1 Attachment(s)
What rate of inflation would you choose?
Late last year Aaron provided a link to a useful NZ inflation chart. Here it is, plus an extra one.
Attachment 8598
Attachment 8599
So if you were going to choose an average compounding rate of annual inflation over the rest of your life that you would want/need your capital base at retirement to go up by each year so it wouldn't erode no matter how long you lived, what would it be?
Assume you are incapacitated so there is no chance of working to supplement the income this capital base can annually generate.
Assume there is zero chance of any inheritance.
Assume you never go to the casino or buy lotto.
Assume you own a freehold dwelling and keep it until you impersonate a frog, and croak.
For a realistic forecast, I would use an average of 3.5% per annum. Adding in a prudent amount of conservatism, use 4.33%. If you want belts and braces, use 5%.
At first glance this may seem a tad on the low side for prudent planning for a forecast period of say 40 years, but the NZ General CPI is the all-up result calculated from 5 individual consumer price indices which are Housing, Wages, Food, Clothing, and Transport. Using the official figures over the last 40 years, the averages look like this:
CATEGORY |
COMPOUNDING
AVERAGE
ANNUAL RATE
Q1 1977 - Q3 2016 |
CPI - General |
5.2% |
Food |
5.1% |
Clothing |
3.6% |
Wages |
5.8% |
Transport |
4.3% |
Housing |
8.1% |
Source: http://www.rbnz.govt.nz/monetary-pol...ion-calculator
The idea of retirement should include the option of not working, and the assumptions mentioned above include already owning a freehold dwelling, so Wages and Housing (the two components with the highest average annual compounding rates) can be removed. I don't know the weightings of each of the 5 above elements in calculating the General CPI but my instinct tells me Housing and Wages would have the heaviest weightings of the 5 if in fact they are weighted at all.
Further to this, the 40 year period from 1977 to today includes some of the highest inflation in New Zealand's history and excludes the lowest.
Attachment 8600
Anyone with an alternative preference to mine in blue above?