Accounting for Inflation in FI/Retirement Number

Investing
#1

Hey everyone! This community seems super awesome. I have a question about accounting for inflation when planning for retirement.

Let’s say I’d like to live off of $50k/year in retirement. My “retirement number” is 1.25 million. I’m 27 now, and according to the retirement calculator using a 7% return I’ll reach that goal by 62 if I continue to invest $500/month.

But won’t I need to be withdrawing more than 50k a year in retirement due to inflation? If there’s an average of 3% inflation per year… won’t I need to actually be withdrawing about $150k annually to maintain the equivalent to today’s $50k lifestyle?

Thank you all for your help!

#2

Hi Allison!

Basically, accounting for inflation is built into that 7% number. Historically, the US stock market has returned about 10% per year over the last 100 years. (Over 11% the last 40 years). Inflation has been about 2-3%. If you subtract the historical inflation from the historical growth, you get an inflation adjusted growth of 7-8%. That’s why I use 7% as a reasonable forward looking, inflation adjusted growth projection. That means you can think about that $50K as it would spend today.

That said, 7% after inflation certainly isn’t guaranteed. It could be more or less. You can play with different percentage numbers to see the impact if it ends up being different in the future! :slight_smile:

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#3

Awesome, thank you! That makes sense. And thank you for all the information you share + the community you’ve created!

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