There was a good article in the Journal of Financial Planning about this way back in 2013: "Inflation, Hyperinflation, Adjustment Lags: Why TIPS Don’t Guarantee Real Rates of Return"[1]. The effects aren't especially large for the range of inflation we're likely to expect in developed countries. But for people who demand 0% risk of any decrease in standard of living (i.e. people who slavishly follow SWR) then even slight drops in standard of living breach that SWR contract.TIPS, Social Security, and inflation-linked pensions also lag actual inflation. The inflation adjustment that occurs this year is for inflation that occurred last year. Unfortunately, expenses do not lag inflation. That difference compounds over time.
[1]: https://www.financialplanningassociatio ... tes-return
Complete agreement here. The entire point of economic progress is that life gets better than the rate of inflation. If all you do is keep up with inflation then you are gradually getting poorer. Over a short retirement or periods of economic stagnation the effects might not be particularly large. But I think many of us know people who rely entirely on Social Security (which uses a differently, slightly lower inflation adjustment than TIPS does) and after 30+ years of that are not exactly what we'd consider middle class anymore.I have a more fundamental problem with the assumption that inflation hedging is sufficient for retirement -- even if it were truly available. Such hedging does not protect against standard of living growth in the general population, and therefore effectively ensures that the retiree will not maintain the same standard of living as the general population. Computers, mobile phones, and internet access are all examples of things that have moved from luxury to essential in the past 30 years.
Smart phones didn't even really exist until 2008 when the iPhone 3G was released. There are plenty of actual retirees on this board whose "retirement budget" didn't include anything about smartphones because they retired before that. Yet now they're probably spending $200+ a month when you amortize the cost of the phone hardware, the data & voice monthly spending, subscription to picture backup services, etc, etc.
A long time ago I wrote a pair of articles exploring this in more detail. In the first[2] I compared data from the BLS on how American spending changed over the first half of the 20th century.
[2]: https://justusjp.medium.com/inflation-m ... 78bd0b7283In 1901, the average annual expenditures for an American family were $769. [...] Now let’s fast forward to 1950. If we look at an inflation calculator then it will tell us that $769 in 1901 is $2,061 at the start of 1950. Except in 1950 the average expenditure was actually $3,808.
If you only kept up with inflation then you went from middle-class to poor.
In a later post[3] I use the "US Consumer Bundle" (all the money spending by consumers in the US) as an alternative to CPI-U in typical SWR calculations, just to demonstrate the size of the effect we're talking about. The SWR drops to 2.4% and the worst years aren't from the the Great Depression or 1960s/70s Stagflation -- they're from times like 1940s when inflation was relatively low (2.2%) but standards of living were increasing dramatically (+9% a year). If you only kept up with inflation then you'd be living a Great Depression lifestyle while everyone around is getting a TV, a car, and buying a home (home ownership was only about 20% before this period).
[3]: https://justusjp.medium.com/safe-withdr ... 1c19f9a8fd
Statistics: Posted by AlohaJoe — Mon Sep 02, 2024 8:06 pm