Running out

kw: inflation, retirement, finance, analysis

My wife and I are at such an age that we think about retirement a lot. Can we afford to retire yet? Will our IRA's and other funds last long enough? Will there be anything left for our heirs?

We have reached one milestone I had set for myself: The sum of my company pension and the Social Security for the two of us will match our expected needs when my next birthday arrives. That's a good place to be, because it means that at least for a few years we won't need to touch the tax-deferred funds. How soon will we need them?

Inflation has been about 2.5% on average for a few years, but it has ranged between 1% and 4% in various months just in the past two years. Longer term it is more stable, averaged over a year at a time. While I hope it stays at 2.5% or less, it is wiser to plan for at least some periods of higher inflation rates, such as one caused by a real hit to energy prices (such as war with Iran).

Here are two measures that help my planning, without revealing specifics. Firstly, the doubling period. When prices double, the buying power of money has been cut in half. Secondly, we have a joint life expectancy of about thirty more years, so the 30^th power of one minus the inflation rate (e.g., 0.975 for 2.5% inflation) yields the amount of buying power left in your fixed income. Of course, Social Security presently has COLA adjustments, but there is no guarantee that these will continue. These two measures produce this table:

Rate, 30y, Dbl
2.5% 0.468 28y
3.0% 0.401 23½y
3.5% 0.343 20y
4.0% 0.294 17½y

While it would be nice if the inflation-based doubling rate really lasted 28 years, I think it wisest to plan for 20 years or less.