I call malarkey - inflation is NOT lower in retirement. Lets debate...

The giant elephant in the room here is housing. I am surprised honestly this didn’t come up sooner. If you own for a significant amount of time, while it’s true maintenance, insurance, property taxes go up, the cost of mortgage or the fact you are living in a house that’s appreciating reflected in inflation for the same house isn’t.

Housing is the number one cost for most people, but if you own, in effect the largest cost for most households is likely deflating.

Not all retirees of course own though.

Interesting discussion. Related, I have anecdotally experienced an increase in annual spending the first 2-3 years of retirement with myself and several friends. Of course this is spending (not inflation to the original discussion), and presumably is due to pent-up demand for goods and services. Travel of course is a big one, but also home repair and upgrades (if staying at the same address) or a new home costs (if relocating). I would recommend folks account for this possibility in their planning.

For the topic of inflation, the discussion is often focused on the prices of consumer items like gas and groceries, but I wonder about broader inflation of things that wealthy people typically "buy" - - stocks, real estate, precious metals, fancy travel, etc. as they have all seen very high price increases in recent years. I wonder how that ties into the thought about how to calculate inflation during retirement.

For long term forecasting and planning I would suggest modeling your housing costs and medical expenses expenses explicitly and just using general indicators of background inflation (like CPI) for "everything else". It makes sense to recognize (in your forecast) that medical costs inflate at higher than average rates and (for example) to recognize that your are not very exposed to housing inflation if you own your home with a mortgage that is either fixed rate or paid off) - but beyond that I am not sure that splitting hairs over general background inflation rates is really worth the effort? If your rank the sensitivities and uncertainties in your forecast I think you will find that uncertainty around background inflation rates is a relatively minor variable - compared to say Investment Returns, Long Term Care needs, and longevity (if that is an issue for you)? So at most you might want to test the sensitivity of you plan/forecast over a range of background inflation rates, but (personally) I wouldn't invest too much effort in trying to figure out which assumption is "right". It is inherently unknowable, some of your investment are probably natural inflation hedges, and if your plan depend on this there are probably bigger problems with the plan? So although you make some valid points about some of the "big ticket" items I might suggest just accounting for those explicitly, and "don't sweat the small stuff" (like the inflation rate on everything else).

What do you mean you "call malarkey"? Just because you can make a lot of shit up - and it is really is deep AI dripping doo-doo you got there – doesn't mean it's true. "It's possible" does not make it probable or likely.

There are well known studies from TRowe Price, JP Morgan and the RAND Corporation detailing spending beyond retirement and others that date back to 2014. All of it indicates that post-retirement spending inflates at 1-2% LESS than the CPI for the typical American. JP Morgan's research breaks it down by category. It's very insightful.

Have you reviewed any of this research and can you refute it with actual survey results and not numbers you just made up? I suggest you dump the made up numbers from nowhere and address the work that has already been done. Otherwise your speculations about "what might happen" are worthless.

And NO, YOU CANNOT IGNORE THESE STUDIES BECAUSE YOU THINK THAT EARLY RETIREMENT IS "SPECIAL". It really is not that special and you are going to age like everyone else. So unless you actually PLAN to increase your spending, the base rates about inflation are going to apply to you, too.

Instead of making shit up, let's talk about real studies and the real world. Our experience is that our spending has been flat to down in nominal terms during the first six years of retirement. That means we have experienced zero to negative inflation. The main reason for this is that only 50-60% of our spending is mandatory, which is fairly typical for people who have good financial habits and have reached financial independence. That means that most of our marginal spending is just choosing between entertaining ourselves and giving money away. And for every additional expense, there is something we didn't end up buying or doing that we thought might be on the table.

So the first question is what has your ACTUAL experience been? Not numbers you are making up now. Real numbers from your actual records. Percentages are fine. Or are you not retired and are just looking for excuses to hoard more money?

That is usually what is going on here. People who hoard money (1) refuse to look at the actual research about a topic like this; and (2) consistently use fallacious "possibility effect" thinking – like Rain Man not wanted to fly on a plane because "some planes crash." "I might become a spendthrift and be forced to grossly inflate my lifestyle", "I might get three cancers and then spend 10 years in memory care", "we might lose a war and become the Weimar Republic" are all manifestations of the Possibility Effect cognitive bias. And yes, vivid stories about it just lead to the Narrative Fallacy, which is related. Just because you can generate a big list of crap does not change the probabilities.

For most people, expenses and personal inflation will peak when their children are high school or college age and decline from there. That was true for us. And we knew that and had planned for it. It wasn't surprising or unknowable in advance. It wasn't scary. It wasn't a problem or a big deal.

That is the real question everyone needs to answer. Why is it not going to be true for you? What makes you more special than everyone else?

Our actual, real inflation is lower in retirement. Why isn't yours?

This is a thought-provoking post. I agree that inflation is the same for the same commodities purchased (except housing), but I do think that the IMPACT of inflation is generally less for retirees. Well-planned retirees have better inflation adjusted income sources (e.g., Social Security, most pensions if they have it, inflation adjusted rental income (they should be raising rents with inflation), and following best practices for safe withdrawal rates on investments to include inflation adjustments). A lot of the non-retired workforce's wages have not kept pace with inflation over the past 3-4 decades. I wrote a blog post about understanding your personal inflation rate using CPI (BLS data) from 2023 (Understanding Your Personal Inflation Rate – Living The FIgh Life Housing had a 44% weight in those numbers. The housing portion of the CPI is based on "imputed rent" ad does not include the lower inflation increases homeowners enjoy from stable P&I payments (the majority of homeowner housing costs) over time. If their homes are paid off, then the increases for taxes, insurance, and maintenance, is better because it is less spent on housing overall (similar to your original point of spending less vs. less inflation). Also, CPI includes education costs which retirees likely won't be spending on at all. Anyway, great discussion. I think everyone would benefit from better understanding their own personal inflation rate and not taking the government's published rate as impacting them directly. Cheers!

It's not that inflation is less per se, it's that spending is less. See the research –>

The Retirement Spending Smile: Why Your Expenses Drop 26% — Then Surge Back

Retirees spend 26% less by age 84, then healthcare costs spike. Model the spending smile with category-specific inflation rates to avoid a late-retirement shortfall.

QuantCalc

Also, if the retiree owns the home (even if still paying mortgage), then no housing rent/mortgage inflation which CPI numbers include which adds to this. But yes, its a reduction in consumption later on as mobility drops, so does driving, food, entertainment even while healthcare may increase.

There is a lot here, and I'm not even going to attempt to address everything that prompted me to have a particular thought. However, I wanted to point one practical issue.

Is it worth tracking your expenses annually to tease out REAL inflation on some expenses for you in your spending pattern?

I actually think that most people (as in 99%+) do not/will not/cannot track their expenses to this level of detail. The type of expense tracking that people do frequently mixes inflation and behavioral components (i.e., changes driven by price elasticity). For instance, if the price of some commodity goes up, that change is often reflected in the pricing of that commodity (or other goods based on it) across the board.

If you were buying premium tortilla chips and the price of corn goes up, causing all of the various brands to raise their tortilla chip prices, you might switch to buying the lower cost store brand. There was real inflation, but the purchasing behavior compensated. In that case, inflation is only measurable if you continue purchasing the same thing regardless of what happens with the price. And that doesn't even address the issue of shrinkflation, such as standard OJ containers going from 64 fl oz, to 59 fl oz, to 52 fl oz, without the price changing. So, to be accurate, one would have to measure unitized price for everything.

Maybe something like the household electric bill isn't subject to the same sorts of vagaries. But then it is necessary to ask how useful it is to just track the monthly account charge. Suppose that one year a person spends Thanksgiving and Christmas with family. Then the next year all the children and grandchildren are invited over for both, and a half dozen people stay as houseguests. The cost will be higher in the second scenario, but again that is a result of increased consumption.

I think that stuff like this is why the common approach (at least as I've heard it described around here) is to track your own personal spending from year to year (or whatever interval makes sense) and then look at it as a trend-line. Because our portfolios are structured with the idea of broad inflation (as reflected in CPI), if the growth of the personal spending trend-line exceeds the inflation rate (regardless if that increase comes from "real" inflation, changes in spending behavior, or some combination of those things including spending more on things that have inflated more) then that is when there is a cause for concern.

But your "what if" question about 0.5%, 1% and so on higher personal inflation is something that any decent modeling tool can trivially answer.

You are highlighting the difference between CPI-W (Consumer Price Index for Workers) vs CPI-E (Consumer Price Index for Elderly), both of which are tracked by the US Federal Government.

To your point, CPI-E is consistently about 0.2% higher than CPI-W.

So you are correct, that spending reductions on (normal age retirement) are from consumption reduction not reduced inflation (increase in price of goods and services).

I say normal age retirement, because evidence supports that early retirees (e.g. FIRE) are much less likely to reduce spending in their early retirement years.

This is because reductions in consumption come mostly from limitations of health or wealth, which should both be in adequate supply in most FIRE scenarios (unless the early retirement is due to health issues) at least until normal retirement age and the "slow go" years.

consumption for wealthy and healthy households is virtually flat, declining only 0.3 percent a year over their retirement. Thus, at least in part, wealth and health constraints help explain the observed pattern of declining consumption.

Do Retirees Want Constant, Increasing, or Decreasing Consumption?

crr.bc.edu