Comments on: Your Job is Indexed for Inflation. Your Investments (Probably) Aren’t.

By: Mike P

Mike P — Tue, 20 Jan 2009 18:17:40 +0000

@Chiko: As a business owner myself, I couldn’t agree more! Building passive income is an excellent way to prepare for retirement. (Or just to improve your standard of living right now.)

@Sam: See my above comment to Marci for all the assumptions mentioned in the study. (It explains the assumed asset allocation, but doesn’t give what expected returns they’re using. It does, however, say that the data is from T. Rowe Price, so I’d be willing to bet that it’s pretty good.)

By: Sam

Sam — Tue, 20 Jan 2009 15:57:38 +0000

What does the $2.5 and $3.6 million mean? How much money per year will that generate for you. I would like to know the assumptions they used to come up with those figures.

By: marci

marci — Tue, 20 Jan 2009 04:13:36 +0000

Thanks for the clarification. I’d like to see what “they” think one needs to live on $20,000 per year. I do fine on that now – and once I get to SS and pensions will be living higher on the hog than I am now – so it should be very easy

By: Chiko

Chiko — Tue, 20 Jan 2009 02:01:36 +0000

My advice is, create a passive form of income that continues to increase overtime, that way you don’t have to worry too much about inflation. That is what I am currently working on right now. I am working to create a passive income stream of about $3,000 on a monthly basis.

By: Mike @ TheThriftyLife

Mike @ TheThriftyLife — Mon, 19 Jan 2009 21:15:40 +0000

That is, people tend to get annual raises even without getting promoted. … On the other hand, our annual raises have taught many of us that inflation is something we don’t have to worry about. We’ve been lulled into a false sense of security.

Regarding raises – The people I work with are well aware of what they make and are often actively striving to do more and learn more to increase their earnings and earn their raises and bonuses. The time of the assumed/automatic raise is over and it has been for a while. Nothing is guaranteed, and today’s workers knows that – we FEEL IT.

I for one haven’t been lulled into a false sense of security. The truth is that if you felt secure and now aren’t, you probably weren’t paying attention to your finances well enough in the first place. Save, save, save and live the thrifty life!

By: Manori Money

Manori Money — Mon, 19 Jan 2009 17:48:41 +0000

I think this a very good post for what we are going though these days. We def. need to plan our retirement/financial situation

By: Mike P

Mike P — Mon, 19 Jan 2009 15:36:58 +0000

Hi Marci, thanks for commenting.

Here are the assumptions made in the study:

1. Investor seeks to maintain a standard of living that would currently require $75,000. (I definitely agree with you here. My wife and I could live on significantly less than that.)

2. Inflation is 3% (This is actually a bit lower than I’d count on.)

3. Asset allocation is 60% stocks, 30% bonds, 10% cash. So–while a conservative asset allocation–it certainly assumes a significant amount of investment return.

4. No Social Security or Pension income.

5. Nothing at all is left to heirs.

By: marci

marci — Mon, 19 Jan 2009 15:31:09 +0000

Obviously those studies don’t take into account the people that are used to living frugally.
No way will it take that kind of money! As long as I let my principal sit, and just skim off the interest, I figure I can make it to 103 (my personal goal) on one heckova lot less than that!

And did the studies factor in social security, pensions, investment income into those figures, or are those figures cash only?

By: Mike P

Mike P — Mon, 19 Jan 2009 15:17:19 +0000

Hi Rendell.

“Studies have shown that humans are outliving their ancestors every year.” Exactly.

In so many ways, it’s a wonderful thing… We just have to make sure we’re ready to pay for it!

By: Rendell @ BrandlessBlog.com

Rendell @ BrandlessBlog.com — Mon, 19 Jan 2009 15:11:33 +0000

Hi,

Thanks for pointing that out.

It is likely most people would assume that by contributing to their retirement accounts or govt schemes, they would be able to live comfortably during their retirement (probably at 65). However studies have shown that human are outliving their ancestor every year. And since most of the insurance companies are using 100 years old as the top limit for their annuity plans, and as you point out the whole lot of us, below the age of 40 will be facing this longevity risk.

Naturally, strategies to hedge against inflation will be the of the most important things we need to out into our financial plan.

Rendell
Brandless Blog