Ignoring Inflation

beaker141

Hi all - I've just got the pension bug recently and started focusing on retirement planning - Aged 43 with 140k DC pot already built up and a plan to put decent amounts of salary in for the next 12 years with a plan to retire circa 55 (if I can also fund the gap before I can take pension - hoping its no later than 57!)

I've modelled it out but ignored inflation at present, on everything, so salary stays constant, personal allowance constant, tax bands constant, state pension constant and therefore the amount I'm drawing down in retirement is simple to equate to what I can buy today with that money.

The investment return I've pegged at a very cautious 2% Real return, again ignoring the inflation element.

Question is - is this approach reasonable or will I have dropped a massive clanger somewhere in the logic relating to inflation? I can see that all elements would have to inflate at the same pace - so a risk/opportunity if the state pension grows slower than inflation, or the tax free allowance increases faster etc?


I want to set a plan in January, then update it all next January and compare against the previous version of the plan - that way updating my plan every year with the latest figures, but that should include my POT having grown by inflation + 2% + hopefully more %.

Linton

With a little care you can work with current value £s, but dont forget to decrease fixed items (eg large cash amounts) by inflation each year. There are advantages in handling inflation explicitly - in 10 years time you dont want your plans presented in 2017 prices, they wont mean much to you.

Triumph13

By far the most sensible way to do it as if you model post-inflation the answers don't make any sense.
Personally, I have a column in my spreadsheets for inflation and each year plug in the actual inflation percentage on the investments page and then decide whether to mark-to-market or let it run. I also update things like state and DB pension and tax allowance on the retirement income page.
The only spreadsheet I run that has an inflation estimate built in is the one I use for tracking actual investment values against budget. The formula for the budget number includes my main real return number and an estimated inflation number so that you get a fair comparison to actuals.

beaker141

Linton wrote: »

There are advantages in handling inflation explicitly - in 10 years time you dont want your plans presented in 2017 prices, they wont mean much to you.

I agree - but if I update everything to current each year, I'll keep it in line with "current" prices?