What does the forum think is a sensible rate of return to use for pension planning?

michaels

SO my pension statement arrives and I think they illustrate what my pension pot would be worth (in terms of an index linked annuity) with a 5% (down from 7%?) annual investment return until my retirement date.

I tend to recalculate this using a 2% real return to get a feel of the likely spending power in today's terms which I think is easier to understand. However this assumes 2% real growth in the fund but is thinking about what can be bought in today's terms really the best thing to think about? After all poverty is measured using a relative yardstick rather than an absolute, one so perhaps I should look at spending power in terms of the proportion of future annual average income the pension will buy me? As incomes tend to increase 2% faster than prices this would leave me to base my calcs on basically zero capital growth in income adjusted terms.

Does this sound reasonable?

kidmugsy

Credit Suisse recently put out a report suggesting that for the next 20-30 years you should expect real rates (i.e. above inflation) of:

Equities: about 3%
Govt Bonds: 0%
Cash: -0.8%

So add these to your expected average rate of inflation and there you are.

Linton

For my planning I assumed 3% RPI inflation and 4% investment return. The past 8 years since my early retirement have shown both estimates to be pessimistic, my actual cost of living has increased less than RPI and my investment returns have been significantly higher than 4%, despite the credit crunch crash in the meantime.

For my estimated expenditure I assumed that it would not change after retirement and then added a bit more for safety. In practice, aided by inflation being less than planned for, I have not had to reduce my standard of living in any way and have enough left over for good holidays etc without breaking the budget.

I would say that basing your plans assuming that you need to keep your income in line with an assumed excess of 2% of wage inflation over cost inflation is unreasonable. By the time you retire you will probably cease to be concerned about what anyone else gets and cease to have any interest in keeping up with the latest must have gadgets etc. In any case I cant see 2% excess of wage inflation as being sustainable in the long term.

Perelandra

I'm personally using an assumption of 3% real income in equities to reach a a desired level of income when I reach retirement. I'm then expecting my real level of income to gradually decline over retirement, as I will be wanting to draw an income greater than 3% of the value of the capital.

sandsy

I do all of my personal projections in real terms. I'm currently using a 2.5% real return after expenses.

Take a careful look at your pension statement though. If it's your Statutory Money Purchase Illustration, it's already in real terms anyway. It uses a price inflation rate of 2.5% so with a nominal growth rate of 5%, you've already got a projection in today's terms using a real rate (before expenses) of 2.5%.

michaels

Linton wrote: »

For my planning I assumed 3% RPI inflation and 4% investment return. The past 8 years since my early retirement have shown both estimates to be pessimistic, my actual cost of living has increased less than RPI and my investment returns have been significantly higher than 4%, despite the credit crunch crash in the meantime.

For my estimated expenditure I assumed that it would not change after retirement and then added a bit more for safety. In practice, aided by inflation being less than planned for, I have not had to reduce my standard of living in any way and have enough left over for good holidays etc without breaking the budget.

I would say that basing your plans assuming that you need to keep your income in line with an assumed excess of 2% of wage inflation over cost inflation is unreasonable. By the time you retire you will probably cease to be concerned about what anyone else gets and cease to have any interest in keeping up with the latest must have gadgets etc. In any case I cant see 2% excess of wage inflation as being sustainable in the long term.

Thanks for all the replies.

I will check to see if the illustration includes an adjustment to 'today's prices'.

I agree that post retirement keeping up with prices rather than earnings is probably reasonable but for the (25?) years until then is it not more reasonable to think about aiming for an initial income that is x% of average earnings at time of retirement rather than x% of average earnings now?

(Of course it is possibly a redundant argument, I pay in what I can afford so it is more will what I end up with buy the sort of lifestyle I expect rather than hope can I achieve the lifestyle I want. I am also one of these cynics who suspects that whatever future 'claims' we have earned through pension pots, what we will actually receive will depend on what successive govts allow us.)