Retirement Planner - Importance of Inflation?

snookered1

Fair enough - I'm not proposing to get bogged down in a numbers game and it's obviously your prerogative to use a figure you're happy with, but over the last ten years, most of which have been a sustained bull run, the FTSE 100 (with dividends reinvested) has averaged 3.9%, although the S&P 500 has undoubtedly been a better index to track over that timeframe.  Are you basing your expectations on averaged historical performance over a certain number of years or something more scientific?

eskbanker
Nothing too scientific, lots of read-ups of long term returns, and average 10 year returns across different markets, as no-one has a crystal ball for what the future holds,  I blended the returns of a few markets together a few years ago that I'm most active in, and then took a couple of percent off as a safety net (then further reduced for inflation hence working on real returns of 3.5% above inflation, and a 6% headline return) I prefer my projections to be slightly on the low side and that I'm generally achieving and ahead of their goal for wiggle room and comfort, rather than plan for something that's frankly unachievable, but looks great on paper.

When you look to longer horizons things tend to even out, even if the now looks bleak,  Kinda like the weather there can be very hot and cold extremes on certain days or weeks, but the average temperature over a year is fairly steady and even more so over a decade.  Hence my opinion its a conservative view, some years I'll be up and some down, but feel its a reasonable and conservative rate to use for my projections not over 1 year, but mid-long term projections.  

As an example this year perhaps surprisingly because of Covid, when much of the market tanked, returns on my largest investments for me have been exceptional I've never had a better year investment wise, but next year they may not be, the short term for me is full of noise that focuses on short term ups and downs, but its the long term that smooths the returns out and produces the real results and wealth.

Sadly the FTSE hasn't been in good health for some years returns wise, but will be back at some point.
I'm not invested in trackers, I just use the index's as a guide and no more, perhaps against the grain I invest in actively managed funds and investment trusts.

hope that makes sense

GSP

Secret2ndAccount said:

I reckon this is as easy as I can make it. Mythical portfolio 1/2 million, withdrawing 26k per year, growing 2% per year with inflation. Pot growing at 4%.

This would be a pretty bad plan as it runs out of money at age 83, but it should illustrate how simply we can calculate what actually might happen

This is great. Really brought it to life! I suppose no two planners look the same. Interesting as you increase withdrawals by 2% for inflation. I have started high but kept the same amount thinking as I would spend less later, the effect of inflation would be cancelled out somewhat.
Have you got your State Pension coming into these figures? If you haven’t, that should see you over the line so to speak.

GSP

Secret2ndAccount said:

Finally, I've added in a pension. 10k per year, from age 67, growing at 2.5%. It would be easy to add multiple columns for several different pensions, paid at different ages or growth rates.

Things now work out much better for our friend. With just the aid of a state pension, his pot now lasts until he is 96 years old.

It’s good how the State Pension slows the rate of fund decline. It’s hard to quantify what numbers will look like in 40 years time, but would you need to be taking out £53,037 at age 96. It’s that increase that kills the pot in the end.
I suppose another one to consider is any inheritances you may receive which would add some more security.

Thrugelmir

GSP said:

Deleted_User said:

“When you actually look at those household bills, the spending you have to make it’s probably half of your withdrawal and affected by inflation. So something like £360 a year. The rest is casual spend on holidays”.

All of it is affected by inflation. Some of it is discretionary. Not relevant to the question about calculating the impact of inflation on your pension’s growth rate. 

It’ll be interesting to hear from anyone who has been using growth less inflation to forecast their fund balance? I reckon by using a growth of 1% (3% growth less 2% inflation), they have ended up with far more money in their fund. 

How are factoring in the years that your fund value falls 15% while inflation remains at 2%?  Investment markets unfortunately don't subscribe to the linear positive return theory.  

Secret2ndAccount

GSP said:It’s good how the State Pension slows the rate of fund decline. It’s hard to quantify what numbers will look like in 40 years time, but would you need to be taking out £53,037 at age 96. It’s that increase that kills the pot in the end.

Well, maybe you have less outgoings at 96, but that 53k in 36 years time only has the same shopping power as 26k today.

Would be easy to ad a 'special items' column: zero most years, but sometimes "New Car -30k" or "Inherit +100k" or "Roof falls in -40k"

Secret2ndAccount

GSP said:

 Interesting as you increase withdrawals by 2% for inflation. I have started high but kept the same amount thinking as I would spend less later, the effect of inflation would be cancelled out somewhat.

To look at this another way, if you set your withrawal amount at 30k and never changed it, you would have the shopping power of 12,250 after 36 years. Even at age 96 could you get by on that?

Your plan works well if you don't live very long, but turns ugly if you get to old age.

GSP

Secret2ndAccount said:

GSP said:

 Interesting as you increase withdrawals by 2% for inflation. I have started high but kept the same amount thinking as I would spend less later, the effect of inflation would be cancelled out somewhat.

To look at this another way, if you set your withrawal amount at 30k and never changed it, you would have the shopping power of 12,250 after 36 years. Even at age 96 could you get by on that?

Your plan works well if you don't live very long, but turns ugly if you get to old age.

Does that include the State Pension? If not, the inclusion of that would get me over the line.

cfw1994

Secret2ndAccount said:

Finally, I've added in a pension. 10k per year, from age 67, growing at 2.5%. It would be easy to add multiple columns for several different pensions, paid at different ages or growth rates.

Things now work out much better for our friend. With just the aid of a state pension, his pot now lasts until he is 96 years old.

That’s pretty well the layout of my sheet, as shared with a few on here.  I have a column for the inflation so each year I can adjust it, plus one to apply growth % to the pot each year - allows me to “stress test” a big % drop early on with the main DC pot, for example, but essentially it is this.
Haven’t pulled the trigger yet (another 6 months...), but happy with the broad plan.

Secret2ndAccount

cfw1994 said:

That’s pretty well the layout of my sheet, as shared with a few on here.  I have a column for the inflation so each year I can adjust it, plus one to apply growth % to the pot each year - allows me to “stress test” a big % drop early on with the main DC pot, for example, but essentially it is this.
Haven’t pulled the trigger yet (another 6 months...), but happy with the broad plan.

I agree with you cfw. My sheet has several more columns as you state. I just wanted to keep the visuals simple here to illustrate the points relating to the original question. I think OP just needed some help to see how much bigger the numbers get over a long period of time.

Secret2ndAccount

GSP said:

Does that include the State Pension? If not, the inclusion of that would get me over the line.

Then you're good to go. If you've got half a mil you can retire at 60.

If you have a spreasheet like the ones here you can play what-if? until your fingers are sore. You can take a bit more, and see how much sooner the pot runs out. You can start by taking a bit less, and grow the withrawal just a little (even 1%) per year, and see the picture. You might find you don't give up very much now in order to have a bit more comfort in your late 70's. There's no right answer - it's each to their own - but this is an easy way to look at a dozen (or a 1000) scenarios.