Predicted Pension Growth after Inflation and Costs

Linton

236dave said:

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?

I would not have retired purely on the basis of your numbers given here. I think you have more work to do to reduce possible problems at some later date.  Some initial concerns and questions

1) What happens if one of you dies early?  Will the survivor have sufficient for an acceptable lifestyle? There is a high likelihood that at least one of you will live past 90 if you are both in good health now.

2) What is your assumed rate of inflation for discounting the fixed rate DB pension - you seem to be working in current prices. Have you tested different scenarios?

3) Hard wiring a reduction in expenditure at 80 seems risky.  By that age you may find you are needing help - eg garden, cleaning/ironing etc.  Once you get much beyond that one of you may need personal help.

4) How have you estimated future expenditure needs?  Do you include the occasional  one-off large cost items? What are you actually spending now including average one-offs but not including expenses that wont apply after retirement?

5) Since your chosen fund started about 6 years ago it has pretty closely matched inflation over the years up in total by about 30%..  Whether this is by design or luck I dont know.  However it gives virtually no leeway for periods of unusually high inflation or poor fund performance.  Whilst you are withdrawing a fixed amount each year  inadequate temporary matching of the inflation increase could lead to a more rapid fall in pot value than the average would suggest. 

6) Do you have other significant assets such as cash savings?

Pat38493

Videos from Meaningful Money stated that they reccomend to use inflation +2% for long term modelling when using flat line projections, and they stated that this is what they also do as IFAs with their clients.   They stated they consider this to be conservative and the majority of people will beat this in the long run (but obviously not every single year).

However - that fund you are invested in is probably pretty cautious and if hardly beating inflation, so if you insist on using only that fund, you might struggle to meet inflation +2%.  Therefore you may also want to consider looking at your asset mix and maybe moving some of your longer term fund needs into some more adventurous funds.

coyrls

Pat38493 said:

Videos from Meaningful Money stated that they reccomend to use inflation +2% for long term modelling when using flat line projections, and they stated that this is what they also do as IFAs with their clients.  

I can't see any use for long term modelling using flat line projections.  I am surprised that IFAs would use this method with their clients.

Linton

coyrls said:

Pat38493 said:

Videos from Meaningful Money stated that they reccomend to use inflation +2% for long term modelling when using flat line projections, and they stated that this is what they also do as IFAs with their clients.  

I can't see any use for long term modelling using flat line projections.  I am surprised that IFAs would use this method with their clients.

If you mean flatline as in inflation+x% it seems to me that they are excellent as a simple order of magnitude estimate, and in my view may will turn out to be not significantly less reliable than assuming the next 30 years will match the previous 100-150 years patterns of both inflation and short term returns.

coyrls

Linton said:

coyrls said:

Pat38493 said:

Videos from Meaningful Money stated that they reccomend to use inflation +2% for long term modelling when using flat line projections, and they stated that this is what they also do as IFAs with their clients.  

I can't see any use for long term modelling using flat line projections.  I am surprised that IFAs would use this method with their clients.

If you mean flatline as in inflation+x% it seems to me that they are excellent as a simple order of magnitude estimate, and in my view may will turn out to be not significantly less reliable than assuming the next 30 years will match the previous 100-150 years patterns of both inflation and short term returns.

I would expect an IFA to use a range of projected returns.  I believe this is mandatory for projecting pension returns.

Hoenir

coyrls said:

Pat38493 said:

Videos from Meaningful Money stated that they reccomend to use inflation +2% for long term modelling when using flat line projections, and they stated that this is what they also do as IFAs with their clients.  

I can't see any use for long term modelling using flat line projections.  I am surprised that IFAs would use this method with their clients.

I've used inflation plus 2% for decades. Majority of good stock market performance arrives in short bursts. Likewise you never know when the next (unexpected) fall will arrive. When markets go into freefall can be an unnerving experience. 

Long term historical growth , with income reinvested, is computed to be 4% - 5% above inflation. That's before fees and the impact of taxation on income. Puts the 2% into perspective. Smooths out the market's excessive highs and lows. 

dunstonh

coyrls said:

Linton said:

coyrls said:

Pat38493 said:

Videos from Meaningful Money stated that they reccomend to use inflation +2% for long term modelling when using flat line projections, and they stated that this is what they also do as IFAs with their clients.  

I can't see any use for long term modelling using flat line projections.  I am surprised that IFAs would use this method with their clients.

If you mean flatline as in inflation+x% it seems to me that they are excellent as a simple order of magnitude estimate, and in my view may will turn out to be not significantly less reliable than assuming the next 30 years will match the previous 100-150 years patterns of both inflation and short term returns.

I would expect an IFA to use a range of projected returns.  I believe this is mandatory for projecting pension returns.

The FCA has set rules on pension providers and the projection rates they use.   IFAs can deviate from those in modelling/planning but have to revert to them for cost comparison.

Pat38493

coyrls said:

Pat38493 said:

Videos from Meaningful Money stated that they reccomend to use inflation +2% for long term modelling when using flat line projections, and they stated that this is what they also do as IFAs with their clients.  

I can't see any use for long term modelling using flat line projections.  I am surprised that IFAs would use this method with their clients.

They don't only use that - my understanding is that they use Voyant Go as the main tool for financial planning for their clients with inflation +2%, but they then also use Timeline to stress test the scenario against history.

The flat line approach seems to work ok as long as you use conservative growth rates - I guess in reality most of their clients will end up better off than what Voyant Go says.

jamesd

Almost all are likely to end up wealthy in their grave. One of the trickier problems is working out how much you can usefully use when young while possibly taking money from a less agile or spendy future self.

Linton

jamesd said:

Almost all are likely to end up wealthy in their grave. One of the trickier problems is working out how much you can usefully use when young while possibly taking money from a less agile or spendy future self.

Yes, I  also think most prudent drawdown pensioners, most of the time, will die rich.  Perhaps better than living your final years in relative poverty having exhausted your money.  The problem is that the long term outcome could  be highly dependent on a relatively small amount of over-spending  coupled with some bad luck with your timing in the early years. Getting the balance right would be very difficult.

It may be helpful to set aside a lump sum on retirement to finance a few years of bucket list holidays. Better than just spending extra money on day to day living, getting used to a high standard of living and then having to cut back drastically.