Nearly 0% odds of a rate decrease this year.
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
PPI (6%) just had the largest month to month increase since 2022.
On a related topic, the current administration just received 5 of the worst poll results ever - one of them being on inflation - which is fascinating considering the inflation of 2022.
Just before COVID hit, I was right about at the point where I thought I had hit my “CoastFIRE”(*) number. The initial market dip during the pandemic combined with the incredible employment uncertainty at the time helped me realize that even if I was on track for retirement, I wasn’t anywhere near financially robust enough to handle nearer term financial shocks.
Then, when the 2022 inflation hit, the cost of basic living surged to the point where I had to rebase my assumptions higher, shifting up my overall cost projections and thus my CoastFIRE savings target. In addition, my personal inflation rate seemed to keep rising faster than the headline numbers, even as those headline inflation rates slowed back down.
That set of experiences led me to do three things:
I rebased my long-term inflation expectations up from 3% to 5%, which then raised my CoastFIRE target even more.
I started focusing on finding ways to reduce my core costs of living without driving major negative lifestyle reductions.
In addition to the retirement and kids’ college focused investing, I got serious about building a more robust overall financial plan.
That combination of factors were key drivers to why I now own two plug-in hybrid cars, have solar panels on my roof, a paid-off mortgage, and an investment-grade bond-ladder in a taxable account.
I’m still exposed to the risk of hyperinflation or an all-out economic collapse, but I also recognize that in those situations, I’ll probably have bigger problems to worry about.
Still, even as I made those choices, part of me thought I was a little bit crazy for making those sizable and often inefficient financial decisions and investments. Right now, though, I fully recognize that making those moves has put my family in a much better spot to handle the current reality.
Regards,
-Chuck
(*) CoastFIRE is a concept where you invest more aggressively for retirement early in your career. Then, when your account balance hits the point where reasonable assumptions on market growth and inflation can get you to a reasonably comfortable retirement at a standard retirement age, you can “coast” and redirect at least some of the income you had been investing towards retirement to another priority.
Biden was organized in everyway until the end of 2022. He just got elderly.
Our stable one is cra cra.
Well, that’s a polite way of putting it.
DB2
U.S. Treasury yields spiked on Friday following a week of messy inflation data and as traders looked to price interest rate policy under new Federal Reserve Chair Kevin Warsh.
Probably not a bad idea. I’ve increased my inflation used in projections from the traditional 2% to using 3%. One thing about inflation, it is very individualized. Gas doubles, doesn’t matter, I live in a walkable community. Beef increases, doesn’t matter, I’m vegan. College tuition up 30%, doesn’t matter, no kids. Cost of healthcare up, doesn’t a matter, on medicare. One can go on and on. The more important things would be to track your expenses over time and see how they have changed. I’ve done that for the past 15 years and my personal inflation rate is a little above 2%. I use 3% in calculations to give a buffer.
Same. But there are things I’m now considering, or rather not considering: extra travel, which I was hoping to do this year so that one matters for me…
Pete
Thanks. I go back and forth on whether my 5% estimated inflation rate is ok or too high a rate to use for projections. On one hand, it’s higher than the historical long term average. On the other hand, in recent years, inflation has hit us hard in hard-to-avoid costs like property taxes, home repairs, insurance, medical, auto (maintenance, repairs, purchase), food, and energy. In addition, Social Security’s trust funds are projected to empty well before I hit 62, which adds yet another unknown to the question of “how much will really be enough?”
As the time horizon shrinks, it should get easier to figure out whether we’re really on target or whether our assumptions were off. Still, after the last half-dozen years and given the current job market, I’d rather aim a bit high and be pleasantly surprised than aim for a “return to old trend lines” and wind up off-track when there’s little I can really do about it.
Regards,
-Chuck
Almost everything you consume and pay for is somehow shipped. Prices will rise on everything. And don’t you want to travel periodically?
Eventually taxes, not just payroll taxes, but regular income taxes as well, may increase to cover increased costs to Medicare.
Also, as inflation goes up, the value of the dollar will likely go down. That further increases costs of many of the things you may want to consume and pay for.
Yep, in my old age, I’ll now be paying maximum IRMAA due to my profit on the Avis short squeeze.
Unfortunately, there are a few rare situations where you can’t “Long Term Buy & Hold” or “Minimize the Skim.”
intercst
But won’t that only be for 2028? If your 2027 income goes back to normal, you’ll be paying less IRMAA in 2029. I think that’s the way it works, no?
But my point of the above post was that just because someone’s “personal inflation” avoids certain direct increases in prices, there are plenty of indirect increases in costs that they will experience.
I have a sub 4% mortgage (two of them actually) which I view as an inflation hedge. The bank is essentially letting me use their money for free. In real terms, every year the principle just keeps getting smaller. If I could get those sweet rates back I’d borrow more.
Yup. The thing to remember, though, is that there are two key aspects to a debt payment: the interest rate and the cash flow. In my case, I was solving for a cash flow problem, not an interest rate one.
In addition to the rapid rise in the base costs of living at the time, I was facing a few things that made the cash flow crunch worse:
Could I have made it work? Very likely yes, but I was in a spot where paying off the mortgage meant that I could avoid the cash flow driven financial gymnastics that would have been required to do so.
In addition, with only a few years left on the mortgage anyway, my interest payments were not high enough to enable me to deduct them. As a result of paying taxes at my marginal rate on interest received while not being able to deduct the interest paid on the mortgage, the “interest rate arbitrage” game wasn’t really worth it.
Here’s an article I wrote at the time explaining my rationale: These Are My 5 Highest-Conviction Stock Market Moves for 2023 | The Motley Fool
As it turned out, shortly after that article published, I had an unexpected and very lucky windfall in my options trading account. That, combined with the other moves we were making to free up cash, provided just enough to completely pay off the mortgage a bit faster than the accelerated plan would have called for.
From a pure net worth perspective, the odds are decent that holding on to the mortgage would have resulted in a higher number than accelerating the payoff. From a cash flow standpoint as well as a simplification one, paying off the mortgage was absolutely a choice I would have made again.
Regards,
-Chuck