Growth assumptions in your models/spreadsheets

OldScientist

Aylesbury_Duck said:

What am I using?  Zero growth.  I've done all my planning so far using today's values and assuming that all my pensions will rise in accordance with inflation.  It's not very sophisticated but there are just too many variables to consider and I'm reasonably confident that it will prove to be a very prudent approach.

When I'm your age in a few years' time I may adopt a more sophisticated approach like yours, to help me pick the right age to retire.  I'd enjoy it, as you are!

I'd agree 0% real growth is a good starting point because it is
a) Historically realistic (there have been 20-30 year periods in the past where equities and bonds have returned 0% real or less)
b) The modelling becomes easy (if inclined, it can be done on the back of an envelope without needing a spreadsheet).

Of course, a more sophisticated spreadsheet can be built with different returns or, more sophisticated still, with historical returns/inflation. However, the basic problem is that future returns are unknown and unknowable.

nicknameless

My word there are some pessimists on this board.  0% growth?  Best cancel my retirement and work a few more years then (no thanks).  Silly discussion without considering what costs you need to cover.  With 0% growth I can still easily cover basic expenses.  Do I expect that to be my lifestyle - no.  Am I going to keep working on and on because I modelled on 0% for anything above basic living expenses - not on your proverbial.

Come on folk - live a little (tongue in cheek before backlash)

Linton

The purpose of assumptions in retirement planning is not to accurately predict the future which is impossible, but rather to give you the confidence to jump.  So there is no right answer  as to what those should be, it's very much up to you as to what rassurance you need.. 

You have to accept that there will always be global circumstances when your retirement plan will fail. The best you can hope for is that you will be in a no worse position than everybody else.  If there is a global crash that lasts 20-30 years the absence of real profits in global industry would imply that vast numbers of people are unemployed across the world. 

20-30 years of failure to beat inflation could well arise in individual countries, but to assume that it could occur globally is in my view more a plot for a disaster movie than a realistic scenario that needs to be, or can be, planned for.  These considerations do illustrate that diversification in countries across the world is essential.

westv

I don't bother with growth figures. The only spreadsheet I've done shows my expected annual income and expenditure from when I expect to retire until I'm 100. The amounts are in today's figures with a guessitmate of 4% inflation.
Income figures are 3%-3.5% drawdown and various DB pensions - one with no inflation increases.

Fink_Nottle

Useful thread as I'm in the middle of doing this now, and for me, using different values for different assets seems worth the very small effort involved. 

I've been using:
- today's values (i.e. 0% inflation) for DB and state pensions
- I'm looking at setting up an index linked ladder for bonds till SP kicks in (so 0% again)
- I'm thinking that remaining DC pots and ISAs will move almost 100% to equities, and I have 3 columns for this - 0% growth vs low positive and low negative (+/- 2 or 3%) to give a range. My mindset is that the negative is the useful one as planning for falls is more practical than dreaming of riches.
- I also add liabilities (i,e, living expenses), and have set that to 0% growth for now, but being able to amend this might be useful if circumstances change.

I had left cash at 0% but I think, as per some other replies here, a low negative seems smarter.

snowlaser

I am about 15 years from retirement.  I model 2% pa real until 5 years before retirement, tapering down to 0.5% pa real at retirement.  This is my main scenario.   Then I model a "low" scenario which is 1% pa real until 5 years before retirement, tapering down to 0% pa real at retirement.  I want to buy an annuity with most of my pension at retirement, so there is also an "expected" and "bad" annuity cost built into those two scenarios too.

This is effectively keeping tabs on what I EXPECT to have at retirement, but also a lower figure which I can look at to think "I might only have that, would I still be happy?"

I don't think modelling "OH YEAH" scenarios is worthwhile - if returns are stupendous well then you'll do really well of course, and can cross that bridge when you come to it.  Similarly I don't model huge crashes as in reality I'd probably delay retirement if that happens.  A bit like winning the lottery or being run over by a bus - both could happen between now and your retirement age but neither is worth modelling.

4500_Donavan

Average UK inflation since 1989 is 2.82%. It has averaged 2.5% for the last 20 years.

I have only been actively managing my DC SIPP for the last 11 years. During that period, my average annual return has been 7.3%, so in simplistic real terms 4.8% growth. Over the last 5 years, I have focused more to 100% equities and the average annual return has been 10.1%, adjusted for inflation it's 8.6%. All these figures are nett of fees.

The S&P500 has averaged 8% over the last 97 years and around 10% over the last 20 years.

In my growth model for retirement planning, my lowest growth rate is 5% gross, 2.2% after inflation. I have calculated my required annual expenditure based on current budget minus costs that won't be experienced at retirement (e.g. mortgage, etc) and then apply a 2.8% inflation factor to that for each future year. That way, I can just consider my SIPP returns without netting off inflation. It makes the calculations simpler and gives me suggested retirement dates.

Aylesbury_Duck

nicknameless said:

My word there are some pessimists on this board.  0% growth?  Best cancel my retirement and work a few more years then (no thanks).  Silly discussion without considering what costs you need to cover.  With 0% growth I can still easily cover basic expenses.  Do I expect that to be my lifestyle - no.  Am I going to keep working on and on because I modelled on 0% for anything above basic living expenses - not on your proverbial.

Come on folk - live a little (tongue in cheek before backlash)

To be clear, I'm not assuming zero growth in my pensions, simply that they won't grow faster than the cost of living.  It just makes planning so much easier, and probably very prudent.  I hope my pension growth outstrips inflation, but if it doesn't I won't have retired too soon or have to live on less income than desired.

AlanP_2

As said its a bit "how long is a piece of string".

I know we have more than enough to fully retire on but my wife enjoys her job and is still working albeit reducing hours per week ( 4 days currently going down to approx 2 later this year).

For the model I built a few years ago I have used:


Payrises @ 1%

Our Expense Inflation @ 4%

Cash Returns @ 1.5%

Investment Returns @ 3.0%

CPI @ 2.5%


As long as the plan "worked" with those numbers I was comfortable to retire a couple of years ago feeling confident that everything should be ok until we are in our late 90s at least.

NOTE - We both have access to CPI linked DBs and full SPs to cover normal living costs + a couple of holidays.

The investments are for the icing on our cake to be fair so we have less concerns than someone who is wholly DC dependent.

Prism

My returns are around 7% since the mid 90's and 9.5% since I took more control around 10 years ago. Deduct inflation of around 2.5% and I will use that as a basis going forward.