Returns and inflation forecasting

anonmoose

Morning All,

I am around 10yrs from retirement and have a rather simplistic way at forecasting what I need! I know many others have spreadsheets etc but it is over my head.  It was hard enough deciding on investment decisions!

So I am basically using the assumption that what I have now will be what I have when I come to retire in that years money equivalent. So what my money buys me today will buy me then.

So my assumption is that investment returns will balance out inflation over the next 10yrs. Hopefully add a little more on top but I am not banking on it.

So my question is, is this an OK assumption at this stage or do I need to be using spreadsheets and properly forecasting. I would be expect to be drawing down around 3.5% when the time comes on my figures.

Oh and my investment is medium risk and will stay that way for the foreseeable.

JohnWinder

Might as well have that assumption as any others, they’re all guesses. The boffins often don’t get inflation predictions even close to right six months ahead, forget 5-10 years. Investment returns are a bit easier to predict: 10 years bonds with a 2%/year yield should return 2%/year as a best guess, but plenty can change in 5-10 years. And we have no idea of your portfolio, not that it would help us much.

Spreadsheets do calculations quicker than I do, but they don’t know the future any better than you or I do. I doubt they’d help. Drawing down 3.5%year is common/safe/sensible to avoid running out of money.

Linton

For my plans I assume an inflation rate of 3% and a return of 4% (ie a real return of 1%).  I review the situation once a year and make adjustments accordingly.  That approach has served me very well for nearly 20 years. 

anonmoose

Ah ok so it sounds like I won't be too far off the mark. I don't mind underestimating a bit but I don't want any big shocks of not having enough.

SouthCoastBoy

If you don't want any big shocks, I would suggest you plan for 75% of your money in real terms on retirement, that way you have built in contingency, but then i'm a half glass empty person.

Personally I like spreadsheet modelling as it helps plan my drawdown and income tax calculations. Also you can model some disaster scenarios, such as 35%-40% reduction over 2 or 3 years and then small recoveries, plus inflation at 10+%. Modelling these helps me sleep at night.

Albermarle

1% above inflation is as good an estimate as any . Although maybe discount this year as a bad job, and start your calculations from next year. 

Thrugelmir

anonmoose said:

So my assumption is that investment returns will balance out inflation over the next 10yrs. Hopefully add a little more on top but I am not banking on it.

While inflation remains at elevated levels I'd be more cautious. Instead assume a negative real return. 

anonmoose

Yes I would agree over the shorter term but most commentators I have heard speaking about inflation seem to be saying it will be a 12 - 18 month issue rather than very long term. 

I don't know how realistic this is but I have to say I am more concerned about investment growth than inflation over the next 10yrs. 

NedS

anonmoose said:

Yes I would agree over the shorter term but most commentators I have heard speaking about inflation seem to be saying it will be a 12 - 18 month issue rather than very long term. 

I don't know how realistic this is but I have to say I am more concerned about investment growth than inflation over the next 10yrs. 

and 6-12 months ago they were saying inflation would be transitory - not a term they are using now!

But I agree, it's not worth worrying about things you cannot control, so positioning your portfolio according to your risk profile and taking a long term view is probably not a bad thing.

Sea_Shell

Do you have to account for inflation on both sides of the spreadsheet?   Both remaining pot "worth" and projected spending?

The money runs out very quickly doing it this way, if sustained.

Should I only be factoring inflation on EITHER pot value or spends, rather than both?   

westv

Sea_Shell said:

Do you have to account for inflation on both sides of the spreadsheet?   Both remaining pot "worth" and projected spending?

The money runs out very quickly doing it this way, if sustained.

Should I only be factoring inflation on EITHER pot value or spends, rather than both?   

Definitely one or the other. Not both