FI target number now vs. at retirment -- do I factor in Inflation?

Funny thing: I just wanted to make a post on this topic. While searching for the right forum to use, I have found your post. A bit angry that you've beaten me at sharing this issue. :-)

Here is what I wanted to post:

I have recently thought about a fundamental issue with our current narrative about the FIRE number. I think it is important and has never been fully addressed on the podcast. Since I know you read these emails, I wanted to share it.

It is something that I encountered in my own FI journey, and it was kind of a bummer. Let me be brief, as the issue is really simple once you see it.

When you start your FI journey, you look at your current yearly expenses and multiply them by 25. Now you have your static FIRE number, and you start chasing it.

The issue is that we calculate this target in "today's dollars," but we track our progress using the nominal dollars displayed on our brokerage dashboards. If your journey takes 10 years, that original number becomes completely outdated due to inflation.

Let me give you an example. If your yearly expenses today are $50k, your target is $1.25 million. But if it takes you 10 years to hit that exact $1.25 million on your Vanguard dashboard, you are actually short! Your $50k lifestyle will cost about $61k then (at 2% inflation), meaning your real dashboard target needed to adjust upward to $1.52 million.

I think this is a huge psychological trap in our current narrative. We treat our FIRE number as a fixed, permanent finish line, forgetting that the target must be adjusted for inflation every year we are still working.

And it's exactly what happened to me. With these recent market highs, I hit my original, static FIRE number a couple of days ago. But looking at what my expenses actually cost today compared to when I started, I realized the finish line moved, and I have a little bit more to go.

All you really need to do is compare apples to apples. The easiest way to do that for your purposes is calculate everything in today's dollars. The wrong way to do it is to apply inflation to your expenses but not to expected returns (or vice versa). It is also wrong to underestimate or overestimate inflation or use other "fudge factors.." Good forecasting means you ALWAYS USE BASE RATES. Not "aggressive" or "conservative" numbers you made up. This is the number one error both DIYers and financial advisors do in forecasting and using calculators. To the extent you want to make your calculations more aggressive or conservative, you should only do that to the outputs, and not the inputs (because they compound).

So if you are inflating everything, your expected returns for the stock market should be 10-11% and your money doubles about every 7 years on long term averages in tomorrow's dollars. Not some number you made up, took from some crystal ball or some cape wearing swami. Those are not base rates for the reference class you are dealing with. If you are doing it in today's dollars, subtract 3% from that and your money doubles about every 10 years in today's dollars.

And that is how you account for inflation during your accumulation phase. No complicated calculations or manipulations are necessary. Nor is running around screaming about it (or taxes or health care or whatever else is on the free steak dinner invite this month) and "not being able to predict the future" like some financial Chicken Little a useful or appropriate approach to this topic. Fear-based forecasting is also just bad forecasting.

Now when you actually get to retirement, you should actually use a LOWER number than the CPI for inflation, because the base rate for retirees is 1-2% less than the CPI, especially as we age. And if you are using CPI, you are effectively building in a buffer. But that's a different kettle of fish that you don't need to worry about now.

for me there is no right answer as your FI number is just a compass heading. That’s all.

Using $3m in today’s dollars works. You can adjust for inflation sure.

But I would start with expenses, is the 120k what you’ll be spending in retirement? Maybe house will be paid off by then, kids growing and more expenses, or living on their own and that cost gone… if you look forward to what expenses may be when you retire then use that to calculate FI number in today’s dollars. You then may realize you’re closer than you think.

And once you hit the 50% threshold of one of these numbers, time to put away FI number and start doing detailed future projections using tools like portfolio visualizer or projection lab or a new one I found readyaimretire. Free versions work good enough to get you going.

Your FI target is $3M in 2026 dollars. So yes, you should adjust for FI target with inflation (or more specially, with your planned spending each year).

If you are projecting ~3% inflation over the next 10 years, then yes, your 2036 spending would be about $160k and your FI target in 2036 would be ~$4M. Alternatively, you can just adjust the numbers each year based on the previous year's inflation.

I personally adjusted my spending and FI target each year and always viewed it in terms of "today's" dollars. So in 2027, I would increase $120k by whatever inflation was for the previous year, and then re-compute my FI target. Assuming 3% inflation, then my spending would be $123k and target $3.075M. While this sometimes felt like moving the goal post, it was easier for me to keep track.

If you use $4M in 2036, you'll still need to adjust that number by actual inflation every year… so you can't really get away from moving the goal posts.