Inflation is very relevant. Especially when you are talking about annuities—SS is more or less inflation-adjusted, if you invest your retirement money into equities it will inflation-adjust by itself, but if you buy an annuity that pays you $58K/year, that usually means $58K nominal dollars (inflation-adjusted annuities tend to be much more expensive).
For many people it is the case that they have paid off their mortgage by retirement age. Not having to pay a mortgage tends to noticeably reduce the living expenses.
Agreed that inflation adjustment is important—it usually makes sense to annuitize a portion of your portfolio to reduce longevity and market risk. The ballpark I was using is based on a 1% per year increase. hedging more against inflation with a higher escalator or CPI adjustment would be more expensive. Not adjusting at all would be less.
On housing—it doesn’t always make the most sense from a financial standpoint to pay off your mortgage. If you do, on the one hand, that’s less money that you need for living expenses, on the other hand, it’s net worth tied up in home equity—tends to be close to a wash in terms of the net worth required to retire at various points. In the current low mortgage rate environment, many people would need more net worth to support expenses with a paid off house than without.
Two comments.
Inflation is very relevant. Especially when you are talking about annuities—SS is more or less inflation-adjusted, if you invest your retirement money into equities it will inflation-adjust by itself, but if you buy an annuity that pays you $58K/year, that usually means $58K nominal dollars (inflation-adjusted annuities tend to be much more expensive).
For many people it is the case that they have paid off their mortgage by retirement age. Not having to pay a mortgage tends to noticeably reduce the living expenses.
Agreed that inflation adjustment is important—it usually makes sense to annuitize a portion of your portfolio to reduce longevity and market risk. The ballpark I was using is based on a 1% per year increase. hedging more against inflation with a higher escalator or CPI adjustment would be more expensive. Not adjusting at all would be less.
On housing—it doesn’t always make the most sense from a financial standpoint to pay off your mortgage. If you do, on the one hand, that’s less money that you need for living expenses, on the other hand, it’s net worth tied up in home equity—tends to be close to a wash in terms of the net worth required to retire at various points. In the current low mortgage rate environment, many people would need more net worth to support expenses with a paid off house than without.