51 am Several analyses have shown that the times where 4% SWR has failed occurred when retiring into sustained periods of high inflation, not the proverbial “40% drop in the market”.
Whether the '4% rule' has ever actually failed depends on the assets and data being used. Be that as it may, the historical record does indicate that high inflation can certainly be a big drag on SWRs. But it's certainly not the only factor at work. For instance, 1937 retirees arguably had the second worst go of it in terms of SWRs (after 1966 retirees), and they experienced high inflation (that briefly reached 20%) during WW2, the early stage of their retirement. Of course, they also experienced big losses in stocks that took a long while to recover from.

Personally, I haven't seen a compelling reason why retirees shouldn't strongly favor TIPS and I bonds over nominal bonds, the latter of which have no protection from unexpected inflation.
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Re: Is inflation bad...

Post by Soon2BXProgrammer »

BanquetBeer wrote: Thu May 13, 2021 7:32 am I’ve been reading a lot of posts on retirement boards saying that they feel sorry for the youngins who are still working and saving. But thinking about it: the people most hurt by inflation would seem to be 1) those spending down investments and 2) those with substantial assets in non-inflation protected bonds.
My thought process being: stocks (diversified index funds) will eventually catch up to inflation because the price of products they sell will go up. As long as you don’t need to sell during the transition where stocks may be behind the inflation curve, your investments:economy ratio should be around the same before/after an inflation event.
As for bonds, locking into a 4% corporate bond if interest rates and inflation rise should be self explanatory.

So my question is: does this sound right or am I missing something here? Assuming I have at least 10 working years left and I expect inflation to normalize before then... also basically <10% bonds due to timeline and low yields. (Also because I am young and could easily work 10 additional years if need be)
reasonable expected inflation is good... unexpected high inflation is hard on lots of people... deflation is bad. really low inflation is ok, but by having a little inflation, it makes people take action with their money (either invest or spend).
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Re: Is inflation bad...

Post by Astones »

alex_686 wrote: Thu May 13, 2021 7:45 am Inflation increases the price if things. Assets are a thing. Since equities are a claim on real economic productive assets, equities have been a excellent hedge against inflation.
In general this is true, but it seems that inflation has already affected stock prices before it could affect the prices of consumer goods. Because of this asymmetry, for those who intend to start investing now, stocks might not hedge against inflation as well as they normally do.

in other words, there are good chances that the boost in stock prices due to inflation has already taken place.
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Re: Is inflation bad...

Post by willthrill81 »

bottlecap wrote: Thu May 13, 2021 9:35 am Those deep in debt may eventually get some benefit - if their wages keep pace with inflation. But that's not always the case.
Good point. The lag between inflation and income increases can easily overwhelm the supposed benefit of inflation 'eating away at your debt'. If most of one's expenses were fixed in nominal dollars, the benefit would be greater, but if something like a mortgage is 25% of one's income, then that means that the majority of one's expenses are almost certainly not fixed in nominal dollars and are subject to inflation. Consequently, income lagging inflation can put people into a significant crunch.
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Re: Is inflation bad...

Post by willthrill81 »

Astones wrote: Thu May 13, 2021 9:43 am
alex_686 wrote: Thu May 13, 2021 7:45 am Inflation increases the price if things. Assets are a thing. Since equities are a claim on real economic productive assets, equities have been a excellent hedge against inflation.
In general this is true, but it seems that inflation has already affected stock prices before it could affect the prices of consumer goods. Because of this asymmetry, for those who intend to start investing now, stocks might not hedge against inflation as well as they normally do.

in other words, there are good chances that the boost in stock prices due to inflation has already taken place.
Yes, that's true. The stock market is nothing if not forward looking. On David Stein's podcast episode yesterday in which he discussed the likelihood of inflation similar to that of the 1970s occurring again, he mentioned that inflation spikes have generally led to stocks having slightly negative real returns in the following 12 months, though stocks have been pretty resilient against inflation over the long-term.
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Re: Is inflation bad...

Post by Watty »

BanquetBeer wrote: Thu May 13, 2021 7:32 am So my question is: does this sound right or am I missing something here?
Back in the late 1970s and early 1980s double digit inflation years they called it "stagflation" because wages were stagnant but prices were going up. That was really bad since it basically translated into a lower standard of living and reduced savings.

It did benefit some people like my parents who had a mortgage at around 3.25% during the double digit inflation years. Their generation did not talk about money much but I can remember them saying that inflation made their mortgage payments less than their utility bills. This is where the dogma about housing being a good investment came from and how you should buy as much house as possible.

You may also be overlooking the impact of taxes. For example if inflation is 6% and you get a 6% raise then you could easily pay a third of pay raise in federal and state income taxes as well as FICA taxes. Inflation can also put you in a higher tax bracket if the tax brackets are not adjusted for inflation, and that is a common stealth tax increase. If you are investing in a taxable account then you would also have capital gains taxes to pay just because your investments kept up with inflation.

One thing to keep in mind though is that as bad as inflation can be deflation is even worse since it tends to feed on itself an spiral out of control.
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Re: Is inflation bad...

Post by willthrill81 »

Watty wrote: Thu May 13, 2021 10:17 am You may also be overlooking the impact of taxes. For example if inflation is 6% and you get a 6% raise then you could easily pay a third of pay raise in federal and state income taxes as well as FICA taxes.
At least the federal income tax rates are indexed to inflation.
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Re: Is inflation bad...

Post by Watty »

BanquetBeer wrote: Thu May 13, 2021 7:32 am As for bonds, locking into a 4% corporate bond if interest rates and inflation rise should be self explanatory.
That is not at all true. The details are fuzzy since I was right out of college and did not have money to invest but I can remember a time when people would have thought you were insane to buy a 30 year treasury that was paying 12% when inflation was something like 15%.
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Re: Is inflation bad...

Post by starboi »

BanquetBeer wrote: Thu May 13, 2021 7:32 am I’ve been reading a lot of posts on retirement boards saying that they feel sorry for the youngins who are still working and saving. But thinking about it: the people most hurt by inflation would seem to be 1) those spending down investments and 2) those with substantial assets in non-inflation protected bonds.
My thought process being: stocks (diversified index funds) will eventually catch up to inflation because the price of products they sell will go up. As long as you don’t need to sell during the transition where stocks may be behind the inflation curve, your investments:economy ratio should be around the same before/after an inflation event.
As for bonds, locking into a 4% corporate bond if interest rates and inflation rise should be self explanatory.

So my question is: does this sound right or am I missing something here? Assuming I have at least 10 working years left and I expect inflation to normalize before then... also basically <10% bonds due to timeline and low yields. (Also because I am young and could easily work 10 additional years if need be)
"Youngings" are broke and don't have assets. The average net worth of a 30 year old (or younger) American is negative. The only way they can catch up to inflation is if their pay goes up.

https://thecollegeinvestor.com/14611/av ... llennials/
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Re: Is inflation bad...

Post by nisiprius »

alex_686 wrote: Thu May 13, 2021 7:45 am Inflation increases the price if things. Assets are a thing. Since equities are a claim on real economic productive assets, equities have been a excellent hedge against inflation.
In The Intelligent Investor, 4th ed., 1973,
Benjamin Graham wrote:(p. 20) On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods... (p. 23) ....if the investor concentrates his portfolio on common stocks he is very likely to be led astray either by exhilarating advances or by distressing declines. This is particularly true if his reasoning is geared closely to expectations of further inflation.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Is inflation bad...

Post by whereskyle »

nisiprius wrote: Thu May 13, 2021 11:05 am
alex_686 wrote: Thu May 13, 2021 7:45 am Inflation increases the price if things. Assets are a thing. Since equities are a claim on real economic productive assets, equities have been a excellent hedge against inflation.
In The Intelligent Investor, 4th ed., 1973,
Benjamin Graham wrote:(p. 20) On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods... (p. 23) ....if the investor concentrates his portfolio on common stocks he is very likely to be led astray either by exhilarating advances or by distressing declines. This is particularly true if his reasoning is geared closely to expectations of further inflation.
Over the long term, equities are certainly the best inflation protection we have, such that many financial advisers would say equities are essential to beating inflation over the long term. Over the short term, not so much.
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Re: Is inflation bad...

Post by alex_686 »

nisiprius wrote: Thu May 13, 2021 11:05 am
alex_686 wrote: Thu May 13, 2021 7:45 am Inflation increases the price if things. Assets are a thing. Since equities are a claim on real economic productive assets, equities have been a excellent hedge against inflation.
In The Intelligent Investor, 4th ed., 1973,
Benjamin Graham wrote:(p. 20) On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period 1966-1970. The rise in the cost of living was 22%... but both stock earnings and stock prices have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods... (p. 23) ....if the investor concentrates his portfolio on common stocks he is very likely to be led astray either by exhilarating advances or by distressing declines. This is particularly true if his reasoning is geared closely to expectations of further inflation.
As the old saw goes, corrections does not mean causation. Or in this case, a single observation. Were the poor stock returns due to inflation or were they due to the 1961 recession? Or I could counter with a counter example, like the 1990s which had high inflation and excellent returns.

However, there are many excellent studies out there which shows that equities are a decent hedge against inflation. Over 100 years of history, 20 currencies, across multiple sectors. Really solid theoretical and historical stuff to back this up.

Equities are not a good hedge against recession, as you pointed out. While this is not surprising, many people get this mixed up.
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Re: Is inflation bad...

Post by seajay »

alex_686 wrote: Thu May 13, 2021 11:16 amHowever, there are many excellent studies out there which shows that equities are a decent hedge against inflation. Over 100 years of history, 20 currencies, across multiple sectors. Really solid theoretical and historical stuff to back this up.
Just have to figure how to live for another century then :)
Over twenty year periods, perhaps a lifetime for a newly retired 65 year old, such as early/mid 1960's to early/mid 1980's stock gross total returns barely offset inflation, when all dividends were reinvested. Dipping to half the inflation adjusted value along the way. For anyone drawing a income and paying taxes in effect they were eating capital and where a 4% SWR might have seen the SW value rise to being 8% of the portfolio value at times. The events driving such conditions also tend to see taxes being increased over such times.

Click the inflation adjusted chart tickbox in this link for a more recent picture of what can happen.
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Re: Is inflation bad...

Post by simas »

starboi wrote: Thu May 13, 2021 10:31 am
BanquetBeer wrote: Thu May 13, 2021 7:32 am I’ve been reading a lot of posts on retirement boards saying that they feel sorry for the youngins who are still working and saving. But thinking about it: the people most hurt by inflation would seem to be 1) those spending down investments and 2) those with substantial assets in non-inflation protected bonds.
My thought process being: stocks (diversified index funds) will eventually catch up to inflation because the price of products they sell will go up. As long as you don’t need to sell during the transition where stocks may be behind the inflation curve, your investments:economy ratio should be around the same before/after an inflation event.
As for bonds, locking into a 4% corporate bond if interest rates and inflation rise should be self explanatory.

So my question is: does this sound right or am I missing something here? Assuming I have at least 10 working years left and I expect inflation to normalize before then... also basically <10% bonds due to timeline and low yields. (Also because I am young and could easily work 10 additional years if need be)
"Youngings" are broke and don't have assets. The average net worth of a 30 year old (or younger) American is negative. The only way they can catch up to inflation is if their pay goes up.

https://thecollegeinvestor.com/14611/av ... llennials/
and they are now competing with the entire world (not just their peers locally) unless they are in few professions that absolutely require local presence (a plumber via zoom may not be as efficient in fixing that overflooding toilet after all .. ).

My experience is that wages do not keep up with rising costs of living in such situations and you get significantly higher social tension
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Re: Is inflation bad...

Post by alex_686 »

seajay wrote: Thu May 13, 2021 11:58 am
alex_686 wrote: Thu May 13, 2021 11:16 amHowever, there are many excellent studies out there which shows that equities are a decent hedge against inflation. Over 100 years of history, 20 currencies, across multiple sectors. Really solid theoretical and historical stuff to back this up.
Just have to figure how to live for another century then :)
Over twenty year periods, perhaps a lifetime for a newly retired 65 year old, such as early/mid 1960's to early/mid 1980's stock gross total returns barely offset inflation, when all dividends were reinvested. Dipping to half the inflation adjusted value along the way. For anyone drawing a income and paying taxes in effect they were eating capital and where a 4% SWR might have seen the SW value rise to being 8% of the portfolio value at times. The events driving such conditions also tend to see taxes being increased over such times.

Click the inflation adjusted chart tickbox in this link for a more recent picture of what can happen.
Can their be periods of high inflation and low returns? Yes. low inflation and low returns? Yes. High inflation and high returns? Yes. Low inflation and high returns? Yes. You can find all of these examples.

Does inflation have any power to predict returns? No. The linkage between these 2 variables are low. Usually there is a 3rd factor that has a casual impact on inflation and returns.
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Re: Is inflation bad...

Post by secondopinion »

simas wrote: Thu May 13, 2021 2:34 pm
starboi wrote: Thu May 13, 2021 10:31 am
BanquetBeer wrote: Thu May 13, 2021 7:32 am I’ve been reading a lot of posts on retirement boards saying that they feel sorry for the youngins who are still working and saving. But thinking about it: the people most hurt by inflation would seem to be 1) those spending down investments and 2) those with substantial assets in non-inflation protected bonds.
My thought process being: stocks (diversified index funds) will eventually catch up to inflation because the price of products they sell will go up. As long as you don’t need to sell during the transition where stocks may be behind the inflation curve, your investments:economy ratio should be around the same before/after an inflation event.
As for bonds, locking into a 4% corporate bond if interest rates and inflation rise should be self explanatory.

So my question is: does this sound right or am I missing something here? Assuming I have at least 10 working years left and I expect inflation to normalize before then... also basically <10% bonds due to timeline and low yields. (Also because I am young and could easily work 10 additional years if need be)
"Youngings" are broke and don't have assets. The average net worth of a 30 year old (or younger) American is negative. The only way they can catch up to inflation is if their pay goes up.

https://thecollegeinvestor.com/14611/av ... llennials/
and they are now competing with the entire world (not just their peers locally) unless they are in few professions that absolutely require local presence (a plumber via zoom may not be as efficient in fixing that overflooding toilet after all .. ).

My experience is that wages do not keep up with rising costs of living in such situations and you get significantly higher social tension
Fortunately, I have a considerable net worth (definitely not negative). But yes, I see that global competition suppresses wages. However, I have seen junk work as well for this (there are many people who are "remote work con artists" or just plain incapable); many employers are still favoring local talent as a result (which is harmful for me since I am a very talented worker who does remote work).
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Re: Is inflation bad...

Post by nisiprius »

whereskyle wrote: Thu May 13, 2021 11:08 am...Over the long term, equities are certainly the best inflation protection we have, such that many financial advisers would say equities are essential to beating inflation over the long term...
Those financial advisers would be pretending that TIPS do not exist.
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Re: Is inflation bad...

Post by phantom0308 »

Inflation concerns seem overblown. We’ve persistently missed the 2% target so a few quarters of higher than target inflation isn’t concerning to me. For reference 3-4% inflation is similar to the 80s and 90s that most business people are nostalgic for.
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Re: Is inflation bad...

Post by JoeRetire »

David Jay wrote: Thu May 13, 2021 7:51 am Several analyses have shown that the times where 4% SWR has failed occurred when retiring into sustained periods of high inflation, not the proverbial “40% drop in the market”.
When exactly has a 4% SWR failed?
Do you have a link to the analysis?
Last edited by JoeRetire on Thu May 13, 2021 3:35 pm, edited 1 time in total.
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BanquetBeer
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Re: Is inflation bad...

Post by BanquetBeer »

I’m saying if we have high inflation from year 2021-2027 then things settle down... if I don’t need to sell stocks (already accumulated) until 2035 my assumption now should be that the inflation is not going to impact my (diversified index fund) holdings since they should have normalized to the updated P:E (as well as they should have normalized to the P:E had we not experienced high inflation) so long as you don’t need to sell during the non-steady state or transition periods.

I do expect some average long term inflation adjusted growth - for estimation I use 6% on stocks (knowing I can work longer if reality doesn’t meet expectations) so avoiding transitions $100 today will hopefully be around $100 * 1.06^z (in “z” years) so long as my time period is long enough to pass the high inflation and some nominal number of years to return to normal. My hope is that the reversion to mean is <5 years after inflation is tamed.

As for earnings during that time, my hope is it tracks inflation closely but who knows.
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Re: Is inflation bad...

Post by David Jay »

JoeRetire wrote: Thu May 13, 2021 3:29 pm
David Jay wrote: Thu May 13, 2021 7:51 am Several analyses have shown that the times where 4% SWR has failed occurred when retiring into sustained periods of high inflation, not the proverbial “40% drop in the market”.
When exactly has a 4% SWR failed?
Do you have a link to the analysis?
I will try to find it...
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UpsetRaptor
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Re: Is inflation bad...

Post by UpsetRaptor »

In a macro sense, some inflation now is actually a good sign demand is returning strongly. As long as it doesn't get out of hand (and there's no reason at this point to think that), it shouldn't be anything to fear.
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Re: Is inflation bad...

Post by KlangFool »

BanquetBeer wrote: Thu May 13, 2021 7:32 am
So my question is: does this sound right or am I missing something here? Assuming I have at least 10 working years left and I expect inflation to normalize before then... also basically <10% bonds due to timeline and low yields. (Also because I am young and could easily work 10 additional years if need be)
BanquetBeer,

When you asked the wrong question, you would never get the right answer!

A) We cannot predict inflation.

B) Even if we can, we do not know how it impacts the stock and bond return.

C) Essentially, you are asking the wrong question. This has nothing to do with your asset allocation.

The correct questions are

1) What is your current portfolio value?

2) What is your annual savings?

3) What is the return rate that you need in order to reach your goal in X years?

For example, if you only need a 5% nominal return rate to reach your goal, why do you need an AA more aggressive than 70/30 now?

Do not take unnecessary RISK when you have less than 10 years to go.

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Re: Is inflation bad...

Post by whereskyle »

nisiprius wrote: Thu May 13, 2021 3:19 pm
whereskyle wrote: Thu May 13, 2021 11:08 am...Over the long term, equities are certainly the best inflation protection we have, such that many financial advisers would say equities are essential to beating inflation over the long term...
Those financial advisers would be pretending that TIPS do not exist.
TIPS promise to keep up with inflation, but no one should invest in them in anticipation of beating it, and no financial adviser should say "TIPS are essential to beating inflation over the long term," because that's not what TIPS promise to do.
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Re: Is inflation bad...

Post by alex_686 »

whereskyle wrote: Thu May 13, 2021 4:33 pm
nisiprius wrote: Thu May 13, 2021 3:19 pm
whereskyle wrote: Thu May 13, 2021 11:08 am...Over the long term, equities are certainly the best inflation protection we have, such that many financial advisers would say equities are essential to beating inflation over the long term...
Those financial advisers would be pretending that TIPS do not exist.
TIPS promise to keep up with inflation, but no one should invest in them in anticipation of beating it, and no financial adviser should say "TIPS are essential to beating inflation over the long term," because that's not what TIPS promise to do.
It depends. Risk and return are linked.

TIPS is a excellent hedge against inflation. If you ignore taxes, the mismatch between CPI and inflation, etc. It is also one of the lowest risk assets out there and thus has the lowest return.

Equites is a decent hedge against inflation, in particular over the long term. So it comes in a strong second place against inflation risk. There are, of course, other risks out there where it has a high exposure. And, of course, it has a higher expected return than TIPS.
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Re: Is inflation bad...

Post by grok87 »

David Jay wrote: Thu May 13, 2021 7:51 am Several analyses have shown that the times where 4% SWR has failed occurred when retiring into sustained periods of high inflation, not the proverbial “40% drop in the market”.
Interesting. Do you have a source handy?
RIP Mr. Bogle.
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Re: Is inflation bad...

Post by Godot »

willthrill81 wrote: Thu May 13, 2021 9:37 am
David Jay wrote: Thu May 13, 2021 7:51 am Several analyses have shown that the times where 4% SWR has failed occurred when retiring into sustained periods of high inflation, not the proverbial “40% drop in the market”.
Personally, I haven't seen a compelling reason why retirees shouldn't strongly favor TIPS and I bonds over nominal bonds, the latter of which have no protection from unexpected inflation.
How does favoring I-Bonds in retirement help (at only 10k a year)? Seems a bit late, no?
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Re: Is inflation bad...

Post by Oicuryy »

Here is a telltale graph of average hourly earnings versus CPI. Could also be called an index of CPI-adjusted average hourly earnings. It doesn't look like I expected it to.

Image
https://fred.stlouisfed.org/graph/?g=E0JZ

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Re: Is inflation bad...

Post by international001 »

willthrill81 wrote: Thu May 13, 2021 10:20 am
Watty wrote: Thu May 13, 2021 10:17 am You may also be overlooking the impact of taxes. For example if inflation is 6% and you get a 6% raise then you could easily pay a third of pay raise in federal and state income taxes as well as FICA taxes.
At least the federal income tax rates are indexed to inflation.
Nobody mentioned yet taxflation.
If you sell assets, you pay more in taxes. Because selling and cost prices are nominal, not adjusted for inflation.
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Re: Is inflation bad...

Post by BanquetBeer »

KlangFool wrote: Thu May 13, 2021 3:49 pm BanquetBeer,

When you asked the wrong question, you would never get the right answer!

A) We cannot predict inflation.

B) Even if we can, we do not know how it impacts the stock and bond return.

C) Essentially, you are asking the wrong question. This has nothing to do with your asset allocation.

The correct questions are

1) What is your current portfolio value?

2) What is your annual savings?

3) What is the return rate that you need in order to reach your goal in X years?

For example, if you only need a 5% nominal return rate to reach your goal, why do you need an AA more aggressive than 70/30 now?

Do not take unnecessary RISK when you have less than 10 years to go.

KlangFool
I am about halfway to my goal, mid 30s. Save about 0.6x every year. Could survive on much less than goal. Don’t really see it as a risk because timing is flexible: recession hits soon, work more and save more. No recession? Swap to bonds and retire. Recession after retirement? I can get by comfortably on less than half. But I was just wondering about inflation on securities. If it does happen now, is this a long term savings risk or just something to ignore.. (if I don’t spend any during the turmoil).

All of the high inflation risk scenarios people talk about are during draw down. But I’m wondering about the risk during savings - does it hurt/help/not matter. I imagine if stocks drop it could be a net positive. Suppose it depends on how my salary changes.
Last edited by BanquetBeer on Thu May 13, 2021 7:08 pm, edited 2 times in total.
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Re: Is inflation bad...

Post by willthrill81 »

Godot wrote: Thu May 13, 2021 6:30 pm
willthrill81 wrote: Thu May 13, 2021 9:37 am
David Jay wrote: Thu May 13, 2021 7:51 am Several analyses have shown that the times where 4% SWR has failed occurred when retiring into sustained periods of high inflation, not the proverbial “40% drop in the market”.
Personally, I haven't seen a compelling reason why retirees shouldn't strongly favor TIPS and I bonds over nominal bonds, the latter of which have no protection from unexpected inflation.
How does favoring I-Bonds in retirement help (at only 10k a year)? Seems a bit late, no?
I didn't mean that investors should wait until retirement to buy TIPS and I bonds, rather, that removing inflation risk from one's fixed income allocation is potentially very valuable for retirees.

However, retirees can still move up to $10k per individual ($20k for couples) from nominal fixed income to I bonds. Better late than never.
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Re: Is inflation bad...

Post by willthrill81 »

international001 wrote: Thu May 13, 2021 6:56 pm
willthrill81 wrote: Thu May 13, 2021 10:20 am
Watty wrote: Thu May 13, 2021 10:17 am You may also be overlooking the impact of taxes. For example if inflation is 6% and you get a 6% raise then you could easily pay a third of pay raise in federal and state income taxes as well as FICA taxes.
At least the federal income tax rates are indexed to inflation.
Nobody mentioned yet taxflation.
If you sell assets, you pay more in taxes. Because selling and cost prices are nominal, not adjusted for inflation.
Taxflation is a little more complicated than it seems at first glance to many (not saying you) because the tax brackets for both earned income and long-term capital gains are adjusted annually for inflation. But you're correct that your cost basis effectively 'shrinks' at the rate of inflation, creating more capital gains even if the real gains are zero. Also, not all taxes are indexed to inflation (e.g., taxation of SS benefits).
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Re: Is inflation bad...

Post by KlangFool »

BanquetBeer wrote: Thu May 13, 2021 7:03 pm
I am about halfway to my goal, mid 30s. Save about 0.6x every year. Could survive on much less than goal. Don’t really see it as a risk because timing is flexible: recession hits soon, work more and save more. No recession? Swap to bonds and retire.
BanquetBeer,

What is the trade off of taking on more RISK? Assuming that your portfolio is at 12.5X and you save 0.6X every year,

You can reach 25X with an annual 5% return in 8+ years.

You can reach 25X with an annual 7% return in 6+ years.

You can reach 25X with an annual 10% return in 5+ years.

Starting Net Worth 12.50
Annual Savings 0.60
Years
Annual Return Rate 5 6 7 8 9
5.00% 19.27 20.83 22.47 24.20 26.01
6.00% 20.11 21.92 23.83 25.86 28.01
7.00% 20.98 23.05 25.26 27.63 30.17
8.00% 21.89 24.24 26.78 29.52 32.48
9.00% 22.82 25.48 28.37 31.52 34.96
10.00% 23.79 26.77 30.05 33.66 37.62

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Re: Is inflation bad...

Post by BanquetBeer »

KlangFool wrote: Thu May 13, 2021 7:15 pm BanquetBeer,

What is the trade off of taking on more RISK? Assuming that your portfolio is at 12.5X and you save 0.6X every year,

KlangFool
I’ve run the numbers every witch way... I can’t tell you what the right path is. Risk retiring a few years early or a few years late than a more balanced portfolio. I would guess I have something like 20% more over the last 5 years due to 100% stocks. My long term goal is have enough money that I can increase my equity position and not worry.

Compared to my current expenses I have about 25x but long term I expect to spend more as the kids grow. So there is lots of flex. Main goal is to not care during the oil price ups and downs.
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Re: Is inflation bad...

Post by David Jay »

David Jay wrote: Thu May 13, 2021 3:37 pm
JoeRetire wrote: Thu May 13, 2021 3:29 pm
David Jay wrote: Thu May 13, 2021 7:51 am Several analyses have shown that the times where 4% SWR has failed occurred when retiring into sustained periods of high inflation, not the proverbial “40% drop in the market”.
When exactly has a 4% SWR failed?
Do you have a link to the analysis?
I will try to find it...
I find a number of links here on BH referring to 1966 (or “mid-60s”) as the worst year to retire, it seems like common knowledge:
viewtopic.php?p=3559560#p3559560
posting.php?mode=quote&f=10&p=3712732
viewtopic.php?t=344094

Here “willthrill” (who usually does careful work) states that 1966 is the worst year and the SWR for 1966 is 3.8%, you could probably query him further: posting.php?mode=quote&f=10&p=5456731

I know I have seen a detailed analysis, but I can’t recall where it was...
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Re: Is inflation bad...

Post by willthrill81 »

David Jay wrote: Thu May 13, 2021 10:22 pm
David Jay wrote: Thu May 13, 2021 3:37 pm
JoeRetire wrote: Thu May 13, 2021 3:29 pm
David Jay wrote: Thu May 13, 2021 7:51 am Several analyses have shown that the times where 4% SWR has failed occurred when retiring into sustained periods of high inflation, not the proverbial “40% drop in the market”.
When exactly has a 4% SWR failed?
Do you have a link to the analysis?
I will try to find it...
I find a number of links here on BH referring to 1966 (or “mid-60s”) as the worst year to retire, it seems like common knowledge:
viewtopic.php?p=3559560#p3559560
posting.php?mode=quote&f=10&p=3712732
viewtopic.php?t=344094

Here “willthrill” (who usually does careful work) states that 1966 is the worst year and the SWR for 1966 is 3.8%, you could probably query him further: posting.php?mode=quote&f=10&p=5456731

I know I have seen a detailed analysis, but I can’t recall where it was...
You rang? :wink:

I got the number from HomerJ, but I don't know where he got it from. I've referred to the Trinity study, Michael Kitces posts on the '4% rule' (he has many), , and the Simba backtesting spreadsheet, and none of them show that the '4% rule' failed for the 1966 cohort. All of them show that the portfolio would have been very close to depletion by the 30 year mark but not an outright failure. Only Karsten from Early Retirement Now shows failure of the '4% rule' for the 1966 cohort; I believe he did so using cFIREsim to do so and found the actual SWR for that cohort to be 3.6% (I personally trust the Simba backtesting spreadsheet, the product of long labor from many of our own BHs, over everything else though). When we get down to the very fine points of SWRs, the choice of which asset class and which data we use can make a significant difference (e.g., using 10 year Treasuries, commercial paper, T-bills, etc., for the bond portion).

At any rate, I don't think that whether the SWR for the 1966 cohort was 4%, 3.8%, or 3.6% should matter a whit to retirees today. Nobody should be banking on 4% working with no flexibility whatsoever (which is how the '4% rule' has been defined, tested, and identified) and face dire poverty if the 30 year SWR actually turns out to be 3.6%. Like it or not, everyone needs to be prepared to reduce their withdrawals if their portfolio suffers, and thankfully, it seems that virtually everyone intuitively understands this. I've never heard of anyone who even attempted to strictly implement the '4% rule' as a withdrawal strategy for a meaningfully lengthy period of time.
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Re: Is inflation bad...

Post by willthrill81 »

BanquetBeer wrote: Thu May 13, 2021 8:59 pm
KlangFool wrote: Thu May 13, 2021 7:15 pm BanquetBeer,

What is the trade off of taking on more RISK? Assuming that your portfolio is at 12.5X and you save 0.6X every year,

KlangFool
I’ve run the numbers every witch way... I can’t tell you what the right path is.
That's because there isn't one. The choice of AA is dependent on many factors. Just yesterday, vineviz posted the following, which very accurately and succinctly describes how some of these factors are interrelated.
vineviz wrote: Wed May 12, 2021 11:02 am A recommendation of "take no more risk than needed" doesn't seem very clear headed unless the concept of "risk" is VERY specifically defined in a way that is contrary to what I suspect most people think when they hear a phrase like this.

In the need/ability/willingness framework it is "ability" that should place the upper bound on the risk you take: "Don't take more risk than you are able to bear." If you can't afford to lose more than $100, don't bet more than $100.

"Need" is the concept that should place the lower bound on the risk you take: "Don't take less risk than you need to take in order to achieve financial goals."

"Willingness" is the concept that allows the investor to pick the spot between the level of risk they "need" to take and the level they are "able" to take which suits their preferences.

Note that "need" and "ability" are essentially objective functions. It's never literally true that they are COMPLETELY exogenous constraints, but they are mostly exogenous. "Willingness" is almost completely a subjective function, one that lets the investor find the spot they are most comfortable with.
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Re: Is inflation bad...

Post by Marseille07 »

willthrill81 wrote: Thu May 13, 2021 11:09 pm At any rate, I don't think that whether the SWR for the 1966 cohort was 4%, 3.8%, or 3.6% should matter a whit to retirees today. Nobody should be banking on 4% working with no flexibility whatsoever (which is how the '4% rule' has been defined, tested, and identified) and face dire poverty if the 30 year SWR actually turns out to be 3.6%. Like it or not, everyone needs to be prepared to reduce their withdrawals if their portfolio suffers, and thankfully, it seems that virtually everyone intuitively understands this. I've never heard of anyone who even attempted to strictly implement the '4% rule' as a withdrawal strategy for a meaningfully lengthy period of time.
The problem is, this is hard to foresee in advance. Your 2000 retiree study is a good example. Should they cut back spending today, 21 years out of 30? There's no easy answer here, because we don't know if they'll run out of money by 2030.

And if they realize they will run out of money in 2029, it's too late - their retirement plan would be ruined by then and there's no way to get back on track.
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Re: Is inflation bad...

Post by Oicuryy »

David Jay wrote: Thu May 13, 2021 7:51 am Several analyses have shown that the times where 4% SWR has failed occurred when retiring into sustained periods of high inflation, not the proverbial “40% drop in the market”.
David Jay wrote: Thu May 13, 2021 10:22 pm I find a number of links here on BH referring to 1966 (or “mid-60s”) as the worst year to retire, it seems like common knowledge:
But 1966 does not meet your criteria. The S&P price index fell 22% from 2/9/66 to 10/7/66, 36% from 12/13/68 to 5/26/70 and 48% from 1/11/73 to 10/3/74. If 1966 was the year that failed it was because of "the proverbial “40% drop in the market”" not because of inflation.

Ron
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