Retirement Planner - Importance of Inflation?

AnotherJoe

Deleted_User said:

pensionpawn said:

Deleted_User said:

pensionpawn said:

Stubod said:

Assuming you are not too fussed about leaving loads to next of kin / charity, it makes sense to me to burn through your "pot" and defer the state pension, particularly if you are a little risk averse. I think it offers around 5% increase for each year deferred?

Why defer your state pension? Yes your SP will increase by around 10% each year however you will then be depleting your private pension instead. This isn't for me as my investments should (are) growing near that rate and secondly, if you croak it before you start taking your pension you've lost a chunk of money that you could have passed to your estate.
I'd be more interested in the opposite, taking your pension earlier at a reduced rate. Also, as with annuities, taking your pension at a reduced rate from your SP age which allows for a significant percentage to be passed onto your wife / husband. 

Its insurance against living too long and running out of money. Delaying SP by a year is a much better value than buying an annuity at the cost of 1 year SP.   Your level of confidence in the 10% annual growth of your investments is very impressive. 

You can't run out of money as your SP is with you for life (and you have a large pension pot). I, personally, don't see how an extra £3k a year SP (on top of a lets say £300k pension pot) is going to make a significant difference against the a sudden and unexpected need for money later in life. Even at the 6% (not 10%) I used in the example above the pot will still be growing each year (on average) if drawing down the equivalent to a boosted SP. There is no way I would be buying a private annuity as the SP is my annuity. There will be plenty in the pot / savings to pay for any emergency and of course if all that fails there are safety net strategies such as equity release or downsizing.

Regarding my faith in continuing to achieve 10%, well as we all know past returns are no guarantee of future returns. That said you can assume that you will only achieve around 5% and feel obligated to pile more into your pension (cutting back on holidays with the kids, not pushing the boat out at Christmas etc) whilst you are working only to find you have excess cash in your 60s+ and less opportunity / energy to fully enjoy it. Or you can keep faith with how you've managed your pension planning over the previous decades, enjoy life to the full during the younger family years, and ease back in retirement if growth doesn't pan out as hoped. My father once said to me that he came into the good money too old (mid 60's in the mid 1980's) to enjoy it. I think we'll all agree it's getting the balance right and that's a very personal choice.

1. In the real world you may or may not get 5% return. Or you may get more.  But you certainly won’t get it every year. People in drawdown can’t handle volatility unless a) they are wealthy and can easily cut expenditure by half or more or b) have a lot of db type income to cushion volatility. Reliability and steady future income become more important than percent return. People without significant DB are forced into bonds (zero  expected return) or annuity (very low rate).  Delaying pension is a much better deal than either. 

2. Spending more and “enjoying life” in early years is wonderful but the future isn’t a certainty. Its a probability. Living a long time increases your probability of running out of investments, particularly if you enjoy life a little too much early on. Standard or reduced pension isn’t fun if thats all you have. As we get older we tend to make errors in managing investments. Thats why a few extra quid in guaranteed and inflation linked DB income purchased at a very low market-beating cost is a great deal for most people. 

Id say the opposite. Id have a LOT more  if I hadn't  made some stupid errors earlier on.

coyrls

Yes, the fuss should be about assuming yearly linear growth.

GSP

AnotherJoe said:

GSP said:

AlanP_2 said:

But actual investment returns include inflation surely?

For example, inflation increases the price of your BT Broadband & TV package, which (assuming BT make a reasonably fixed %'age Nett Profit) will lead to higher reported profits down the line and thus in to Dividends and Share Price but the "value" to you of those £s has been reduced by the same inflation rate.

There'll be exceptions where particular investments make a real return over a period and some make a real loss as they fail to keep up with inflation but surely all that you are trying to achieve in your cashflow is an "average" or "indication" on how things could go over 10/20/30 years? You don't know whether your chosen investments will be in the former or the latter category.

In my cash flow I use Personal Expense Inflation of 4% applied to our projected spend, Cash Return of 1.5%, Investment Returns of 3% and CPI at 2.5% for DB / SP increases.

So I am planning on real returns of 0.5% from investments and a loss of -1% on cash.

If the plan looks like it will work with those assumptions then I'm happy as I wouldn't expect future returns to be as poor in reality.

In the fund, the overall figure is where you see real growth or loss and there are so many factors in there. Take that money out of fund and that’s where it becomes affected by inflation to pay bills etc.
To me, there are attempts to produce an inflation figure in funds themselves, where they are also visibly hit outside your fund in spending. Could be there is double counting for those using inflation in their fund calculations, only to be hit outside as well?

Only if you take out many years worth. Over a year or so, unless inflation was massive you wont see any meaningful change.

This whole thread seems to be big fuss over nothing. If you think growth will be 5% and inflation 2%  then modelling 3%growth lets youydo all numbers in todays value which is far less confusing than looking say 10 years ahead to an amount of X and then decreasing it by the inflation rate over that period to work out what its actually worth in today's terms which is all that matters.

Interesting as that’s why I was trying to ascertain the importance of inflation in planner’s AJ.
This mainly all came about from my IFA’s ‘quick and dirty’ planner for me. I have never had or see one before, but his one showed growth 3% less 2% inflation with a real return of 1% growth to apply to my fund for a forty years view. Doesn’t take much to realise the 1% growth less my withdrawals took my money to run out in my eighties. His words were, you are taking out too much, you are going to run out of money. From my view however things paint a much better picture than his quick and dirty.
For my planner, I have used exactly what you have used, 3% growth.

eskbanker

GSP said:
This mainly all came about from my IFA’s ‘quick and dirty’ planner for me. I have never had or see one before, but his one showed growth 3% less 2% inflation with a real return of 1% growth to apply to my fund for a forty years view. Doesn’t take much to realise the 1% growth less my withdrawals took my money to run out in my eighties. His words were, you are taking out too much, you are going to run out of money. From my view however things paint a much better picture than his quick and dirty.

It's all very well playing with numbers for academic modelling purposes, but you do realise that, for a given starting pot size, agreed withdrawal rate, and consensus on growth and inflation assumptions, only one of you can be right about when the money would run out?  My money would be on the one who does this for a living but I don't have any dog in this fight, whereas if you find out further down the line that he was right, chances are it'll be too late to do anything about it....

GSP

eskbanker said:

GSP said:
This mainly all came about from my IFA’s ‘quick and dirty’ planner for me. I have never had or see one before, but his one showed growth 3% less 2% inflation with a real return of 1% growth to apply to my fund for a forty years view. Doesn’t take much to realise the 1% growth less my withdrawals took my money to run out in my eighties. His words were, you are taking out too much, you are going to run out of money. From my view however things paint a much better picture than his quick and dirty.

It's all very well playing with numbers for academic modelling purposes, but you do realise that, for a given starting pot size, agreed withdrawal rate, and consensus on growth and inflation assumptions, only one of you can be right about when the money would run out?  My money would be on the one who does this for a living but I don't have any dog in this fight, whereas if you find out further down the line that he was right, chances are it'll be too late to do anything about it....

Thanks. That’s very true. He could be right, but do you feel a real return of 1% is realistic for forty years? Yes, I have played around with figures and produced many many scenarios’ trying to test to see how far things would go. A couple of scenario’s had negative growth every other year, or every two years, but the outcomes were always much better than the IFA’s 1% for forty years.

eskbanker

GSP said:
Thanks. That’s very true. He could be right, but do you feel a real return of 1% is realistic for forty years?

It seems pretty conservative but that's how long-term planning should be IMHO - in my equivalent model my baseline assumption is investment growth of 4% (after fees) and inflation at 2.5%, so broadly similar.

GSP said:
Yes, I have played around with figures and produced many many scenarios’ trying to test to see how far things would go. A couple of scenario’s had negative growth every other year, or every two years, but the outcomes were always much better than the IFA’s 1% for forty years.

That's a slightly different issue - there are obviously any number of modelling scenarios that can be used, but my point was that for the same scenario (agreed figures for size of pot, withdrawal rate, growth and inflation assumptions), there can only be one mathematically correct answer as to when the money would run out.

NottinghamKnight

It's generally wise to do a sensitivity analysis in calculations such as this, the differences in apparently small changes in input numbers can be dramatic. 

[Deleted User]

AnotherJoe said:

Deleted_User said:

pensionpawn said:

Deleted_User said:

pensionpawn said:

Stubod said:

Assuming you are not too fussed about leaving loads to next of kin / charity, it makes sense to me to burn through your "pot" and defer the state pension, particularly if you are a little risk averse. I think it offers around 5% increase for each year deferred?

Why defer your state pension? Yes your SP will increase by around 10% each year however you will then be depleting your private pension instead. This isn't for me as my investments should (are) growing near that rate and secondly, if you croak it before you start taking your pension you've lost a chunk of money that you could have passed to your estate.
I'd be more interested in the opposite, taking your pension earlier at a reduced rate. Also, as with annuities, taking your pension at a reduced rate from your SP age which allows for a significant percentage to be passed onto your wife / husband. 

Its insurance against living too long and running out of money. Delaying SP by a year is a much better value than buying an annuity at the cost of 1 year SP.   Your level of confidence in the 10% annual growth of your investments is very impressive. 

You can't run out of money as your SP is with you for life (and you have a large pension pot). I, personally, don't see how an extra £3k a year SP (on top of a lets say £300k pension pot) is going to make a significant difference against the a sudden and unexpected need for money later in life. Even at the 6% (not 10%) I used in the example above the pot will still be growing each year (on average) if drawing down the equivalent to a boosted SP. There is no way I would be buying a private annuity as the SP is my annuity. There will be plenty in the pot / savings to pay for any emergency and of course if all that fails there are safety net strategies such as equity release or downsizing.

Regarding my faith in continuing to achieve 10%, well as we all know past returns are no guarantee of future returns. That said you can assume that you will only achieve around 5% and feel obligated to pile more into your pension (cutting back on holidays with the kids, not pushing the boat out at Christmas etc) whilst you are working only to find you have excess cash in your 60s+ and less opportunity / energy to fully enjoy it. Or you can keep faith with how you've managed your pension planning over the previous decades, enjoy life to the full during the younger family years, and ease back in retirement if growth doesn't pan out as hoped. My father once said to me that he came into the good money too old (mid 60's in the mid 1980's) to enjoy it. I think we'll all agree it's getting the balance right and that's a very personal choice.

1. In the real world you may or may not get 5% return. Or you may get more.  But you certainly won’t get it every year. People in drawdown can’t handle volatility unless a) they are wealthy and can easily cut expenditure by half or more or b) have a lot of db type income to cushion volatility. Reliability and steady future income become more important than percent return. People without significant DB are forced into bonds (zero  expected return) or annuity (very low rate).  Delaying pension is a much better deal than either. 

2. Spending more and “enjoying life” in early years is wonderful but the future isn’t a certainty. Its a probability. Living a long time increases your probability of running out of investments, particularly if you enjoy life a little too much early on. Standard or reduced pension isn’t fun if thats all you have. As we get older we tend to make errors in managing investments. Thats why a few extra quid in guaranteed and inflation linked DB income purchased at a very low market-beating cost is a great deal for most people. 

Id say the opposite. Id have a LOT more  if I hadn't  made some stupid errors earlier on.

There is education. And experience. And then there is age. Both are important factors. Not one or the other.  Our mental abilities diminish past 60. Every year. At different rate but none of us is immune.  Financial decline in seniours is a real thing. Abusers and swindlers target seniors for a reason. I would not want to manage an investment portfolio if I live to 90.

Thrugelmir

GSP said:

eskbanker said:

GSP said:
This mainly all came about from my IFA’s ‘quick and dirty’ planner for me. I have never had or see one before, but his one showed growth 3% less 2% inflation with a real return of 1% growth to apply to my fund for a forty years view. Doesn’t take much to realise the 1% growth less my withdrawals took my money to run out in my eighties. His words were, you are taking out too much, you are going to run out of money. From my view however things paint a much better picture than his quick and dirty.

It's all very well playing with numbers for academic modelling purposes, but you do realise that, for a given starting pot size, agreed withdrawal rate, and consensus on growth and inflation assumptions, only one of you can be right about when the money would run out?  My money would be on the one who does this for a living but I don't have any dog in this fight, whereas if you find out further down the line that he was right, chances are it'll be too late to do anything about it....

Thanks. That’s very true. He could be right, but do you feel a real return of 1% is realistic for forty years? Yes, I have played around with figures and produced many many scenarios’ trying to test to see how far things would go. A couple of scenario’s had negative growth every other year, or every two years, but the outcomes were always much better than the IFA’s 1% for forty years.

What's your potfolio going to be invested in to achieve this consistant growth?  

BritishInvestor

eskbanker said:

GSP said:
Thanks. That’s very true. He could be right, but do you feel a real return of 1% is realistic for forty years?

It seems pretty conservative but that's how long-term planning should be IMHO - in my equivalent model my baseline assumption is investment growth of 4% (after fees) and inflation at 2.5%, so broadly similar.

GSP said:
Yes, I have played around with figures and produced many many scenarios’ trying to test to see how far things would go. A couple of scenario’s had negative growth every other year, or every two years, but the outcomes were always much better than the IFA’s 1% for forty years.

That's a slightly different issue - there are obviously any number of modelling scenarios that can be used, but my point was that for the same scenario (agreed figures for size of pot, withdrawal rate, growth and inflation assumptions), there can only be one mathematically correct answer as to when the money would run out.

"It seems pretty conservative"
It's not possible to say given the information.