Retirement Planning: Inflation Considerations and Tools

When planning for retirement, it's important to factor in inflation by using historic average numbers to forecast living expenses accurately.

### Planning for Retirement Spending: How to Factor in Inflation
* 💸 " Adjust for inflation when planning for retirement spending based on **how high it's been lately**.
* 💡  Use a "know your number" tool to play around with **inflation rates, rate of return, and savings rate** to determine your financial plan.
* 🎢 " We all suffer from **recency bias**, where **recent events stick in our minds the most**.
* 📊 " Over a long enough timeline, with enough data points, **reversion to the mean** is a realistic thing.
* 💭  Realistically, use a historic average inflation number for **forecasting retirement living expenses**.
* 💰  Inflate your current expenses to your retirement age to determine the **future dollar amount** you need to save.
* 🚫  Avoid getting caught in **recency bias** thinking that **recent inflation rates will persist**.

[Music] All right, Heather's question is up next. She says, Do you adjust for inflation when planning for retirement spending based on how high it's been lately? And I thought that was an interesting question. Like, how do you factor in inflation when thinking about retirement? Because it has been kind of high in the past couple years. It's been crazy. I'll give. I'll let you kind of fill in. But one of the things I think is important when we were developing 'cause I know not everybody is at the point where they graduate on the abundance cycle where they need a financial advisor. They're kind of still in that building or trying to figure out how you accelerate your path. One of the things I'm pretty proud of is we created a know your number tool and course. If you go to learn. money.com. And I love that you in within the tool you get to play around. Not only with inflation rates. So yes, it is important, Heather, when you're thinking about your planning is that we allow you to talk tole the inflation.

rate up or down. We also allow you to toggle your rate of return, as well as your savings rate. And all those things are going to have a dramatic impact on your final result. So that's why we wanted to make sure we gave you all the levers when you're trying to plan. So you can kind of start figuring out how do you live your best life. So that you know if you're ahead of the curve, behind the curve, or right on the curve. You've got to kind of have the metrics to know what you control and what you can actually do to catch up or start enjoying life even more. Yeah, the two things that I would add is that we all, it's part of the human condition, we all suffer from recency bias. That which has happened most recently is the thing that sticks in our mind the most. And so when we come through like this hyperinflationary environment where we saw the price of common goods go up 9% in one year.

then maybe it settled back in our mind. It is constantly wrapped on the idea that inflation was this, and it's going to stay this. However, one of the truths about numbers is that over a long enough timeline, with enough data points, reversion to the mean is a realistic thing, right? So while we have seen high inflation, I would argue that as we move through economic cycles, we see periods of higher inflation and periods of lower inflation, and periods of higher inflation and lower inflation. And so, realistically, when it comes to forecasting out your retirement living expenses, I think you can use a historic average inflation number. Maybe your estimate is that numbers 3% or 4%, or maybe you want to even be aggressive and say 5% inflation. I don't think that's crazy, and I think realistically, as time goes on, that's probably going to be what the mean reverts to, even if it has been a little higher recently. So I would keep that in mind. So when you think about, okay, today, I know in today's dollars we

spend $5,000 a month. That's our living expense. I do think it's prudent to inflate that up to your retirement age to figure out what that number is. We have a tool that can help you do that. And then when you figure figure out how big your pot of number, how big your pot of money needs to be, you use that number. You use the future dollar number so that you're actually saving an adequate amount. But I would not get caught in recency bias thinking, Oh, well, just because things were this way means that things are going to stay this way. Because I think if you do that, you'll send yourself into like a into like a death spiral, yeah.

Should We Adjust for Inflation When Thinking About Retirement?

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Planning for Retirement with Inflation in Mind

Inflation has been high in recent years, so it's important to consider it when planning for retirement spending.

A "know your number" tool and course available at learn.

com allows people to adjust for inflation rates, rate of return, and savings rate to see the impact on their retirement planning.

Recency bias is a common challenge, as people tend to focus on the most recent high inflation rates, which can influence their retirement planning decisions.

The Reality of Inflation and Forecasting Retirement Expenses

Inflation rates fluctuate over economic cycles, with a realistic tendency to revert to the mean over time.

When forecasting retirement expenses, using a historic average inflation number of 3% to 5% is reasonable.

It is realistic to expect that, over time, inflation will revert to this mean, even if it has been higher recently.

It's important to calculate living expenses up to retirement age to determine the needed savings.

Using the future dollar number helps ensure adequate savings without being biased by current expenses.

Avoiding the trap of assuming current expenses will remain the same is crucial for financial planning.