Stress testing for inflation (2)

Inflation is an issue which I need to be highly confident that I will be able to manage once I leave the working world. Previous posts explained why I worry about inflation and just how vulnerable the private portfolio is to the impact of inflation.

So, how do I get comfortable with the inflation issue?

1. know my expenses: I've been running detailed monthly expense accounts since December 2009. A year into this exercise, I have a pretty good idea where my money is going;

2. budget for post retirement changes: I'll travel a bit more, go out more and increase expenses in a few other areas. I'll also cut back in a few places;

3. create sinking funds: I'm putting aside an allowance for some of the larger one off items, of which the largest is refurbishing our apartment;

4. over engineer the budget: I arbitrarily added 20% to our expenses. I made no allowance for the fact that at some stage in the distant future our young children will become financially independent (I hope);

5. have a few emergency sources of funds which are not in the financial plan: a small whole of life policy which matures when I am 55, some Bordeaux which is way too expensive to drink and debt free home (our mortgage will be paid off shortly after I retire);

6. work longer: if I retire now the portfolio passes Firecalc with inflation at 3.7% or less. If I work for one more year the inflation threshold rises to 4.2%. I will be working at least one more year;

7. allocate assets to protect against inflation: most of our money is in real estate or equities. There is a very small allocation to bonds (which will probably be a bit bigger when the time comes). Since the cost of mortgage finance is below the inflation rate, I will carry some debt on our investment properties into retirement;

8. constant vigilance: I will continue to monitor expenses and income post retirement. If a problem is identified, I will take action sooner rather than later - asset reallocation, cutting expenses, finding a job or other actions;

9. mental preparation: I have a massive list of things to do once I retire. Keeping myself mentally and physically busy will prevent me from spending excessive amounts of time brooding about an issue which I believe I am well prepared for. Have had at least three years advance notice of my retirement target date, I hope to have no difficulties making the adjustment when the time comes.

As things stand, I'm pretty sure I will be ready to pull the trigger in early 2012 - both financially and emotionally.