GAAP wrote: ↑Mon Oct 03, 2022 1:23 pm
My fundamental issue with any lifecycle model that I've seen is that it only considers inflation when leveling income. This completely ignores lifestyle improvements at a societal level which in turn is connected to per-capita real GDP growth, not just inflation.
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Inflation is not the only thing consider over multi-decade periods. Until these models start acknowledging that fact, I will continue to ignore them.
Good point. It's easy to look up historical CPI and it's one central set of data acknowledged as standard (even if people criticize the methodology they are arguing against it because it's standard, if it was some obscure thing they'd ignore it). There isn't the same accessible standard for wage/income growth, though there are measures and some of them have real world personal financial impact*. But though 'cost of living' increases vary individually, relevant wage/income increases vary more, in who you're likely to compare yourself to. That's part of skierincolorado's also good point:
"...most people want or need to spend more money as they get older. They have kids and college and medical expenses. But beyond that, people just socially expect to spend more money as they are older."
The social expectation depends on your social circle, to some degree and that's about income growth in that subset, not the general price level.
That said, it's not necessarily invalid for authors to suggest people reexamine their beliefs and behavior. Maybe planning to spend more in some indefinite future when you'll be less physically able to enjoy it isn't such a good idea, even if it's the natural tendency of some.
Also I'd reiterate that the relative trade off of early v later saving is affected by the expected return. In the extreme, the reason Buffett could say (or at least supposedly said) he'd avoid the price of haircut now to invest more, if he could earn say 20% real pa for 30 yrs $25** jumps a couple of orders of magnitude to $6k. At the 'long term past' stock index return say 6% it's looking shaggy for years to able to pay for 3 times as frequent haircuts when you're older, a lot less compelling. Likewise if the expected index return now is 4% not 6% the relative long term impact of relatively small early retirement savings is less. Then it's more purely psychological (form saving habits) to start small, early. If the expected return is lower you have to eventually save more, not less, to build up the same expected pile, but there will be less 'magic of compounding' skew by which the relative few dollars most people can manage in their 20's makes a significant difference in the final result.
*Social Security is adjusted at CPI-W once you start receiving it, but while working your benefit is indexed up at an index of wage growth.
**cue the BH's saying that's way too much to pay for a haircut