Kiisu Buraun's  Instablog

Kiisu Buraun
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I'm retired. Bought the farm -- literally (in NE Texas). I'm a boomer, not a depression era kid (it was my parents who lived through that mess). So I'm exaggerating a bit when I state that the "Great Depression" ran into the late 50's where I grew up (the Appalachia of the West). But I did go... More
  • Historical Inflation 7 comments
    Jul 14, 2012 11:24 PM

    Inflation is not constant... not exactly breaking news, I know.

    However, if I am trying to project future inflation so I can decide if my retirement funds are growing quickly enough, its handy to know what historical inflation has been.

    In a previous post ( I looked at historical inflation through the eyes of a new retiree in the year 2000. In the post, I looked back 10, 20, 30, 40 and 50 years to get an estimated inflation rate and used that rate to increase withdrawals from a retirement portfolio.

    However, it is now mid 2012, not 2000 and I thought it might be interesting to see what has happend to our money.

    Years Date Cumulative Inflation Dollars CAIR
    -- 31.Dec.2011 -- $100.00 --
    1 31.Dec.2010 2.96% $102.96 2.96%
    2 31.Dec.2009 4.50% $104.50 2.23%
    3 31.Dec.2008 7.35% $107.35 2.39%
    4 31.Dec.2007 7.44% $107.44 1.81%
    5 31.Dec.2006 11.83% $111.83 2.26%
    10 31.Dec.2001 27.71% $127.71 2.48%
    15 31.Dec.1996 42.29% $142.29 2.38%
    20 31.Dec.1991 63.65% $163.65 2.49%
    30 31.Dec.1981 140.08% $240.08 2.96%
    40 31.Dec.1971 449.08% $549.08 4.35%
    50 31.Dec.1961 652.24% $752.24 4.12%
    60 31.Dec.1951 751.59% $851.59 3.63%
    70 31.Dec.1941 1,355.95% $1,455.95 3.90%
    80 31.Dec.1931 1,455.70% $1,545.70 3.48%
    90 31.Dec.1921 1,204.46% $1,304.46 2.89%
    97 31.Dec.1914 2,134.38% $2,234.38 3.25%

    InflationData ( provided the cumulative inflation data, and Investopedia ( provided the CAGR calculator.

    CAIR (Compound Annual Inflation Rate) is merely CAGR applied to inflation.

    Examples help me understand. And I find the following examples enlightening:

    For every $100 of buying power I had at the end of:

    • 2008, I would now need $107.35.
    • 2001, I would now need $127.71.
    • 1961, I would now need $752.24.
    • 1914, I would now need $2,234.38.

    Thus, if we ignore taxes and my retirement projections are "golden" with a 3% inflation rate and future inflation mimics the recent sub 3% rate, all is well.

    However, if in the future the CAIR creeps up and I don't adjust my projections accordingly, I can easily deceive myself with a rosy projection that does not meet reality.

    And that could be "interesting."

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Comments (7)
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  • David Fish
    , contributor
    Comments (9347) | Send Message
    Looking at the chart, it appears that the "stagflation" of the 1970s had a significant impact and that otherwise, a 3% rate seems to have been more typical. (Even the longer-term rates would have been affected by that decade.) Or am I misreading things?


    In any case, even inflation of 3-4% seems like it would be offset by dividend growth that typically runs above 5%.
    15 Jul 2012, 05:05 AM Reply Like
  • Kiisu Buraun
    , contributor
    Comments (1327) | Send Message
    Author’s reply » David,


    Good comment.


    A period of high inflation may appear benign if it is followed by a lengthy period of low inflation. In other words, CAIR like CAGR tends to smooth out peaks and valleys.


    For example, in the "Dogs" blog I imagined retiring in 2000 and looking back at historical CAIR. From that perspective only the previous 10 year CAIR was below 3%. The 20 year CAIR was 3.53%, the 30 was 5.04%, the 40 was 6.06% and the 50 was 4.93%.


    Another example: the 10 year prior CAIR for a person retiring in 1970 was 2.94% while the 10 year prior CAIR for a person retiring in 1980 was 8.05%. Even 8% looked rather benign until I looked at the annual inflation for the period...


    1971... 3.27%
    1972... 3.41%
    1973... 8.71%
    1974... 12.34%
    1975... 6.94%
    1976... 4.86%
    1977... 6.70%
    1978... 9.02%
    1979... 13.29%
    1980... 12.52%
    1981... 8.92%
    1982... 3.83%


    If I had retired in 1970 and made what seemed like reasonable projections of portfolio survival based on prior inflation rates, my retirement portfolio would have been "adversely impacted" (a bureaucratic phrase I picked up from my government service) by the nine years of high inflation.


    To survive future problems, prudence suggests I need "margin"... or phrased another way; even in retirement I need to live below my means and let excess income accumulate for an eventual rainy day.


    If I spend all my annual retirement income and expect dividend growth to provide the necessary income growth... then a "great wailing, gnashing of teeth, and rending of garments" might very well ensue. And I would prefer to avoid that.


    Over longer times dividend growth will most likely catch up. But without having the margin of excess income, surviving harsh transitions can be very unpleasant.


    Best wishes,


    15 Jul 2012, 02:33 PM Reply Like
  • David Fish
    , contributor
    Comments (9347) | Send Message
    Well, it still looks to me that, except for (relatively short) periods of extreme inflation, dividend growth tends to more than offset the effects and, in fact, builds that cushion.
    Of course, a lot depends on whether or not you need to spend the opposed to accumulating/compounding them.
    15 Jul 2012, 03:03 PM Reply Like
  • Kiisu Buraun
    , contributor
    Comments (1327) | Send Message
    Author’s reply » David,


    I agree.


    If I don't spend everything, if I accumulate a cushion, then most likely an event similar to the 70s is survivable. A sufficient cushion transforms a panic to a minor "ouch".


    On the other hand, if I assume income growth will solve all my problems and spend every income dollar each year, then I've set myself up for a problem when projections divert from reality.


    And yes, one of the fellows I used to work with had exactly that attitude. I thought his attitude foolish... but then I try to be reasonably cautious.


    Best wishes,


    15 Jul 2012, 03:44 PM Reply Like
  • joesmith323
    , contributor
    Comments (1271) | Send Message
    I got here by from a comment you made to your profile to this post.


    it does seem to me that inflation is a an under appreciated risk to retirees. Even two percent annual inflation can be devastating over long periods of time.


    To make things even more interesting we don't really seem to have very good definitions of inflation: are price increases that result from scarcity "inflation", the problem with accounting for improvements in quality are well known.
    28 Dec 2015, 11:03 AM Reply Like
  • Kiisu Buraun
    , contributor
    Comments (1327) | Send Message
    Author’s reply » Joe,


    Thank you.


    In my monthly portfolio report is the following section:
    Though my pension is inflation adjusted via a COLA, I strongly suspect the COLA will not compensate for actual (experienced) future inflation. If I depend solely on my pension for income and the annual COLA does not compensate for inflation, my standard of living will decidedly decrease as I grow older.


    Following its meeting in January 2012, the Federal Reserve targeted a 2% inflation rate (as measured by the annual change in the price index in for personal consumption).
    The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve's mandate for price stability and maximum employment.


    From my birth (1953) through the end of August 2015, average (CAGR) inflation was 3.56% (with a cumulative inflation rate of 793.8%). From the time I started my formal career (1980) through the end of August 2015, average (CAGR) inflation was 3.03% (with a cumulative inflation rate of 189.6%). And from the time I retired (2009) through August 2015, average (CAGR) inflation was 1.63% (with a cumulative inflation rate of 11.2%).


    With a Federal Reserve targeted floor rate of 2%, in 20 years the “Fed” would devalue the dollar by 33% and to compensate I would need nearly 50% more income to keep my current purchasing power. Based on my life experience, 3.5% appears a reasonable planning rate (with an implied 50% dollar devaluation requiring 100% more income in 20 years to maintain my current purchasing power).


    In my opinion (and in my experience), published inflation does not match my experienced inflation. Part of the problem comes from how published inflation is defined ... and what is excluded.


    In my opinion, of the two, personal "experienced" inflation is by far the most important.


    Best wishes,


    28 Dec 2015, 08:26 PM Reply Like
  • joesmith323
    , contributor
    Comments (1271) | Send Message
    I was born in 1953.


    I started my formal career in 1980.


    I haven't achieved retirement yet.


    30 Dec 2015, 08:20 PM Reply Like
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