My concern with many of them is the arbitrary use of 3% for inflation. That is the average if you go back and include the Great Depression, but if you look at the last 60 or so years, you should definitely use a higher number.

There are complex tools called Monte Carlo simulators that figure inflation and earnings in a far more sophisticated way. They consider that if inflation is extremely high in year X, it is more likely to be high than low in year X + 1. So for the year X + 1, many scenarios are run on your nest egg but those with a higher inflation are weighted more highly. An inflation very low in year X + 1 would be weighted less. Same progression of possibilities, probabilities and outcomes for year X + 2, etc. Like a branching tree, we are talking about thousands of calculations and probabilities. Could never happen without computers!!

That sort of simulator is a little more emcompassing than a simple plug-in-your-nest-egg-and-income-type calculator.

I had access for a while to a Monte Carlo simulator because it was a perk of a retirement account. I can tell you that the results were very like what you get with the Financial Planner in Quicken *but* ONLY if you overrode the default inflation estimate of 3% and used a more realistic figure like 3.6%

Check what inflation estimate and return estimate these tools on sites are using. I have seen some that use 3% for inflation and 10% for returns which is not at all realistic. If you are considering a step as major as early retirement, definitely invest in Quicken Financial Planner (but reset inflation) or a similar tool. One half per cent over many years throws everything way off, and playing with Quicken will reveal that to you. And if you have access to a Monte Carlo simulator (without paying!! could be a scam), try that too.

But know too that nothing can truly predict the future and it is just probabilities in all this. You need to accept that there is always a possibility the least likely financial scenario may occur.

Good luck.

My personal opinion is that inflation runs about ten percent a year, that household costs will about double over a ten-year period. This is not based on any hard factual information. And there are wide extremes. I remember in the 1960's our first color TV cost $500. Now you can find small TV's for $200, but look at those flat-screen and plasma behemoths. And what gasoline prices have done since August!

Some of my clients used to chortle and tell me what a great deal they got at 19% on Canada Savings Bonds back in '81 or so, with similar rates for various other kinds of dollar-denominated investments!

When you see those figures go into your bank book, it does give one a warm glow.

But - don't forget that there are two rats that eat your cheese.

The income tax people want to talk to you each year about all of your various kinds of income in that year; in Canada they charge different rates of tax on various kinds of income, with, of course, the highest rates being on the kinds that most people make: employment earnings, pension that results from it (if any), and interest income.

So they eat part of your current income, off of one end of it.

When you leave certain money with the bank on, say, a five year certificate, they like to tell you about their guarantee - that they'll pay you back every dollar that you lent them (plus interest, the rent on the money).

There's another guarantee that they never mention - they won't pay you one dollar more, either.

Suppose you'd lent the bank $10,000. on a 5-year certificate, 15 years ago, and renewed the contract twice since.

They'd pay you back precisely $10,000. now (plus the interest, as you went along).

That $10,000. would have bought a decent car, 15 years ago - but not now.

Inflation erodes the value of every dollar of your dollar-denominated asset, every year. The value of each such dollar shrinks, every year.

So you must take part of your interest earnings each year to add to your principal, in order to maintain your purchasing power.

The inflation rat eats part of your asset, each year.

And don't forget - the rats eat first.

You get to keep what's left - and in the current interest rate environment, that's not much. In fact, sometimes lately some people say that you're actually paying the lender for the privilege of lending him/her the money!

If those people back in '81 who earned 19% on their bonds were in 30% income tax bracket, that took their after-tax income to slightly over 13%.

When I asked whether they remembered what the rate of inflation was in 1981, hardly anyone knew - how about 12%?

Though the amount that showed in the bank book gave one a bit of a warm glow - there was something of a chill in the air if they calculated the costs and losses involved.

Learning how money works is an interesting hobby - that pays well.

There's only one person that shouldn't get involved in that game - the person who has no money and never will have any.

Have a happy weekend, everyone.

ole joyful

Jannie,
This is important. Say you are right that prices double in 10 years. You say that means inflation is 10 percent.

Actually just 7 percent would get prices doubled in ten years.

This is what happens year to year:

start with 100.00
after 1 year 107.00 (so far so good)
after 2 years 114.49 (see that extra 49 cents? That's from the new $7)
after 3 years 122.50 (now an extra 1.50 on top of 3 X 7)
after 4 years 131.08 (now 3.08 over 4 x7)

You get the picture. That add on grows really fast and will get you doubled in 7, not 10 years.

So your sense of things doubling in 10 years would be a 7% inflation rate. Remember that as you follow the upcoming news and all about inflation likely rising in the furture.

Just want you to be as knowledgeable as you can be.

Yes I do have a general understanding of compounding interest, so that to say ten percent in one year is not the same as double in ten years. Sorry for the error. I am not a mathemetician. My bad.

Sorry Jannie if I sounded condescending - didn't mean to. And the phrase "compounding interest" would have a wee bit pithier, hey? The Irish do yammer on...why use a word when twenty will do?

Interest is one of the "rats that eat first" as joyful notes.