The FIRE Plan Inflation Assumption That Is Too Low

Episode 129 of The FIRE Podcast tackles the single most dangerous number in any early retirement plan: the inflation assumption. Lucas and Luna drill into why using the Federal Reserve's 2 percent target — or even the long-run historical average of 3 percent — can systematically understate the cost of the goods and services that actually matter to a FIRE retiree. They walk through the concept of 'hedonic adjustment' and show how government statisticians strip quality improvements out of inflation data, making official CPI figures lower than what a fixed-income household actually experiences. The hosts examine two real-world categories — health insurance premiums and property taxes — where the gap between official inflation and personal inflation has run at 3 to 5 percentage points over the past decade. They explain why a 40-year retirement at 3 percent withdrawal with a 2.5 percent inflation assumption can fail by year 28 if real inflation runs at 4 percent. Lucas and Luna then offer a practical rule of thumb: build your plan around a 3.5 to 4 percent long-run inflation assumption, stress-test it at 5 percent, and model your personal consumption basket separately from the government's. No scare tactics. Just the math that keeps a FIRE plan honest. #FIREPodcast #FexingoBusiness #BusinessPodcast #Finance #FIRE #EarlyRetirement #Inflation #CPI #HedonicAdjustment #WithdrawalRate #RetirementPlanning #PersonalFinance #SequenceOfReturns #HealthInsurance #PropertyTax #CostOfLiving #LongTermPlanning #FinancialIndependence Keep every episode free: buymeacoffee.com/fexingo