Predicted Pension Growth after Inflation and Costs

236dave

Hi,
I'm a 61 year old considering early retirement in mid 2024 and want to be able to give the best estimate of my ongoing pension value as I move into drawdown.

I have browsed a few old threads debating pension growth rates, but was wondering what the latest predictions are? ie, Is it predicted to grow quicker than inflation?  I'm looking for a predicted average over a 30 year period.

I have a spreadsheet estimating what I can withdraw in years to come. For simplicity I have calculated my future pension growth after costs to keep pace with inflation.  Is this too cautious?
Should I use an estimated pension growth which is higher than inflation, and if so how much higher?
Looking forward to reading replies.
btw - Happy New Year to everyone.
Dave

Albermarle

Best to be not too optimistic and maybe look at 1 or 2% above inflation in the long run.

dunstonh

I have browsed a few old threads debating pension growth rates, but was wondering what the latest predictions are?

You cannot predict the unpredictable.    Predicting is a futile game.

If you look at drawdown modelling tools, you will see very quickly that the difference between the best-case scenario and worst-case is massive.   It could be a case of having £1.9 million by age 78 or running out of money by age 78.

Generally, you should plan for a pessimistic outcome and hope for an optimistic one.

Also, you haven't mentioned how you are invested.  So, what predictions would you be looking for?

For simplicity I have calculated my future pension growth after costs to keep pace with inflation.  Is this too cautious?

No. 

Should I use an estimated pension growth which is higher than inflation, and if so how much higher?

Again, no information about your assets.    What someone with 80% equities should use will differ to someone with 20% equities for example.

SouthCoastBoy

If it is any help I predict equities to grow 1% above inflation and costs. Cash 1.5% below inflation, then adjust yearly based on actual figures and also economic climate, for example over the next 3 years I have equities matching inflation and costs rather than beating it. Obviously all guess work but any model is guesswork and you need to model something 

coyrls

The problem with guessing growth rates and linear models is that you can get any result that you want and so pessimists will never have enough and optimists will always be safe.  The spreadsheet is a bit redundant.

SouthCoastBoy

coyrls said:

The problem with guessing growth rates and linear models is that you can get any result that you want and so pessimists will never have enough and optimists will always be safe.  The spreadsheet is a bit redundant.

All models have flaws but you need to model something to help in your decision making, and refine it as you go, it is a starting point but you need to understand its limitations. It is also useful for stress testing, I.e. I have modelled a 50% decrease in fund prices over a 3 year period, inflation at 7 or 8 % over 5 years etc.

coyrls

The primary determinants of whether a withdrawal strategy will be successful are the initial withdrawal rate and the sequence of inflation and returns that follow, particularly in the early years.  There has been extensive research with more sophisticated models than simple scenario projections.  I think your time would be better spent understanding the research, rather than trying to start from scratch yourself.

In my opinion it is more important to understand: portfolio construction, asset allocation and risk.  The potential role of annuities and index linked gilts.  How you spend your money.  What withdrawal strategies you are prepared to consider.  The impact of any non DC and state pensions.

If your initial withdrawal rate is below 2.5%, then you don’t really have much to worry about, if it’s 2.5-3.5% it will require some management, at 3.5% to 4.5% you will need much closer management and potentially variable income and if you’re over 4.5%, you probably don’t have enough.  I don’t think that a spreadsheet model will change that.

jamesd

Your approach is probably wrong. Average performance isn't the problem. Sustained bad periods is. There's extensive research done into safe withdrawal rates that do account for this issue, called sequence of returns risk, so why not use it?

The safe income level also depends on the withdrawing guidelines/rules used.

In the US the original safe withdrawal rate was 4% of the starting capital increasing every year for a thirty year plan. Later the author added some small caps and he now calls it his 4.5% rule. Common discussion still uses 4% as the name because everyone knows what that means even if the percentage is different. The author also suggests that 5% is safe enough to start with in the US if you're willing to adjust for bad times.

In the UK you'll see something in the 3.2-3.5% of the starting capital range as safe for a thirty year 4% rule plan's initial income.

Alternatively you could start around 5% and use the Guyton-Klinger rules instead. Those usually increase with uncapped inflation but skip that or use extra cuts or increases depending on how your actual investment performance goes.

Other work has looked at the decline in spending as people get older or the effect of the amount of guaranteed income and willingness to accept cuts. Both increase the acceptable starting income but aren't used in most day to day discussions like those here, mainly just to try to be consistent.

If half of your income is guaranteed and you're willing to take a 50% drop that means you can even handle loss of all investment income so could choose to be very generous at the start and maybe take 8% increasing with inflation. If you'll take a 25% cut, less of a bump up at the start to say 6%, but then you might factor in say a 30% spending cut for age 80 and take a further increase back up to 8% with those planned cuts happening. 8% and 6% aren't calculated, just illustrate the approximate capability. If you happen to live through average investment performance you'll probably not need to cut.

Want more, without cuts? State pension deferral both pays more than drawdown rules starting levels and increases guaranteed income.

To bridge years until state pension just deduct the desired income times number of years from starting capital then do a usual calculation. If the SWR with your preferred adjustments is higher, up the income and try again until they are about the same. This is imperfect but good enough.

Linton

236dave said:

Hi,
I'm a 61 year old considering early retirement in mid 2024 and want to be able to give the best estimate of my ongoing pension value as I move into drawdown.

I have browsed a few old threads debating pension growth rates, but was wondering what the latest predictions are? ie, Is it predicted to grow quicker than inflation?  I'm looking for a predicted average over a 30 year period.

I have a spreadsheet estimating what I can withdraw in years to come. For simplicity I have calculated my future pension growth after costs to keep pace with inflation.  Is this too cautious?
Should I use an estimated pension growth which is higher than inflation, and if so how much higher?
Looking forward to reading replies.
btw - Happy New Year to everyone.
Dave

You wont know until it happens what the future growth will be, particularly over a time period shorter than  say10 years..  If most of your investments will be in equity rather han bonds, it would be reasonable to assumetthat growth over the long term will be somewhat higher than inflation.  If not, people may not invest in industry at all and that could be the end of the world as we know it with all bets off anything except perhaps annuities.

If you are highly invested in bonds perhaps you should assume growth lower than inflqation,

How much higher than inflation you opt for is up to you.  I used 1% above inflation for investment returns for my planning 20 or so years ago which worked out very well.  The higher the growth assumption the greater the chance of failure. Whatever you choose wont affect reality so it makes sense to keep the risk on the upside as far as you can whilst still meeting your desired expenditure. If the results make you feel uncomfortable dont retire until you have a larger pot.

236dave

Thanks for all the replies, much appreciated!

To give a little more detail, here is the drawdown fund:
https://markets.ft.com/data/funds/tearsheet/charts?s=GB00BYXD5G42:GBP

Here is a summary of my plan based on my drawdown fund keeping pace with inflation.
btw - this is to support both myself and wife....
My Age 61-65 = Drawdown in tax efficient way, also using cash savings.
Age 65 = Level term DB scheme kicks in (giving about 16% of target income at 65, reducing to about 8% at age 90)
Age 67 = Full state pension (giving about 25% of target income)
Age 70 = Wifes state pension (giving a 25% of target income)
Age 80 = Reduce our overall income by 10% (both state pensions will then account for about 60% of target income)
Age 90 = Target for drawdown to last till, if i reach this age?
If we live longer, then we have equity in our home. ie, we could down size, releasing about £150-200k in todays money.

Any thoughts?

Linton

jamesd said:

Your approach is probably wrong. Average performance isn't the problem. Sustained bad periods is. There's extensive research done into safe withdrawal rates that do account for this issue, called sequence of returns risk, so why not use it?

The safe income level also depends on the withdrawing guidelines/rules used.

In the US the original safe withdrawal rate was 4% of the starting capital increasing every year for a thirty year plan. Later the author added some small caps and he now calls it his 4.5% rule. Common discussion still uses 4% as the name because everyone knows what that means even if the percentage is different. The author also suggests that 5% is safe enough to start with in the US if you're willing to adjust for bad times.

In the UK you'll see something in the 3.2-3.5% of the starting capital range as safe for a thirty year 4% rule plan's initial income.

Alternatively you could start around 5% and use the Guyton-Klinger rules instead. Those usually increase with uncapped inflation but skip that or use extra cuts or increases depending on how your actual investment performance goes.

Other work has looked at the decline in spending as people get older or the effect of the amount of guaranteed income and willingness to accept cuts. Both increase the acceptable starting income but aren't used in most day to day discussions like those here, mainly just to try to be consistent.

If half of your income is guaranteed and you're willing to take a 50% drop that means you can even handle loss of all investment income so could choose to be very generous at the start and maybe take 8% increasing with inflation. If you'll take a 25% cut, less of a bump up at the start to say 6%, but then you might factor in say a 30% spending cut for age 80 and take a further increase back up to 8% with those planned cuts happening. 8% and 6% aren't calculated, just illustrate the approximate capability. If you happen to live through average investment performance you'll probably not need to cut.

Want more, without cuts? State pension deferral both pays more than drawdown rules starting levels and increases guaranteed income.

To bridge years until state pension just deduct the desired income times number of years from starting capital then do a usual calculation. If the SWR with your preferred adjustments is higher, up the income and try again until they are about the same. This is imperfect but good enough.

I would strongly support the principle that all expenditure that you regard as essential for a simple but acceptable standard of living is covered by guaranteed income.  Security here is much more important for a low stress retirement than the level of discretionary expenditure you can support.  You dont want to have Guyton Klinger coming in and reducing at short notice the income you have previously determined is essential. For some people SP would be sufficient, others may decide on rather more.