Inflation forecast for early retirement

SMcGill

I’m hoping to retire within the next 2 years at age 57 so I’ll have 10 years to fund through savings before my DB and SP pensions kick in. In figuring out whether I have enough savings to do this I’ve assumed an inflation rate of 2.5%.

Does that sound about right or should I allow for a higher rate? In the absence of a crystal ball I want to make sure I’m at least rounding off the sharp edges of inflation! Thanks.

cfw1994

I would say it is reasonable, given what we have seen recently...

....although if you look at https://tradingeconomics.com/united-kingdom/inflation-cpi, you can see the past 25-30 years had some peaks beyond that.

Perhaps make it 3% to give yourself wiggle room.....

Sea_Shell

Are your savings invested (ISA) or in cash. Have you factored in growth/interest in your calculations, or just seeing if your capital sum will last as it is??

Also, have you been analysing your spends, to accurately know what you currently need in today's prices too?

SMcGill

About half my funds are in an ISA and the other half in a property I plan to sell. I’ve assumed no income from interest payments, also that I will not earn any income ... those are my third line of defence, after having the cash to fund my income and an additional cash reserve.

I’ve been tracking my spend broadly for the last few years and monthly for the last year, so hopefully I’m estimating my income needs realistically!

Thanks for the replies

squirrelpie

If your savings are invested in 'stocks and shares' rather than interest-bearing products, it is fairly usual and more useful to disregard inflation and think of everything in current money terms. Then you need to think of the return from your investments above inflation, rather than as an absolute percentage.


Inflation of 2.5% would assume that the government and BofE hit their targets for the next ten years. There are a wide range of other possibilities, ranging from lower inflation or even deflation all the way up to double digit inflation. How likely they are, or you think they are, depends on a whole raft of factors.


So diversify your investments and do several forecasts (low, medium and high) and see how well your plan deals with each possibility.

SMcGill

I’ve had to come to terms with the truth that I simply don’t possess the aptitude or appetite to be even slightly clever with my finances (a SIPP sounds complicated to me) so I’ve settled on being predictable instead. I’m not embarrassed about that but it does mean that sometimes sound advice such as you offer is simply beyond my ability to follow it!

I realise that inflation could go anywhere and I suppose what I’m really asking for here is the best guesses of those who know more about it than I’m ever likely to.

JoeEngland

SMcGill wrote: »

I’ve had to come to terms with the truth that I simply don’t possess the aptitude or appetite to be even slightly clever with my finances (a SIPP sounds complicated to me) so I’ve settled on being predictable instead. I’m not embarrassed about that but it does mean that sometimes sound advice such as you offer is simply beyond my ability to follow it!

I realise that inflation could go anywhere and I suppose what I’m really asking for here is the best guesses of those who know more about it than I’m ever likely to.

Future inflation rates are just that, a guess.

jamesd

SMcGill wrote: »

In figuring out whether I have enough savings to do this I’ve assumed an inflation rate of 2.5%.

Does that sound about right or should I allow for a higher rate? In the absence of a crystal ball I want to make sure I’m at least rounding off the sharp edges of inflation!

It's completely wrong because it says that you're approaching the problem in the wrong way, a way which tends to produce incomes that are too high to work if you live through bad investment conditions.

What you're missing is sequence of returns risk, which led to work on safe withdrawal rates.

Because you're probably going to have some state pension to include, using a tool like cfiresim is likely to be the best way to go.

AnotherJoe

SMcGill wrote: »

About half my funds are in an ISA

That doesn't mean anything. They could be in cash, gold, bitcoin, 100% defensive bonds, 100% scary equities or any mixture.

Thrugelmir

SMcGill wrote: »

I’ve had to come to terms with the truth that I simply don’t possess the aptitude or appetite to be even slightly clever with my finances

Then stick to what you understand. Never invest in anything that you don't. Might be boring , but at least it minimises the downside. The loss of irreplaceable capital is a key rule of what one shouldn't do when investing. Chasing returns merely increases the risk.

AnotherJoe

SMcGill wrote: »

I’ve had to come to terms with the truth that I simply don’t possess the aptitude or appetite to be even slightly clever with my finances (a SIPP sounds complicated to me) so I’ve settled on being predictable instead. I’m not embarrassed about that but it does mean that sometimes sound advice such as you offer is simply beyond my ability to follow it!

I realise that inflation could go anywhere and I suppose what I’m really asking for here is the best guesses of those who know more about it than I’m ever likely to.

You don't need to be clever. If you are invested in the general stock market (without getting fancy with specific shares) then in the in the long term your investments will at least match inflation which is why you can ignore it. You don't have to have a SIPP to be invested in the stock market. Or you could have a SIPP and hold one general fund and leave it alone. I wouldn't say that was being "clever" either.
If you are not invested then I'd say you are trying to be clever by thinking you can match or outpace inflation by guessing what it will be which in the long term is riskier than investing, Unless you have so much money that it will outlast you. Which I don't expect is the case or you wouldn't be asking here.