Advisor assumes 3% increase for everything?

Twointhebush

My advisor has provided my wife and I with a pension plan and prediction of our future pension income. In his summary he uses the phrase: assumed 3% increase for everything including what our state pension might be. Is this 3% commonly used as a safe bet? Does it reflect how much we might pay in fees? And could it be higher or lower by much?

Just re-read the summary, he assumes 5% return on investments and 5% drawdown in retirement...

Thanks,

MK62

Twointhebush wrote: »

My advisor has provided my wife and I with a pension plan and prediction of our future pension income. In his summary he uses the phrase: assumed 3% increase for everything including what our state pension might be. Is this 3% commonly used as a safe bet? Does it reflect how much we might pay in fees? And could it be higher or lower by much?

Just re-read the summary, he assumes 5% return on investments and 5% drawdown in retirement...

Thanks,

It sounds like he/she has used an assumption of 3% for inflation, and then 5% ROI, which is basically a 2% real return.
It's a projection though, so it could be wrong (hence why you need to review the situation at regular intervals), but on the face of that, it doesn't seem unreasonable to start with.

As to the 5% drawdown rate, it depends what that actually means (presumably the initial drawdown rate?)......but several factors you haven't mentioned are important here.......your ages, other assets, state pension entitlement etc etc.
The adviser (hopefully an Independent Financial Adviser) will/should have done a full fact find and based his/her assessment on that. Is there any provision to reduce the pension when your state pensions kick in?

TBH though, if you are paying for advice and don't understand the adviser's report, or even just certain aspects of it, then you should really ask the adviser to clarify and answer your questions - he/she came up with the plan and wrote the report, so would be in a far better position to answer questions about it than anyone on here.

Linton

5% return on investments and 5% drawdown seems questionable. Assuming the 5% means 5% of the initial pot increasing with inflation and 5% return is gross rather than after inflation, there are 2 problems:
1) Inflation will eventually lead to decreases in the capital base which will reduce your ongoing investment returns.
2) What happens when prices crash? If you continue taking your drawdown you will reduce the capital base you will need to replenish your drawdown pot when prices rise recover. The usual way around this is to hold a substantial cash pot as a reserve.


In my planning I used 3% inflation and 4% ROI which in the event proved to be very pessimistic. The drawdown was whatever was needed to support expenditure and success measured by the pot size remaining at the end of the plan.

dunstonh

Is this 3% commonly used as a safe bet? Does it reflect how much we might pay in fees? And could it be higher or lower by much?

Just re-read the summary, he assumes 5% return on investments and 5% drawdown in retirement...

Everyone has different views and will use different assumptions. Advisers are encouraged to be pessimistic with assumptions. For obvious reasons. Under project and over perform then everyone is happy. Over project and underperform and everyone is unhappy.

Returns have been getting lower and lower every decade for 40 years. So, it makes sense to use sensible cautious assumptions.

Does it reflect how much we might pay in fees? And could it be higher or lower by much?

Why do you have an adviser and are asking questions on the internet and not to the adviser?

The answer to the latter is yes. Statistically, the most likely outcome is that it will be higher or lower. All projections use assumptions that give you an average but are statistically unlikely to be correct.

Paul_Herring

The answer to the latter is yes. Statistically, the most likely outcome is that it will be higher or lower.

Being mischievous, what is the likelihood of the answer being no? Asking for a friend...

(That said, the OP did add ".. by much" to the question you answered.)

Twointhebush

Thanks for all your advice, it's very interesting to read and helps to clarify. I am putting together a list of questions for my advisor (he is independent), and I'm attempting to understand how it all works before wholeheartedly signing up with him. I take it his summary is his pitch for my business, and now I think I'll be able to ask him better questions before giving him the work. Based on everyone's answers to this and other questions, I'm getting the impression that he would provide me with reasonable value for money.

badmemory

Well I have been getting my state pension for 6 years & I only remember getting a CPI increase of 3% once & one year it was zero (well negative actually).

bostonerimus

Your advisor's assumptions are not ludicrous, although a straight inflation adjusted 5% drawdown is on the high side. Given those assumptions and your pension pot they should be able to tell you how long your money will last. Ideally they should also use historical data to come up with a probability that your money will last for a time consistent with your predicted life expectancy.