'Personal' Inflation Rate for Pension Calculations

Retireinten

Hi

Possibly a bit of a daft question but I've been mulling this over for a while so thought I'd post for feedback/thoughts.

I find it easier to track our retirement income in today's money - we will be funding retirement in 9 years time from a mix of DB (me) and DC (husband) schemes. For each year of retirement I essentially have a target annual net income (currently £37,200) and then I list our expected annual income from each income source, all in todays money.  I then apply CPI to my target income and/or the relevant uplift for each income stream each year. 

Given the subdued stock market and higher inflation rates I increased our income target by CPI  and our inflation protected income  streams by the relevant amounts in April 2022. But I left my husbands DC as is, so I  assumed no growth at all, not even to cover inflation. I plan on doing the same in April 2023 when the time comes...BUT adding, say 7.8% CPI to my income target and not applying this rate to my husbands DC will have a massive negative impact on our retirement figures... and most importantly it doesn't feel right for our personal circumstances. 

Headline inflation is high but we're all affected differently by it, my household has been affected by price increases but our personal costs have definitely not increased by the headline rates. For instance, we have a big solar system and hot water diverter (8kw) so our utility costs are £200 a month which should build a buffer for winter and we have no risk of an increase in October as we are on a fixed deal, I work from home and husband has a funded vehicle so fuel costs are negliable and there is no risk of interest rates impacting loans or mortgage costs (we're completely debt free).  We are impacted by rising food costs but we can easily cut back on non essentials to at least partially offset this increase (I battle daily with a spendy family to maintain control of the purse strings, so to be honest, inflation is the least of my problems😊) 

So I'm thinking of calculating a more realistic personal inflation rate and increasing our income target by that in 2023. Other income streams will go up based on scheme rules but husbands DC will not be increased at all. 

Does this sound sensible or am I missing something? 

Albermarle

Energy and fuels are the biggest cost increases so if you are largely directly protected from that, it would be sensible to use a slightly lower inflation rate .
On the other side the increase in energy and fuel costs, will mean many businesses having to increase prices .Business energy prices are not capped even. So it will affect you indirectly.

Stubod

I use a spreadsheet and do something similar. I have posted previously that I was using (what I thought was a rather pessimistic method at the time),  of inflation as the main driver and assuming interest rates as a (lower)  percentage of inflation for my calcs.

eg if inflation is assumed at 4%, then savings/investments would be 50% of this (ie 2%), and index linked pensions would be (say), 80% of inflation. ie you could then model various "worst case" scenarios and decide on an annual "spend" amount you felt happy with.

As it turns out, (for this year at least), I was being very optimistic!

But at the end of the day it is all guesswork...  

Linton

Basing long term average inflation rates over the rest of your lives  in 1 year's value does not make sense.  I am happy to continue with my assumed long term average inflation of 3% and investment returns of 4% (1% above inflation) for planning purposes unless I want to test the limits of the plan.

Retireinten

I am happy to take a cautious view but my gut feeling is our spending, and therefore our project retirement income needs, will not rise by anywhere near current headline inflation figures.  But I'd rather assume no growth for the time being on the DC pot and therefore not increase my drawdown figure to protect that pot. 


So in simple terms I'm thinking an inflation figure of 50% of CPI on our target income (assuming this remains on the high side), reflecting actual increases in state pension and my DB (which could be a fairly high but guaranteed increase this year) and no change to drawdown figures from the DC for now (to protect the pot). I think overall it will just mean a steady state for us this year. 

I appreciate that I may do things differently by planning in todays money to many on here. But this is just more relatable to me and makes sense given at least half our income is in DB schemes. 

Stubod

.....I also split our projected spends into 2 main groups. One is mainly discretionary, and this may increase at a lower rate of inflation, the other is essential, (eg energy/food/council tax), and this is allocated a higer rate.

...but still largely guesswork?

Audaxer

Retireinten said:

So in simple terms I'm thinking an inflation figure of 50% of CPI on our target income (assuming this remains on the high side), reflecting actual increases in state pension and my DB (which could be a fairly high but guaranteed increase this year) and no change to drawdown figures from the DC for now (to protect the pot). I think overall it will just mean a steady state for us this year. 

I understand about your lower personal inflation rate, and reducing your target income accordingly. However as well as assuming no growth on the DC pension, I would project some years ahead with a loss percentage in the value.  As I understand it, you are planning just to not increase your drawdown amount in loss years, whereas I think most people have a cash buffer to draw income from in loss years. Do you have a few years cash buffer as that would offer more protection to your pot?

Retireinten

Audaxer said:

Retireinten said:

So in simple terms I'm thinking an inflation figure of 50% of CPI on our target income (assuming this remains on the high side), reflecting actual increases in state pension and my DB (which could be a fairly high but guaranteed increase this year) and no change to drawdown figures from the DC for now (to protect the pot). I think overall it will just mean a steady state for us this year. 

I understand about your lower personal inflation rate, and reducing your target income accordingly. However as well as assuming no growth on the DC pension, I would project some years ahead with a loss percentage in the value.  As I understand it, you are planning just to not increase your drawdown amount in loss years, whereas I think most people have a cash buffer to draw income from in loss years. Do you have a few years cash buffer as that would offer more protection to your pot?

The plan is to have around £80-£100k in a lump sum not earmarked for anything in particular alongside our 'retirement income' savings that we could hold a portion of in cash.

We have lots of buffers/contingencies in place on top of this. The DC pot should have more than we need in it and there's scope to increase contributions also, we're saving for the kids (house deposits etc) and our annual retirement income target is higher than we currently spend as a household of four adults. So we should be okay

cfw1994

Stubod said:

.....I also split our projected spends into 2 main groups. One is mainly discretionary, and this may increase at a lower rate of inflation, the other is essential, (eg energy/food/council tax), and this is allocated a higher rate.

...but still largely guesswork?

Makes a lot of sense to me.
Some things you can control.   Classic example: our home insurance renewal came in last week - up over 30% 😳
No claims...no reason...
A cheeky look on Top£Back with an hours typing in found equivalent cover for over 25% lower than *last* years cover, plus some cashback.....
#EveryLittleHelps!!

westv

cfw1994 said:

Stubod said:

.....I also split our projected spends into 2 main groups. One is mainly discretionary, and this may increase at a lower rate of inflation, the other is essential, (eg energy/food/council tax), and this is allocated a higher rate.

...but still largely guesswork?

Makes a lot of sense to me.
Some things you can control.   Classic example: our home insurance renewal came in last week - up over 30% 😳
No claims...no reason...
A cheeky look on Top£Back with an hours typing in found equivalent cover for over 25% lower than *last* years cover, plus some cashback.....
#EveryLittleHelps!!

Maybe the ban on offering discounts to new customers might end some of those instances.