Growth assumptions in your models/spreadsheets

dunstonh

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

If you take a longer term period, then its closer to 4.9%.   Most of the last 20 years have been artificially lower due to events.   Looking ahead, events are pointing towards higher inflation.

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

For a good chunk of that 97 years, the US was an emerging market and didn't have developed market issues.   That is no longer the case.

In my growth model for retirement planning, my lowest growth rate is 5% gross, 2.2% after inflation. 

That is an optimistic approach and would not be suitable for most people.

Nick9967

I use 5% growth on mine, inflation is specific to my cost line , so for example council tax at 4%, food 3% (i can shop around and offset some)  etc etc , i took this idea from someone on this forum a year or two ago and it made sense to me, you can evaluate your expenditure by line and add annual inflation through that, I've messed around with lots of other scenarios but always come back to this - i have versions B, C , D etc which take down growth to 4%, 3% etc just to see what my reality might be at different levels.

4500_Donavan

dunstonh said:

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

If you take a longer term period, then its closer to 4.9%.   Most of the last 20 years have been artificially lower due to events.   Looking ahead, events are pointing towards higher inflation.

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

For a good chunk of that 97 years, the US was an emerging market and didn't have developed market issues.   That is no longer the case.

In my growth model for retirement planning, my lowest growth rate is 5% gross, 2.2% after inflation. 

That is an optimistic approach and would not be suitable for most people.

1989 is 35 years ago. US Fed and BOE both have inflation targets of 2%. That steers me to being comfortable with 2.5% to 2.8% average.

How long would you class the US as being a developed market? Over the last 10 years the S&P500 has returned 12% on average.

I  am not suggesting others use my approach. I was just showing my approach to add some balance to the discussion. I did highlight that I am 100% equity. That comes with both risk and reward.

Cobbler_tone

Mine has 11% growth for my gold....only kidding.

I would think most people work in todays money with assumptions that DC and DB pensions will be in the ballpark.
As for anyone with cash stuffed under the mattress, it doesn't take a genius to work out that your tenner won't go as far as you get older.
Assuming you can retire with less and chase the markets is a strategy but not one that the majority will take I'd imagine.
The retired people I know weren't suddenly panicking and struggling with a couple of years of high inflation. 

dunstonh

How long would you class the US as being a developed market? Over the last 10 years the S&P500 has returned 12% on average.

10 years is short term, and it's in a cycle when US equities have outperformed long-term average.  The first decade of this millennium they lost money over 10 years and US equities were one of the worst area to be invested in.     Historically,   global ex US vs US have cycled.  Some of those cyles are a decade or so. Some are closer to a generation.     

Also, UK investors don't get S&P500 performance unless you have purchased a currency hedged S&P tracker.   You get a GBP currency adjusted version.     And in the last decade, Sterling fell against the dollar and that gave UK investors a better return than USD investors.    If the exchange rate rises (and again, this has historically cycled), then you will get less on the S&P 500 than USD investors.

1989 is 35 years ago. US Fed and BOE both have inflation targets of 2%. That steers me to being comfortable with 2.5% to 2.8% average.

I was referencing your 20 year comment.    Just because they have targets doesnt mean they will hit them.  Events will soon put paid to those targets for a period.   That period could be short term or it could end up long term.

The world has been pretty stable for most of the last 30 years but appears to be regressing.   

At the end of the day, everyone can decide for themselves if they want pessimistic planning or optimistic planning.    Personally, I prefer pessimism.  Its those unusual negative periods that come periodically that do the damage.

Hoenir

4500_Donavan said:

The S&P500 has averaged 8% over the last 97 years 

Worth noting it hasn't existed for 97 years as an index. 

nicknameless

Aylesbury_Duck said:

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.

Understand fully.  But you are making a decision as to when you have enough based on a hen's teeth scenario aren't you unless you have nothing in equities?

barnstar2077

I'm using a prediction of 5% growth on my globally diversified tracker, but often change it to zero, 3%, 10% etc just to see what that looks like.

At the end of the day I'm not going to have any idea until closer to the time, but it is interesting to see the possibilities, and so far actual growth has exceeded the 5%.

I don't factor in increased contributions from pay rises, or inflation, as they should hopefully cancel each other out for the most part.  Plus I don't need much to live on, so I will cut my cloth accordingly. 

Aylesbury_Duck

nicknameless said:

Aylesbury_Duck said:

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.

Understand fully.  But you are making a decision as to when you have enough based on a hen's teeth scenario aren't you unless you have nothing in equities?

I suppose I am, yes, but it feels a prudent approach and I am not a big risk-taker.  The vast majority of my pension provision is in equities, with the certainly of about £14k p.a.(in today's money, and growing) from two DB plans. 

michaels

I think the OP is asking entirely the wrong question. 

I use the SWR tools and a zero historic failure rate over a 40 year time horizon. 

Basically we want to avoid 'failed' outcomes so there is no point modelling any sort of guess on what the central projection might be, only the lower bound.

The only other approach worth taking would be monte carlo but that takes a lot more data on distribution of likely returns.