Spreadsheet planning assumptions

Audaxer

If your pension income is likely to be over your personal tax allowance before receiving the State Pension, remember when estimating future State Pension income to take off 20% income tax if applicable. If that is the case and you estimate inflation at 2.5% pa I would estimate State Pension increases at 2% after tax.

AnotherJoe

I'm with Kinger, as long as your pension input increases in line with inflation, and SP does also, and you model your investment returns after inflation, then you can remove it. Then everything is calculated in today's money terms which makes it understandable, because there's no point knowing you'll get say a million pounds a month in 30 years time if after inflation that comes down to £1k in today's money, that's what you need to know.
Yes you can also model tax in, at today's rates of tax you should be taking 15% not 20% off.

Linton

AnotherJoe wrote: »

I'm with Kinger, as long as your pension input increases in line with inflation, and SP does also, and you model your investment returns after inflation, then you can remove it. Then everything is calculated in today's money terms which makes it understandable, because there's no point knowing you'll get say a million pounds a month in 30 years time if after inflation that comes down to £1k in today's money, that's what you need to know.
Yes you can also model tax in, at today's rates of tax you should be taking 15% not 20% off.

mmmmm but....


A plan becomes really useful when it forms the basis of your on-going financial mangement over an extended time period and you update it with reality each year. If you work in 2020 £s what will your plan look like in 5 years time? Or do you update your target income and current value of assets every year? What happens about fixed costs such as a mortgage or a fixed income such as an annuity? Do you reduce them by inflation each year?


Having used a financial plan for the past 20-odd years I think it avoids major confusion if you work in actual £s. All updating for inflation can be carried out automatically. Have an annual and cumulative inflation values stored for each year. To estimate next years expenses you could multiply last years ones by assumed inflation . If you need to see a value in current £s divide it by the planned cumulative inflation.

OldMusicGuy

I model inflation, interest rates and investment returns as separate individual parameters that can be changed for each year. This allows me to create scenarios where there could be crash and recovery, spikes in inflation, changes in interest rates etc.

I also model the impact of income tax and I have the personal allowance figure linked to the inflation rate on the basic assumption it will probably go up broadly in line with inflation.

My base case scenario is for 2.5% inflation and 3% investment returns after costs (not real returns). In that scenario we will be fine. Two years into retirement we are ahead of where I planned we would be.

cfw1994

Linton wrote: »

mmmmm but....


A plan becomes really useful when it forms the basis of your on-going financial mangement over an extended time period and you update it with reality each year. If you work in 2020 £s what will your plan look like in 5 years time? Or do you update your target income and current value of assets every year? What happens about fixed costs such as a mortgage or a fixed income such as an annuity? Do you reduce them by inflation each year?


Having used a financial plan for the past 20-odd years I think it avoids major confusion if you work in actual £s. All updating for inflation can be carried out automatically. Have an annual and cumulative inflation values stored for each year. To estimate next years expenses you could multiply last years ones by assumed inflation . If you need to see a value in current £s divide it by the planned cumulative inflation.

I would agree that is is useful to include inflation and growth in plans, and then update each year for “actual” numbers.
I have a couple of (small!) DB pensions that kick in over different years, and they grow based on different things, as does the State pension.

I also feel that you can model different scenarios, such as “well, when I hit 75 I can perhaps dial down my income needs 10”.....as well as (potentially) adding anticipated inheritance possibilities (#Don’tCountChickensThough!) or other financial things such as other savings plans “vesting”.
Equally, you can perhaps put “inflation adjusted” events like potential future wedding costs or major purchase such as car/boiler every 5-7 years, etc. (perhaps a boiler every 7 years is a bad example:rotfl:)

Of course you can then also model “what-if” guesses: what if the main pot drops 20/30/50%.....

But I can see how it is easier to just treat things in “today” terms....

michaels

OldMusicGuy wrote: »

I model inflation, interest rates and investment returns as separate individual parameters that can be changed for each year. This allows me to create scenarios where there could be crash and recovery, spikes in inflation, changes in interest rates etc.

I also model the impact of income tax and I have the personal allowance figure linked to the inflation rate on the basic assumption it will probably go up broadly in line with inflation.

My base case scenario is for 2.5% inflation and 3% investment returns after costs (not real returns). In that scenario we will be fine. Two years into retirement we are ahead of where I planned we would be.

I think any future visibility on inflation is zero whereas an assumption of a real terms asset growth rate based on historic experience is reasonable so I can't see any advantage to including inflation in a model just to give a guess of what the inflated values will be in 2035/2045/2055 pounds - it doesn't matter, what matters is spending power and this is best assessed against current spending power as again there is too much uncertainty surrounding economy wide spending power.

As an example we could see the prices index go up by 50% by 2035 so my £30k number would be £45k. Just as easily we could see a 200% cpi increase so the £30k is £90k, both scenarios are supported by historic inflation experience over different periods. However over most periods I would be safe assuming a 2% real return on investments (along with the variance I could model using cfiresim etc). IE I don't care whether the nominal is £45k or £90k if the spending power is the same.

So to me working in real terms rather than using some arbitrary inflation forecast then having to reverse out the same inflation adjustment to understand what the numbers mean in terms of spending power makes much more sense.

ex-pat_scot_2

i have taken the long run averages of:
inflation 3%
equities 8%
My costs are approx 0.25%

I model based on a range of real returns, around an expected long term mean 5% (ie 8% minus 3% inflation).

My modelling is for my accumulation phase for the next 4+ years, principally to see how close I am getting to LTA.
It's all ticking along quite nicely, and I have the various scenarios mapped out on what pot values are possible at each age point, and thus what that means for me in simple "4% SWR" terms.


I haven't yet started modelling decumulation properly, beyond looking at my outcome modelling (above) and applying a range of SWRs to yield an effective monthly income.

cFireSim etc can be then used to do the sensitivity analysis of SWR, the interaction with wife's pension, two SPs later etc.

There's a lot of overthinking I can do (and do do). I suspect I'm not alone in this, on the board.

Frankly, the assumptions I need are simply the weighted return (which is 100% equities for me), and inflation.
This is to answer the key questions:
1. when am I likely to hit LTA?
2. will I overshoot before 55?
3. Do I need to throttle back on either contribution level, or investment risk, if LTA overshoot is on the cards?

michaels

Is LA supposedly going to be CPI uprated going forward? (As this relates to whether there is any need to model in nominal terms for the better endowed)

ex-pat_scot_2

Sunnylifeover50plan wrote: »

...

I have allowed for c. £1100 pa for SIPP fees x 2 and associated costs - this is covered in expenditure forecasts which are again indexed to the rate of inflation which I've set at 2% long term.

...

Thanks

Wow! My SIPP fee is £9.95/ month. II. Just transferred out of Alliance Trust. £1100 seems somewhat steep; even for two SIPPs.

ex-pat_scot_2

michaels wrote: »

Is LA supposedly going to be CPI uprated going forward? (As this relates to whether there is any need to model in nominal terms for the better endowed)

From the Money Advice Service:
moneyadviceservice dot org dot uk
/en/articles/the-lifetime-allowance-for-pension-savings

How much is the lifetime allowance?
The lifetime allowance for most people is £1,055,000 in the tax year 2019-20.

It applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension.

The standard Lifetime Allowance is indexed annually in line with the Consumer Prices Index (CPI).

I thought it RPI rather than CPI. No matter.

Frankly I don't have much faith in the long term sustainability of either LTA or AA at current levels. I think there's too much appetite for further tinkering.