No COLA Retirement Plans

Say you retired in 1979, and died in 2019, you lived 40 years after retirement...

For every $1k purchasing power you had in 1979, the cost now would be $3,470.

The cumulative rate of inflation was 246.7%...

So,if I understand the question, you want to know how much money you would need at retirement to maintain your buying power over the course of retirement...and you want to assume return on investment equals inflation...?

$1k per month * 40 years = $480,000 * 2.5 = (1,200,000/2) = $600k

...just a shot from the hip...

I wanted the reduced monthly rate to give annual COLAs.

..."As an example, an investment with 5 percent return during a year of 2 percent inflation is usually said to have a real return of 3 percent. "...

http://www.finra.org/investors/bond-yield-and-return

$100,000 over 30 years...

This chart shows $100k invested in a bond fund which average a 5% return, with a 2% increase every year, the average inflation rate, to a point of break even at the 30 year mark...

Now if you want to start with $360k, and no return, with a reduced monthly check and keep pace with inflation from there, you can see that the amount nearly doubles over the course of 30 years...so you would start somewhere around $600-700 per month...

https://www.usinflationcalculator.com/

Actually, since the interest rate and COLA are the same, the problem is simpler since you are increasing your withdrawal at the same rate as the principal is increasing. So, let's assume that your savings is S and you want to withdraw monthly payments for 30 years or 360 monthly payments.

Working backward is much easier: Your first payment is S/360. The monthly increase (inflation rate) r = (1.03)^1/12 = 1.002466. So each payment will be r times the last payment. But each month, your savings, S, will be growing at the same rate, r.

Look at it this way: You are drawing your money out at a constant rate of value with shrinking dollars.

If you are assuming that you get Social Security payments, which you don't say, the COLA goes the same way as consumer costs.

Consumer Price Index

If you are talking about your own money, talk to a financial advisor.

I think I know what you mean. You want for a fixed monthly payment the reduced amount you can spend such that you can save (in the beginning) to offset the inflation such that the real purchasing power remains level..assuming inflation is as you predict.

The 3% interest gained on your savings does very little and is likely far smaller than your error in estimating inflation, so use that as a buffer.

Sum it up. Assume the inflation happens at the end of the year. 30 years yields the first year at 1.0 and the remaining 29 at the sum of n=1 to 29 for 1.03^n.

That's a total requirement of 47.6 over 30 years. So 1.59 per year. Invert. 0.629 is the ratio of what you can spend to maintain level purchasing power over 30 years at 3% inflation from a fixed periodic payment without the (small) benefit of 3% return on the cash you stash to keep purchasing power level

I didn't make that very clear. 0.629 is the amount the first year, then following inflation it increases 3% every year. So in the final year you will have ~2.36 to spend so that purchasing power stays the same.

If we use monthly payments of one and have the 3% annual inflation compounded monthly then we get the total over 30 year period with inflation to be 1 plus the sum for n=1 to 359 of 1.0025^ⁿ .

That comes out to 583 for the 360 monthly. Meaning to break even at the end of 360 months (without the benefit of interest on your savings) you will need to limit the inital month to 0.617 of the fixed monthly payment. Each subsequent month to maintain purchasing power the amount you can spend increases by a factor of 1.0025.

With 3% annual interest on accrued sum might allow you to increase the initial ratio to possibly above 0.7 of the first fixed payment off which all subsequent payments are calculated.

Try this as a simple starting point.

I've set the starting amount at 100,000 and dividend at 2800 with interest/inflation at 5%.

It inflates the dividend that you receive each period by the inflation, re-invests the remnant for the next period and then compounds from that condition. The first shot is the formulas and the second is what it looks like. You only need to play with the contents of three cells (A3, F1 and F2) to see the impact over time.

That looks good except for one thing-there's no present value. The rate starts at $1000 per month. If a present value of $1000 per month for 30 years is used, it still wouldn't work out. The amount has got to be taken out of the $1000 and the interest calculated on the funds from the reduced payment. I believe I may have to build a spreadsheet and trial and error it until I get a value that would be the amount at the end of 30 years that would equal the amount necessary to offset inflation.

If they pay you $1000/mo for 30 years, that's $360,000. If you want them to pay you less at first and more afterward to make it a 3% COLA, here's how to figure it:

If they increased your 12000/yr by 3 percent per year then the total amount would be $570,905.

If you scale back down to $360,000, your first check would be (360000 / 570905) x $1000 = $630.58

Your monthly checks for 30 years would be:

1: $630.58

2: $649.50

3: $668.98

4: $689.05

5: $709.72

6: $731.02

7: $752.95

8: $775.53

9: $798.80

10: $822.76

11: $847.45

12: $872.87

13: $899.06

14: $926.03

15: $953.81

16: $982.42

17: $1011.90

18: $1042.25

19: $1073.52

20: $1105.73

21: $1138.90

22: $1173.06

23: $1208.26

24: $1244.50

25: $1281.84

26: $1320.29

27: $1359.90

28: $1400.70

29: $1442.72

30: $1486.00

The sum total would be $360,001.27

Hello,

What I've done was to have a base investment of the amount in cell A3 and the initial dividend that you want to receive in cell F1 (and thus read by B3)

Column B is you periodic payment from the interest received and the amount not used is re-invested into the capital as shown in column A.

Each period, the amount in column B is indexed by the interest rate so that you retain the same buying power.

You can quickly see if you will run out of funds by looking at column D.

Once you've got the first few lines done, run it to your 30 years and then look at the final line. You only need to play with three cells to examine your situation.

Otherwise, you might google Annuity calculations and just look for ones that maintain current buying power.

You need enough invested so that you are earning more in interest than you are spending monthly. The problem is not a question of a spreadsheet, it's a matter of money. If you had $2 million invested at 3% you would receive $5000 per month in interest. If your expenses are then only $1000, you will profit $4000 per month and your money pile grows.

The spreadsheet is simple, the hard part is the money.

I don't have the $2 million to start with. I only have the $1000 a month coming in. I need to know how much to hold out and put in an investment plan to use each year to give me a COLA such that my purchasing power will stay the same.

So if you start with $600 a month income and save $400, that would give you $4800 first year saving and $7200 annual income ...

Second year income would be $600 + 3% inflation = $18 equals $618 per month income $7416 annual income and savings $4584 + $4800. = $9384. + 5% return $240 for a total savings of $9624

That's good. Now to put that in a spread sheet in order to vary the time and interest and inflation rates. The value of $12000 in 30 years is how much with 3% inflation? I think I will have to find the future value of what I will have after withholding for future COLAs. I will have to try $600 per month (withholding $400) and see if the COLA increases will be able to continue for thirty years.

I believe it's going to be a trail and error calculation. The goal is to have the same purchasing power as the amount you use to start with and have little to no surplus in investment side at the end of 30 years.

Using Solar Eagle's scenario your retirement will last 39 years, before your savings run out.

If you start instead at $629 the first month, saving $371. It should last pretty close to just 30 years.

I made an Excel^(R) projection of lost-purchasing-capacity, based on the annual CPI numbers, to find that I have lost more than a quarter of it, during the last 14 years, having gotten no COLA, therein...

(By the way, can anybody recommend a lucrative street corner so that I can start a better second job?... ( the corner of WALK and DON'T WALK isn't working out at all... ) )

Man, you are in trouble. If you can't make it at walk and don't walk you don't have much left to fall back on, you are in a bind. Walmart isn't using designated greeters anymore. The greeters now have to do other duties as they greet.

Lack of cost of living increases is also loss of quality of life.

Canada has an involuntary pension plan for us. The CPP is a nice gift for people who work steady jobs with deductions, half of it paid by their employer. If you are self-employed however, you must pay the employer's portion and it amounts to about 9% of your income above $3500.

I recently turned 60 and elected to start collecting that pension immediately although I am still working. Whopping $115 a month, it's fantastic! First time in seven years I had more than ten dollars in the bank for ten days.

The old age pension is better but they had to bump it back so we don't collect at 65, must go to 67. And there's a guaranteed income supplement, apparently, I read all about it when deciding to collect my CPP. If I can stay alive until 67 I'll be living the dream.

I started out with nothing, and the last time I checked, I still have most of it left...