Retirement Planner - Importance of Inflation?

Linton

Yes, this this is exactly how I do my annual spreadsheet plans.
One can keep adding more features:
 - calculate the tax on drawdown and pensions assuming allowances increase with inflation, but have income from ISAs tax free. This  enables the calculation of the maximum drawdown without incurring higher rate tax.
 - add a column for explicit one-off expenditures.
 - have individual values of grow and inflation for each year to explore what-ifs 

Updating the plan at year end is straightforward, One just replaces the figures for the year with actuals.

Robert_McGeddon

Linton said:

Updating the plan at year end is straightforward, One just replaces the figures for the year with actuals.

Very sensible, IMO. You can ascertain how your original projections turned out in reality - you might then want to revise your assumptions going forward.

cfw1994

Robert_McGeddon said:

Linton said:

Updating the plan at year end is straightforward, One just replaces the figures for the year with actuals.

Very sensible, IMO. You can ascertain how your original projections turned out in reality - you might then want to revise your assumptions going forward.

So there is my next dilemma.
When, exactly, is “year end” 
Is it the logical tax year end, April 5th?  
Is it calendar 31st December (nice to spend the start of a year tallying up, perhaps)?
Is it Feb-Mar, to allow time to sell some assets to take advantage of CGT etc within the tax year?
Is it the day you quit the day job (no doubt a memorable date!)?

The first sounds the right one (from a form-filling perspective, tax returns etc).....but given how April-May appear to be turning into halcyon days of spring, might waste some time that would be better spend on hols/walking/cycling etc....plus I wonder if that date might have slightly skewed numbers some years with people perhaps selling stuff for CGT purposes.
First world problem, I guess......welcome any ideas though!

Stubod

I have been running a spreadsheet similar to the above and I work in calendar years, (ie 1st Jan to 31st Dec).

I base all my calculations on an "inflation" figure, then as a worst case scenario I calculate interest on savings / investments as a percentage of that. eg interest is set at 50% of whatever the inflation figure is, (eg if inflation is set at 4% then interest on my "pot" would be 2%), and DB/state pensions are set at (say) 75% of this (eg 3% if inflation is set at 4%). I also have the option to reduce the starting "pot" by 25% in the first year to (hopefully) offset any longer term drops as I accept investment returns are never linear...

Obviously once you have set up your spreadsheet you can set up various best case / worst case scenarios and take your pick!

Perhaps do a worst case scenario, then a best case scenario and take the average of them both... ?!

GSP

cfw1994 said:

Robert_McGeddon said:

Linton said:

Updating the plan at year end is straightforward, One just replaces the figures for the year with actuals.

Very sensible, IMO. You can ascertain how your original projections turned out in reality - you might then want to revise your assumptions going forward.

So there is my next dilemma.
When, exactly, is “year end” 
Is it the logical tax year end, April 5th?  
Is it calendar 31st December (nice to spend the start of a year tallying up, perhaps)?
Is it Feb-Mar, to allow time to sell some assets to take advantage of CGT etc within the tax year?
Is it the day you quit the day job (no doubt a memorable date!)?

The first sounds the right one (from a form-filling perspective, tax returns etc).....but given how April-May appear to be turning into halcyon days of spring, might waste some time that would be better spend on hols/walking/cycling etc....plus I wonder if that date might have slightly skewed numbers some years with people perhaps selling stuff for CGT purposes.
First world problem, I guess......welcome any ideas though!

That’s a really good point. Balances as we know fluctuate all through the year, and growth can be vastly different depending on that date chosen.
My wife’s pension hasn’t been drawdown yet, has been going 3 years so I was able to do analysis on this clean run of data. The results were interesting. 

Her fund was transferred over in an August and the 3 years annual growth between then has been a consistent 3%-4%. Looking at the same balances in December’s, it’s been something like -6%, +16% etc.
I would say choose the date your fund went on the books so to speak, or perhaps from the time you made your last withdrawal, then you can see how much your pot has grown since then.

Sea_Shell

Rightly or wrongly I take the figure at the end of each month as "day one" and revise our forecast from there.   What has already happened, has been and gone!

(i do have historic versions of the spreadsheet saved annually, so i could look back if I wanted to)

GSP

So to wrap this thread up before it gets too long, just how important is the inflation metric in planner’s?
Is it something that can be omitted from a planner?
Are there ‘other ways’ to account for inflation, without showing it?

Stubod

..I can't see how you can do any long term planning without factoring in inflation?...unless you have no pot to worry about and all your retirement income comes from index linked pensions?

Or alternatively if you are happy that your investments pot will at least keep pace with inflation, in which case you can base everything on today's values?

[Deleted User]

The impact of inflation on long term projections is massive. People can easily be retired for 40 years.

The value of pound has dropped 3.5 times in the last 40 years. That’s with historically low inflation. Go further back, the value of pound dropped by a factor of 50 in 80 years. 

If one wants to plan over a long period of time, he has to account for inflation one way or another. Could be done by counting all costs in today’s pounds and assuming growth in real terms. Projections assuming nominal (Inflated) growth of ones pot and expenditure in today’s pounds are not very meaningful. 

GSP

Stubod said:

..I can't see how you can do any long term planning without factoring in inflation?...unless you have no pot to worry about and all your retirement income comes from index linked pensions?

Or alternatively if you are happy that your investments pot will at least keep pace with inflation, in which case you can base everything on today's values?

Thanks. Thinking more, say if my withdrawals were £40k p.a., of that I would say household bills, shopping, running the cars, insurance would be £17k. The rest is holidays, own money to do what we like, presents through the year.
It’s that £17k that needs to be addressed as in it is must money and inflation prone.