Growth & inflation calculation for forecasting

8 Posts

Hi folks
How do people generally forecast growth and inflation in their planning?
Do you:
(a) use a nett % of growth minus inflation & treat all income at today's value;
or
(b) apply a gross growth % on all assets, treat income (e.g. State Pension) at future inflated value, inflate all costs into the future.
or
(c) do something else?
Any assumptions on growth and inflation are obviously all important and need to be stress tested but I'm interested in the best method.
TIA
How do people generally forecast growth and inflation in their planning?
Do you:
(a) use a nett % of growth minus inflation & treat all income at today's value;
or
(b) apply a gross growth % on all assets, treat income (e.g. State Pension) at future inflated value, inflate all costs into the future.
or
(c) do something else?
Any assumptions on growth and inflation are obviously all important and need to be stress tested but I'm interested in the best method.
TIA
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My default growth rates are 3.5% for equities and 1% for cash, I also apply inflation, modelled as 10%,10%,8%, 6%,6% for next 5 years including this FY, with default being 2.5%.
I then adjust my balance to 2020 figures using the inflation factor I have calculated. All my spending that I have projected is in 2020 figures so again use the inflation factor to identify what the actual yearly value will be.
I have made the assumption that the state pension will keep up with inflation so do not adjust that.
The planning spreadsheet also calculates tax, so I assume bands increase with inflation but again the values are updated with reality.
Model investment returns then inflation projected forwards 30/40 years. I compounded investment pot, compounded inflation and worked out my spending needs in 2062.
Then I thought, what's the point and just base things off today's rate.
Very simplistic, investment return 6% , inflation 3% so that gives 3% overall return.
Add in costs and taxes if you want to be more specific but that has to be done at today's rates.
I suspect a very tiny percentage of the general population......
It would be really interestion to see examples of out peoples spreadsheet to see what I have missed...