The FIRE (financial independence/ retire early) community is better off financially than most, but even they are hurting. I recently read in an FI forum some people complaining (justly) about price inflation.

One woman said her husband is considering going back to work part time in order to help pay for the higher prices they are experiencing. I’m sure this couple could have stayed retired for several more years, but the problem is that they would run out of money eventually.

If you are truly FI (financially independent), then you should ideally be able to live off of your investment assets/ savings forever without them being depleted.

If you have two million dollars in assets, and you are able to generate a 5% return above inflation every year, then you can live off of the $100,000 in interest/ income produced from your investments. Meanwhile, the principal balance won’t go down.

Underestimating Inflation, Overestimating Returns

I saw some people comment and generally agree with the woman. They agreed that price inflation was taking a bite out of them too. This could be the case for someone already retired or for someone trying to save for retirement. Some people have had to postpone their retirement due to the increased prices.

I was also proud of a few people who pointed out that the slightly lower inflation numbers coming in just meant that the rate of increase was decreasing, but prices are still increasing. There was also some debate about how much price inflation would be over the coming years.

I think the only thing to criticize the woman who originally commented is that her and her husband underestimated price inflation. They did not take that into enough consideration in their planning. But at least they are not now in denial. They clearly understand the situation and are talking about doing something about it.

But there were a few people critical of her. They said that she doesn’t understand the 4% rule. They said that inflation would be back down to a 2% average soon. But in all of their criticism, I felt like it was they who didn’t understand.

The problem is that this woman who originally posted was really pointing out a major flaw in the FI/ FIRE community. In general, many people tend to underestimate price inflation and its impacts, while overestimating returns from investments.

The 4% rule itself tends to mislead people into retirement.

Returns Above Inflation

Many in the FI community will say that, over the long run, you should be able to get at least an 8% average annual return. They tell you to just invest in broad-based index funds.

This in itself is flawed. I have to point out that if you invested in the Japanese stock market in 1989, you are still down to this day. I don’t think what happened in Japan will happen in the U.S., but it shows that a long-term downtrend is possible in stocks.

On top of this, many people believe that price inflation will run around 2% per year. This assumption has been blown out of the water in the last couple of years.

When people talk about returns, it isn’t always clear if they are talking nominal returns or real (inflation adjusted) returns. This makes a major difference.

We’re now in an environment where price inflation is currently running around 5% (according to government statistics), while the stock market is shaky at best. Last year, most people lost money in the stock market while prices continued to go higher.

This combination of higher price inflation and low or negative returns is absolutely devastating to a portfolio. Someone’s dream of retirement can be shattered in the matter of a couple of years.

And I think this is just the beginning. Don’t count on price inflation returning to 2% or less with stocks returning 8% or more per year. It is a fantasy, and I think some people are starting to wake up to it.