Retirement Planner - Importance of Inflation?

ukdw

TVAS said:

What is the context what is the planner for? You have not mentioned the income you want and by implication you want it to at least increase with inflation. You also mention an IFA so are you thinking of transferring from a DB scheme? If the answer is yes the planner is irrelevant other factors matter so much more.

When you have an illustration that tells you the cost of the new plan this is expressed in a reduction in yield. Let's say 2.6% this means that you plan needs to grow by 5.6% to keep up with inflation of 3%. 

In the west we are obsessed with GDP so if we have a GDP of 3% if inflation is 3% there has been no growth.

TVAS said:

What is the context what is the planner for? You have not mentioned the income you want and by implication you want it to at least increase with inflation. You also mention an IFA so are you thinking of transferring from a DB scheme? If the answer is yes the planner is irrelevant other factors matter so much more.

When you have an illustration that tells you the cost of the new plan this is expressed in a reduction in yield. Let's say 2.6% this means that you plan needs to grow by 5.6% to keep up with inflation of 3%. 

In the west we are obsessed with GDP so if we have a GDP of 3% if inflation is 3% there has been no growth.

The planner I am referring to is an excel based annual projected cash flow planner from retirement to age 99 that was discussed a fair bit in the earlier posts in this thread. 

My planners tend to use absolute values rather than real terms values, with the odd additional column converting future values back into a real terms figures for things like mandatory spending. 

I have previously mostly increased spending by inflation - with  some periods staying flat.   Taking an alternative approach where you slightly reduce available spending each year rather than increasing it does seem to show a potential quite substantial increase in available cash in the younger years of retirement.

I already transferred out of a DB a few years ago and really like the flexibility it gives for things the front loading of spending suggested in the white paper.

jamesd

Linton said:

2) I dont believe that it is realistic to assume that expenditure  decreases by 1% per year after SP age.  Our's certainly hasnt. 

Maybe, but that's what studies in the UK, US and Australia show happens overall. Exceptions exist, notably for affluent households that travel a lot, but even they eventually do it.

If someone wans to try shifting spending to earlier years, as ukdw does, it's a reasonable approach.

cfw1994

jamesd said:

Linton said:

2) I dont believe that it is realistic to assume that expenditure  decreases by 1% per year after SP age.  Our's certainly hasnt. 

Maybe, but that's what studies in the UK, US and Australia show happens overall. Exceptions exist, notably for affluent households that travel a lot, but even they eventually do it.

If someone wans to try shifting spending to earlier years, as ukdw does, it's a reasonable approach.

My ‘planner’ (okay, my spreadsheet: msg me if you want a sanitised copy!) essentially has a row per year (as I am sure many do).
I then apply an inflationary % to our ‘desired income’, as I do for various pots (DC pot, cash funds, other stocks). 

I can then easily ‘play’ with numbers to check some ‘what if’ scenarios - what if the pot dropped 30% in year 1, for example.

My view is that from now to perhaps 70 would see us wanting an inflationary growth in ‘drawdown’ (which will be formed from those various pots)....but at 70, we should be able to take a drop (eg, 10%).....continue with inflationary growth, then probably another drop at 85 (should we be lucky enough to still be breathing!).  The go-go, slow-go & no-go years are a reality, I am certain, & bourne out by other sources (DYOR!)
My view is that each year we will put in actual numbers for the previous, which will then automatically re-calculate the numbers below based on actual.

It is very tempting to extend this to become a row per month, now I am but a couple of months away from stopping the monthly wage.  I also realise that might over-complicate things.  Welcome any thoughts on that....any financial planners here?!

FWIW, rather than just relying on my own crazy spreadsheet calculations (*cough* - Grandiose Planner, please!), we have also looked at cfiresim to confirm the numbers look good enough, and also the great sheet created here - everything future-looking is moderately guesswork, especially something looking decades ahead, but one can only do the best you can, as my signature reminds me!

DoDa

I think that it depends on your starting retirement income if you can afford to plan for a reduction as you get older.  Your expenditure will change as you age with spending increases in some areas, while reducing in other areas. My parents retired early, my father having been made redundant and had access to both a small DB and DC pensions. They had a great time travelling for a more than a decade from their mid 50's and now in their late 70's have exhausted the DC fund and live a very modest but comfortable life. Their house will ultimately provide for any required care provision and additional funds for widow when the time comes. They have no regrets with their approach and now with numerous health issues are glad to have had the opportunity to enjoy such an active early retirement. 

westv

I've done various spreadsheets over time just to give a rough idea of numbers. Mine try to keep numbers in today's values by keeping the same figure each year for SP, spending, DB pensions that have inflation increases etc. but reducing by inflation (3% in my case) items such as my PPF pension and any savings that are estimated to have interest rates less than inflation.
That way I can more easily see how my funds would get on compared to their value today.

Linton

jamesd said:

Linton said:

2) I dont believe that it is realistic to assume that expenditure  decreases by 1% per year after SP age.  Our's certainly hasnt. 

Maybe, but that's what studies in the UK, US and Australia show happens overall. Exceptions exist, notably for affluent households that travel a lot, but even they eventually do it.

If someone wans to try shifting spending to earlier years, as ukdw does, it's a reasonable approach.

It is reasonable to plan on the basis that expenditure on large discretionary items will tend to fall as one ages after about 80 when travel, new cars and major work on one's home become much less likely.  It is not reasonable to expect basic living costs will drop and some costs may rise.

A problem I see with the statistics is that the global average may well not apply to participants in MSE.  For example for most people retirement occurs at 65 and at around that point some major expenditures will disappear - mortgage, work expenses.  For those people who plan to retire much earlier those falls will be history by the time they reach 65 and so the statistics showing falls from 65 will be irrelevent.

A second problem is that the statistics must be based on historic data.  Many people now are far more active into their 80s than was the case previously.  Also the fall in the averages at any point in time may well arise from necessity as the people who retired some time ago may have spent their savings and be living on a low or zero private pension provision.

So my advice is to base your plan on your actual expenditure now and on your requirements from desire or necessity for expenditure in the future.   Only reduce your planned expenditure on the basis of identifiable reductions in requirements, not because some global average says you ought to.