Calculator, suggested figures

tony4147

I'm trying to set up a spreadsheet for pension calculation and drawdown as I'm looking to retire in 12 years time when I'm 64

For my pension growth until I retire I'm using 6% / yr and then 2.5% inflation, real growth 4%, is this reasonable?

I'm basing my drawdown until I'm 90.
For pension drawdown I'm using 3% growth AFTER inflation and increasing my yearly drawdown by 2.5% to counter inflation, is this reasonable?

To be honest I could probably decrease my DD after the age 80/85 but that adds more complications and I'm not great with excel

tony4147

Can anyone advise if they think the figures above are reasonable for pension calculation and drawdown?

Linton

I used 3% inflation and 4% growth (1% real growth) to plan my retirement which started in 2005. Despite the intervening crash both figures have proved pessimistic. Like you I stopped at 90 but would now advocate a "drop dead" age later than that. With current data someone aged 65 now has a 20% chance of reaching 95.

Although my figures proved very pessimistic I am glad I did it that way as with every new year the future looks better and better. Rather that than otherwise. For planning purposes perhaps a lower growth figure than 6% would be prudent though there is no need to go as low as 4%.

tony4147

Linton wrote: »

I used 3% inflation and 4% growth (1% real growth) to plan my retirement which started in 2005. Despite the intervening crash both figures have proved pessimistic. Like you I stopped at 90 but would now advocate a "drop dead" age later than that. With current data someone aged 65 now has a 20% chance of reaching 95.

Although my figures proved very pessimistic I am glad I did it that way as with every new year the future looks better and better. Rather that than otherwise. For planning purposes perhaps a lower growth figure than 6% would be prudent though there is no need to go as low as 4%.

Thanks for the reply.
It all gets a bit messy because there is inflation on the drawdown, £20k at 65 isn't £20k at 90, and then it is questionable if you should be reducing the drawdown over retirement, as I don't think I will be going on as many holidays at 90 as I would at 90.

jamesd

tony4147 wrote: »

For my pension growth until I retire I'm using 6% / yr and then 2.5% inflation, real growth 4%, is this reasonable?

Depends on the investments used. Historic UK stock market has been around 5% plus inflation less some allowance for charges. So your numbers aren't too bad if you're including some non-equities in there. Hopefully also including lots of non-UK investments and paying attention to which markets have high cyclically adjusted P/E ratios.

tony4147 wrote: »

I'm basing my drawdown until I'm 90.

That's OK if you know that you have significant family or other risks that reduce your life expectancy. Life expectancy at age 65 is quite close to 90 years now and that means you'll have a substantial chance of exceeding 90 - too substantial. If you're in normal good health without such risks I suggest 100 instead, or even 110 if inheritance delivered to others has some value to you.

tony4147 wrote: »

For pension drawdown I'm using 3% growth AFTER inflation and increasing my yearly drawdown by 2.5% to counter inflation, is this reasonable?

Depends on investments used but it looks to be on the low side for growth if you're following the emerging general advice that high equity mixtures are best to maximise the chance of successful drawdown. The emerging advice is not yet broadly accepted, the old combination of mixed equities and bonds that reduces volatility but turns out to reduce success rates is still widely used.

sandsy

tony4147 wrote: »

Thanks for the reply.
It all gets a bit messy because there is inflation on the drawdown, £20k at 65 isn't £20k at 90, and then it is questionable if you should be reducing the drawdown over retirement, as I don't think I will be going on as many holidays at 90 as I would at 90.

I find it easier to do my entire spreadsheet in real terms using a real growth rate. I target incomes in real terms for each age of retirement which allows me to model higher incomes for lots of travelling when I'm younger and lower incomes for when I'm too old and decrepit to climb the plane steps.

TH1878

I think you're being too optimistic on all counts. Whilst 3% real growth rate is definitely achievable, you should plan for prudence and not performance.

If I was doing it, I would probably use the following:

Mortality age - 100
Inflation before retirement - 3%
Inflation after retirement - 4%
Growth - 5%
Increase contributions by 3% pa up to retirement
Increase pension income by 4% pa in retirement

If your plan works with the above assumptions, it gives you much more wriggle room.

If you want to be really clever, you can test it using a monte carlo simulation in excel. Growth is not linear and taking money out in a falling market leads to you depleting your fund (pound cost ravaging).

A monte carlo simulation will use (for example) 1,000 different combinations of non-linear growth rate to give you a % likelihood of achieving your aims.

If there is enough interest, I can build something like this in excel for people to use.

TH1878

jamesd wrote: »

Depends on investments used but it looks to be on the low side for growth if you're following the emerging general advice that high equity mixtures are best to maximise the chance of successful drawdown. The emerging advice is not yet broadly accepted, the old combination of mixed equities and bonds that reduces volatility but turns out to reduce success rates is still widely used.

I agree with this in the main but for planning, it is better to be prudent.

If you're going with a high equity exposure, I would maintain a cash buffer of 2-3 years income requirements to help you ride out any short term market volatility.

fizio

TH1878 wrote: »

If there is enough interest, I can build something like this in excel for people to use.

I am definitly interrested in any kind of modelling spreadsheet for covering the last 5-10 years to retirement

wotsthat

tony4147 wrote: »

I'm trying to set up a spreadsheet for pension calculation and drawdown as I'm looking to retire in 12 years time when I'm 64

For my pension growth until I retire I'm using 6% / yr and then 2.5% inflation, real growth 4%, is this reasonable?

I'm basing my drawdown until I'm 90.
For pension drawdown I'm using 3% growth AFTER inflation and increasing my yearly drawdown by 2.5% to counter inflation, is this reasonable?

To be honest I could probably decrease my DD after the age 80/85 but that adds more complications and I'm not great with excel

I've a spreadsheet, going back to 1993, that currently includes 3% inflation, growth at 7.5%, and a drawdown rate of 4.5%. All future values are inflation adjusted so whenever I look at the numbers they are in today's terms to allow a sense check to be applied. I also include state pensions, income tax rates, tax allowances, the ratio of projected mortgage debt to the tax free lump sum and current spend (minus pensions and mortgage). I've also set myself the target of above inflation increases in pension payments and recycling some of the pension lump sum at age 55 into ISA's and maybe back into pensions if I can stay within the rules.

At the end of each year I reset the year number back to 1 and update tax allowances, state pensions etc. to current values and adjust any other guesstimates as I see fit.

What I'm not doing though is working to a set retirement date other than knowing it won't be before 55. At a basic level I'm simply taking my living costs, assuming they will be met by my (post tax) drawdown rate, calculating the size of the pension pot needed to achieve this. When this pot size is achieved I'll retire.

i.e. if you need £20k income from your pension then at, say 4% drawdown, you retire when your pension pot is worth £500k. (don't forget that £20k is pre-tax rather than post tax though).

Once the spreadsheet is set up you can adjust assumptions, think more carefully about spending patterns in retirement and safety buffers. In my example I retire when drawdown meets my needs and the state pension acts as a safety margin.

Whilst I agree with the previous comments on prudence it's important to remember that the more prudent you are with assumptions the less years in retirement you'll have before meeting the grim reaper - guaranteed. On the flip side if your assumptions turn out to be overly optimistic you'll have to adjust outgoings, lifestyle etc. which you might consider preferable.

TH1878

wotsthat wrote: »

Whilst I agree with the previous comments on prudence it's important to remember that the more prudent you are with assumptions the less years in retirement you'll have before meeting the grim reaper - guaranteed. On the flip side if your assumptions turn out to be overly optimistic you'll have to adjust outgoings, lifestyle etc. which you might consider preferable.

I like that analogy but I'd just encourage someone to save a little more so they achieve financial independence at the age they want to.

Better investment performance than expected is a bonus.