Retirement Planner - Importance of Inflation?

GSP

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.

Thanks. So his conservative view. Just how long should that view go on? I don’t want to be too old 😄

eskbanker

BritishInvestor said:

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

True, in that we obviously don't know what OP actually invests in, but I'd still suggest that 1% net growth is likely to be towards the bottom end of the range of typical modelling expectations for long-term planning.

BritishInvestor

eskbanker said:

BritishInvestor said:

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

True, in that we obviously don't know what OP actually invests in, but I'd still suggest that 1% net growth is likely to be towards the bottom end of the range of typical modelling expectations for long-term planning.

Fees, asset allocation, longevity and desired success rate (based on historical outcomes) are all drivers.
Taking a 60-year-old couple planning on a 40-year retirement (prudent), fees of 1.25% (probably low for all-in IFA costs), a 60/40 global equities/bond portfolio and a desired ~80% success rate allows 3.3% inflation-adjusted annual withdrawal.

If you model that scenario on a spreadsheet you will see that a 1.25% real return is broadly comparable.

Steve182

My very simplistic view which I use to calculate the minimum size of my own retirement pot has been -

FTSE100 normally produces annual dividends of 3.5 to 4%

In the long term, say 20 to 30 years, share prices and dividends can normally both be expected to at least match inflation. So for equities it's fair to assume an annual growth of 3.5% to 4% above inflation.

So for the element in equities you might expect to draw down 3.5 to 4%/year and the value of your pot would increase with inflation indefinitely.

Of course this is no reason to invest in FTSE100,  but I use the FTSE100 as worst case scenario to base my numbers on. 

Fees do need to be considered too of course. I'm DIY so don't pay much in the way of fees, but also you don't need to maintain pot value forever....

[Deleted User]

FTSE 100 isn’t “worst case” scenario. Country indices can under/outperform for decades and then catch up. S&P500 underperformed between 2000 and 2010. Would have been a bad idea to reduce US allocation. Many did. Its called “recency bias”. 

Steve182

Deleted_User said:

FTSE 100 isn’t “worst case” scenario. Country indices can under/outperform for decades and then catch up. S&P500 underperformed between 2000 and 2010. Would have been a bad idea to reduce US allocation. Many did. Its called “recency bias”. 

Looks similar 2000-2010 to me...

Besides, it's not really the point which index performs better or worse than X, Y or Z.
I didn't mention concentrating investments in one index. I simply said I base my own projections on 3.5 to 4% above inflation which I consider a likely worst case 20-30 year scenario. I derive this from the FTSE100 which I consider to be a good example of a poorly performing benchmark to create a cautious or pessimistic projection.

pensionpawn

Fundsmith Equity class 1 accumulation has been meandering along with growth of 12% pa on average since it's launch. Lindsell Train Global Equity growth of 11.5% pa on average since launch. Of course, past performance is no guarantee of future performance. If you are concerned about draw-down in a year of poor growth just keep 12-24 months worth of normal withdrawal in cash.

[Deleted User]

pensionpawn said:

Fundsmith Equity class 1 accumulation has been meandering along with growth of 12% pa on average since it's launch. Lindsell Train Global Equity growth of 11.5% pa on average since launch. Of course, past performance is no guarantee of future performance. If you are concerned about draw-down in a year of poor growth just keep 12-24 months worth of normal withdrawal in cash.

Wow. Good luck. You’ll need it. 

[Deleted User]

Just checked Fundsmith equity class 1 acc. Only been around for 5 years (!). Outperformed the benchmark for the first 3. Underperformed for the last 2.  Global Large cap as a category did have great 10 years. Long term it has underperformed small.  And one big reason last 5 years look so good is you measuring in GBP and GBP losing 20%.

Steve182

pensionpawn said:

Fundsmith Equity class 1 accumulation has been meandering along with growth of 12% pa on average since it's launch. Lindsell Train Global Equity growth of 11.5% pa on average since launch. Of course, past performance is no guarantee of future performance. If you are concerned about draw-down in a year of poor growth just keep 12-24 months worth of normal withdrawal in cash.

I hold them both, and others such as SMT and direct shareholdings which have done much better recently following Covid. I'm targeting the sort of growth rate you mention above in building up my own pot and I've exceeded those numbers over the past couple of years. Whether I actually continue to achieve that sort of growth rate in the short to medium term just determines whether I retire in 3, 5 or 7 years.  

I think it would unrealistic to expect returns in that ballpark to be sustained in the long term. Therefore it's important that you take a cautions approach with any forecasts. That does not mean you cannot continue to invest in Fundsmith, LTGE, SMT etc in retirement, but I would certainly not rely on a forecast above 4 or 5% in drawdown. If you do make 10-15%, which is entirely possible, then great, buy a yacht or second home or whatever you want!