1970s / 1980s inflation
Discussion
What’s the likelihood of seeing 70s and 80s style inflation again in the future?
I’ve been reworking my retirement planning spreadsheet to see when Mrs Oxgreen and I might be able to down tools. I decided to plug in the S&P returns starting from 1972, and we can more-or-less cope with the downturn of the early 70s near the beginning of our retirement.
But that was using a flat rate of inflation of 3% - realistic for the last twenty years or so. Then I thought I’d try plugging in real inflation data starting from 1972. And…
Yeah, 24% in the early 70s, 18% in the early 80s… it all adds up to effectively running out of money in short order.
But inflation has rarely been above 3% since the mid 90s. Even the recent spike is beginning to look short-lived. Are we ever likely to see soaring inflation in the future, or do we simply have better monetary controls these days?
(By the way, I also plugged in S&P returns starting from 1929, and unsurprisingly we couldn’t retire. I guess it was called The Great Depression for a reason!)
I’ve been reworking my retirement planning spreadsheet to see when Mrs Oxgreen and I might be able to down tools. I decided to plug in the S&P returns starting from 1972, and we can more-or-less cope with the downturn of the early 70s near the beginning of our retirement.
But that was using a flat rate of inflation of 3% - realistic for the last twenty years or so. Then I thought I’d try plugging in real inflation data starting from 1972. And…
Yeah, 24% in the early 70s, 18% in the early 80s… it all adds up to effectively running out of money in short order.
But inflation has rarely been above 3% since the mid 90s. Even the recent spike is beginning to look short-lived. Are we ever likely to see soaring inflation in the future, or do we simply have better monetary controls these days?
(By the way, I also plugged in S&P returns starting from 1929, and unsurprisingly we couldn’t retire. I guess it was called The Great Depression for a reason!)
With retiring, if you try to predict these things you will never do it?
You will also need to think about what you will really spend. You will not be spending on commuting, and lunch when working as a simple thing that could make a difference. There will be plenty of other small things that add up. Then you will have the things people do not want to think about. Like you will not be wanting to spend much when you get into your 80's. This will more than likely happen even if all the people here come back with stories of their great grandma skydiving at 110 years old. But think about all the people you know who are over 80 and still buying new cars and going on expensive world tours.
So if you are retiring at 67, you may only be spending big on holidays and stuff for 13 years. If you leave this till you think you have enough cash you may find you only have 5 years before you are too old to enjoy it. If you are really unlucky you may not even make it to retiring if you keep planning for the worst.
My advice is just do it as soon as you can.
You will also need to think about what you will really spend. You will not be spending on commuting, and lunch when working as a simple thing that could make a difference. There will be plenty of other small things that add up. Then you will have the things people do not want to think about. Like you will not be wanting to spend much when you get into your 80's. This will more than likely happen even if all the people here come back with stories of their great grandma skydiving at 110 years old. But think about all the people you know who are over 80 and still buying new cars and going on expensive world tours.
So if you are retiring at 67, you may only be spending big on holidays and stuff for 13 years. If you leave this till you think you have enough cash you may find you only have 5 years before you are too old to enjoy it. If you are really unlucky you may not even make it to retiring if you keep planning for the worst.
My advice is just do it as soon as you can.
I listen to some financial system commentators (I know they all have their own natural biases) and they talk about the US (to which we seem intrinsically linked) debt being 'solved' by inflating it away.
The argument being they cannot repay the debt, the option of defaulting creates a depression and has catastrophic consequences, so the inflating of it away is the seemingly least worst option, the most palatable? Inflation seemingly can be blamed on other reasons beyond the governments incompetence, often global reasons, possible easy scapegoats?
If they go back to more printing to buy debt then (un?)arguably you'll get more money in the system without more productivity which means inflation which means higher costs of everything and if wages don't (and they tend to lag at best) keep up then we all get poorer, then we can't spend as much as we used to and businesses start to suffer and you risk a hard recession/depression anyway, but the politicians don't get lynched that way, our anger is directed elsewhere?
I get a bit doom loop/cynical/borderline tinfoil hat on all this but the debt will one day create big problems, partly because everything possible is done when it's building up to patch things over, like knowing a dam will burst but you just keep adding to the dam wall and letting more water build up behind it hoping you're not Dam manager by the time that no longer works and collapse is inevitable?
The same commentator though also said they couldn't believe it has got this far and so perhaps the dam can be patched for 10-20-30 years more, it's certainly not something you can control!? so the person saying do it as quick as you can is probably right, then at least you guarantee some sort of retirement.
The argument being they cannot repay the debt, the option of defaulting creates a depression and has catastrophic consequences, so the inflating of it away is the seemingly least worst option, the most palatable? Inflation seemingly can be blamed on other reasons beyond the governments incompetence, often global reasons, possible easy scapegoats?
If they go back to more printing to buy debt then (un?)arguably you'll get more money in the system without more productivity which means inflation which means higher costs of everything and if wages don't (and they tend to lag at best) keep up then we all get poorer, then we can't spend as much as we used to and businesses start to suffer and you risk a hard recession/depression anyway, but the politicians don't get lynched that way, our anger is directed elsewhere?
I get a bit doom loop/cynical/borderline tinfoil hat on all this but the debt will one day create big problems, partly because everything possible is done when it's building up to patch things over, like knowing a dam will burst but you just keep adding to the dam wall and letting more water build up behind it hoping you're not Dam manager by the time that no longer works and collapse is inevitable?
The same commentator though also said they couldn't believe it has got this far and so perhaps the dam can be patched for 10-20-30 years more, it's certainly not something you can control!? so the person saying do it as quick as you can is probably right, then at least you guarantee some sort of retirement.
With a DB/final salary pension then inflation matters if the pension is capped - most private sector ones are 2.5 or 5% - so high inflation hurts.
If you're looking at SIPP/DC/ISA's then inflation is only part of the picture. What really matters is the difference between inflation & investment returns. Most models seem to assume that as a positive number - ie returns beat inflation over the long term.
You can never predict it - and if you want 100% certainty of never running out of money, then you'll most likely work too long and leave a fortune to someone else..... you can't compare 1929 returns and 1970's inflation - if you use matching years things generally look OK
If you're looking at SIPP/DC/ISA's then inflation is only part of the picture. What really matters is the difference between inflation & investment returns. Most models seem to assume that as a positive number - ie returns beat inflation over the long term.
You can never predict it - and if you want 100% certainty of never running out of money, then you'll most likely work too long and leave a fortune to someone else..... you can't compare 1929 returns and 1970's inflation - if you use matching years things generally look OK
I first looked into stopping work at 55 then realised that with” normal “inflation and modest growth my Pensions wouldn’t allow us to keep our same lifestyle.
I looked again 3 years later and the numbers were closer.
2 years further on I was offered a very decent CETV on the defined benefit pension and also transferred the dc pension into “ private “ control having then calculated still the normal percentage of inflation and a very modest growth factor whilst also assuming a 30% market crash in my pots.
That took my wife and I to 85 assuming no material change in spending so I was probably a tad pessimistic or too cautious in my numbers but I was quite happy in that.
I looked again 3 years later and the numbers were closer.
2 years further on I was offered a very decent CETV on the defined benefit pension and also transferred the dc pension into “ private “ control having then calculated still the normal percentage of inflation and a very modest growth factor whilst also assuming a 30% market crash in my pots.
That took my wife and I to 85 assuming no material change in spending so I was probably a tad pessimistic or too cautious in my numbers but I was quite happy in that.
My personal opinion is that it's always dangerous to think anything has "gone forever". The recent bout of inflation took people completely by surprise and has blown a big hole in a lot of people's plans.
One solution is to try to buy something like an index linked annuity. They are expensive.
Buying a flat/level annuity is IMO massively high risk (unless you're already over, say, 75).
Holding investments and taking "market risk" isn't usually as risky as it sounds, because there's potential "upside" as well as "downside". Markets,
One solution is to try to buy something like an index linked annuity. They are expensive.
Buying a flat/level annuity is IMO massively high risk (unless you're already over, say, 75).
Holding investments and taking "market risk" isn't usually as risky as it sounds, because there's potential "upside" as well as "downside". Markets,
- tend to keep up with inflation, and
- have always recovered.
i'd take inflation figures with a pinch of salt - a better gauge IMO is just to think back to how much everyday things cost a cple of years ago, 10 years ago etc.....
If one factors in debasement via printing etc, i believe ( according to various independant investment sources ) that to stand still in real terms takes investment portfolio growth of 10-14% annually - to negate the impact of losing approx half the 'current' value of a 'pot' over a 7-8yr period.
I'd like to know how the heck Gov's are able to massage the figures, but there's various everyday bits that we buy food wise which have jumped 70+% since 'that' vote; yet we're supposed to believe that inflation only really rose above 2ish% for a cple of years after 2020.
If one factors in debasement via printing etc, i believe ( according to various independant investment sources ) that to stand still in real terms takes investment portfolio growth of 10-14% annually - to negate the impact of losing approx half the 'current' value of a 'pot' over a 7-8yr period.
I'd like to know how the heck Gov's are able to massage the figures, but there's various everyday bits that we buy food wise which have jumped 70+% since 'that' vote; yet we're supposed to believe that inflation only really rose above 2ish% for a cple of years after 2020.
ARHarh said:
With retiring, if you try to predict these things you will never do it?
You will also need to think about what you will really spend. You will not be spending on commuting, and lunch when working as a simple thing that could make a difference. There will be plenty of other small things that add up. Then you will have the things people do not want to think about. Like you will not be wanting to spend much when you get into your 80's. This will more than likely happen even if all the people here come back with stories of their great grandma skydiving at 110 years old. But think about all the people you know who are over 80 and still buying new cars and going on expensive world tours.
So if you are retiring at 67, you may only be spending big on holidays and stuff for 13 years. If you leave this till you think you have enough cash you may find you only have 5 years before you are too old to enjoy it. If you are really unlucky you may not even make it to retiring if you keep planning for the worst.
My advice is just do it as soon as you can.
Well put, especially that last line!You will also need to think about what you will really spend. You will not be spending on commuting, and lunch when working as a simple thing that could make a difference. There will be plenty of other small things that add up. Then you will have the things people do not want to think about. Like you will not be wanting to spend much when you get into your 80's. This will more than likely happen even if all the people here come back with stories of their great grandma skydiving at 110 years old. But think about all the people you know who are over 80 and still buying new cars and going on expensive world tours.
So if you are retiring at 67, you may only be spending big on holidays and stuff for 13 years. If you leave this till you think you have enough cash you may find you only have 5 years before you are too old to enjoy it. If you are really unlucky you may not even make it to retiring if you keep planning for the worst.
My advice is just do it as soon as you can.
Another thing to consider is how your “personal rate of inflation” looks.
Obviously you have some costs cannot be affected - council tax - without dramatic action (moving!)….luckily I believe Councils are generally limited to 5% rises (so expect that).
But many other costs are within your control to limit rises:
Are you the sort to let insurance renewals automatically roll forwards?
Do you like a new car every 3 years?
Do you always shop at Waitrose or Fortnum & Mason?
If so….maybe change your habits?
There are a lot of things you can do to help manage your personal outgoings.
Our car insurances all went up dramatically with the last renewals, but a bit of time (quite a bit in one case!) with the search tools from that great cashback site, topcashback, kept the overall costs within a reasonable sum.
We keep cars for years….so yes, plan to change one at some point, but maybe put it off.
Once your time is your own, you can find all sorts of things you do can be done ‘off peak’, keeping prices low.
By our 50s - 60s, we generally all have a lifestyle we want to maintain.
Maybe we have £££ bucket list things we want to do/achieve.
Plan for those, but also look how you can get great pleasure from doing things cheaper (off-peak gym membership, for example).
3 years in here, haven’t regretted a moment. Not sure any of my retired pals feel they made a mistake either!
I know that we are all different but I don’t understand why people do this sort of planning.
Do you spend the same number of hours working out if your current salary will still support your lifestyle in 5 years or do you just get on with it and deal with stuff when (if) it happens?
In my experience people simply talk themselves out of doing stuff for the fear that something completely outwith their control may happen.
Do you spend the same number of hours working out if your current salary will still support your lifestyle in 5 years or do you just get on with it and deal with stuff when (if) it happens?
In my experience people simply talk themselves out of doing stuff for the fear that something completely outwith their control may happen.
In these cases I always like to understand how people can’t just adjust their spending if necessary, should the worst happen it’s unlikely you’re chipping away your essentials but just your luxuries.
And if your luxuries are that important to you by your 70s I’d argue you’ve missed the point of life.
And if your luxuries are that important to you by your 70s I’d argue you’ve missed the point of life.
Mr Whippy said:
In these cases I always like to understand how people can’t just adjust their spending if necessary, should the worst happen it’s unlikely you’re chipping away your essentials but just your luxuries.
And if your luxuries are that important to you by your 70s I’d argue you’ve missed the point of life.
Agreed. If a bad run of inflation / investing still leaves you with a good quality of life then great.And if your luxuries are that important to you by your 70s I’d argue you’ve missed the point of life.
If it will mean chosing between heating and eating then not so great.
Dr Mike Oxgreen said:
Thanks folks!
The problem with “do it as soon as you can” is knowing when you’ve reached that point. That’s the whole problem!
It's a bit like directions that tell you to "turn left 3 miles before the church on the right." or instructions to "reverse until just before you hear the crunch" The problem with “do it as soon as you can” is knowing when you’ve reached that point. That’s the whole problem!
There is an oddity in Swiss pension law which means you cannot claim tax relief of any extra contributions made in the three years before retirement[1]. Therefore you need to have a good look at cash, savings and projected income during (and of course after) those three years and load up your pension as a consequence. Knowing that if you then delay retirement, you have then lost the tax relief possibility for those particular years when you deliberately didn't make any. There is no flexibility on using a previous year's allowance, once Dec 31st has passed the year is closed in fiscal terms.
My target retirement date is 01.08.2026 at age 60, so I made my final big batch of AVCs this time last year. These included some 'rainy day' immediate access savings accounts which I was confident of being able to reconstitute over the next two years; the vastly reduced tax bill for 2023 has already gone some way towards that.
[1] Or rather you can, but if you then retire and buy an annuity and/or draw down capital from that policy within 3 years of the contribution, the taxman will immediately demand repayment of the relief received.
skeeterm5 said:
I know that we are all different but I don’t understand why people do this sort of planning.
Do you spend the same number of hours working out if your current salary will still support your lifestyle in 5 years or do you just get on with it and deal with stuff when (if) it happens?
In my experience people simply talk themselves out of doing stuff for the fear that something completely outwith their control may happen.
There's a huge difference between your salary. and life style in 5 years time and the complete pot of "cash" I have now lasting the rest of your life.Do you spend the same number of hours working out if your current salary will still support your lifestyle in 5 years or do you just get on with it and deal with stuff when (if) it happens?
In my experience people simply talk themselves out of doing stuff for the fear that something completely outwith their control may happen.
If you're still being paid in 5 years then you can almost certainly just deal with it.
If you don't have a paid income then it's clearly harder. How you deal with it potentially affects how you are able to live for the rest of your life.
It seems an entirely reasonable calculation to attempt, but at the end of the day nigh on impossible to work out properly. Just how much of a s
tty stick do you account for.Personally I make an assumption of 2% growth above inflation, to see how that works and used firecalc to get an idea of the chances of the pot lasting for long enough.
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