Calculate inflation

Albermarle

1. May I check the calculation of 3% withdraw would be £1.35m x 3/100 = £40500 pa.  and do something similiar to a 'saving ladder' 

Yes and the idea is that each year you increase the £40,500 by inflation, so your real spending power does not change. It is a rather rigid system, and in reality probably most people will not stick to it exactly.

It is a whole area of study in itself, and as said the 3% is just a ball park figure based on history, as over 45 years quite a lot can happen !

20122013

Albermarle  appreciate this. 
I still wondering how it will be £1.35m needed with a £40k x 45 year spent ? as it is great that it is less than the way I had worked it out. 

QrizB

20122013 said:

Albermarle  appreciate this. 
I still wondering how it will be £1.35m needed with a £40k x 45 year spent ? as it is great that it is less than the way I had worked it out. 

It's because you're calculation assumes zero investment growth.

Albermarle's drawdown percentage, and my gilt ladder, both take investment growth into account.

20122013

QrizB I am sure yours and Albermarle's figures are correct.
As both your figures include investment growth - should the final figure be greater than mine then?

QrizB

20122013 said:

QrizB I am sure yours and Albermarle's figures are correct.
As both your figures include investment growth - should the final figure be greater than mine then?

No, they should be lower.

Over a period of 45 years, 2% of steady growth will turn £1 into £2.44. So, in order to have £40000 in 2070 you'd need to invest £16400 today.

The final year of your 45 benefits the most from this, but the same principle applies to every year after the first. The amount you need up-front is less than the amount you get back over time.

Note that we've both calculated for £40k gross per year, not £40k net. To calculate the net amount we'd need much more information on your likely income streams and a guess at what tax rates will apply between now and 2070.

DRS1

QrizB said:

20122013 said:

QrizB I am sure yours and Albermarle's figures are correct.
As both your figures include investment growth - should the final figure be greater than mine then?

No, they should be lower.

Over a period of 45 years, 2% of steady growth will turn £1 into £2.44. So, in order to have £40000 in 2070 you'd need to invest £16400 today.

The final year of your 45 benefits the most from this, but the same principle applies to every year after the first. The amount you need up-front is less than the amount you get back over time.

Note that we've both calculated for £40k gross per year, not £40k net. To calculate the net amount we'd need much more information on your likely income streams and a guess at what tax rates will apply between now and 2070.

I thought the OP wanted the £40k figure to increase by 3%pa inflation so in 2070 it would be a lot higher than £40k (let's say £100k).

Are you assuming investment return of 2% over inflation?

But would you get that from a ladder of index linked gilts?

I may be over simplistic but would you not need to put £40k today into an index linked gilt maturing in 2070 to get your inflation proofed £40k result (let's say £100k) in 2070?  OK I am ignoring the coupon but that is usually pretty minimal for an index linked gilt.  I freely admit I have never understood the gilt ladder calculator linked earlier in this thread.

QrizB

DRS1 said:

Are you assuming investment return of 2% over inflation?

Yes.

DRS1 said:

But would you get that from a ladder of index linked gilts?

2% was an illustration.

However, Yieldgimp does show a real GRY 2% or more for a number of longer-dated index linked gilts at present.

https://www.yieldgimp.com/index-linked-gilt-yields

DRS1 said:

I may be over simplistic but would you not need to put £40k today into an index linked gilt maturing in 2070 to get your inflation proofed £40k result (let's say £100k) in 2070?

No, you'd buy fewer than that due to the real yield. It's too late for me to work out exactly how many but the cost would be significantly less than £40k.

20122013

QrizB said:

20122013 said:

QrizB I am sure yours and Albermarle's figures are correct.
As both your figures include investment growth - should the final figure be greater than mine then?

No, they should be lower.

Over a period of 45 years, 2% of steady growth will turn £1 into £2.44. So, in order to have £40000 in 2070 you'd need to invest £16400 today.

The final year of your 45 benefits the most from this, but the same principle applies to every year after the first. The amount you need up-front is less than the amount you get back over time.

Note that we've both calculated for £40k gross per year, not £40k net. To calculate the net amount we'd need much more information on your likely income streams and a guess at what tax rates will apply between now and 2070.

ah, I have more understanding of it now.
My original question was that, if I need £40000 (net) income a year, for the next 45 years and need to factor in at least 3 % inflation, what would be the total amount I need to have   ?  I did a very basic calculaton of £45000 x 45 years and I would like to include inflation,  so I was expecting the final figure will be a lot higher..   

20122013

Stubod said:

...does that £40k include  income from your State Pension????......ie if that is 12k pa, (give or take), you "only need" £28k???)...

Sorry I have misread your post.  No, it does not include State Pension, either,  as I am not looking to withdraw from it for another 15 years and my expense may be higher by then (I know it should be lower as I age).   Hence, I would like to know how much I will need so I can plan. 

TheGreenFrog

20122013 said:

Stubod said:

...does that £40k include  income from your State Pension????......ie if that is 12k pa, (give or take), you "only need" £28k???)...

Sorry I have misread your post.  No, it does not include State Pension, either,  as I am not looking to withdraw from it for another 15 years and my expense may be higher by then (I know it should be lower as I age).   Hence, I would like to know how much I will need so I can plan. 

As your requirement is £40k net of tax, an inherent unknowable has been introduced:  tax rates and their application to ILGs.  A change in law to make capital gains on ILGs taxable would radically alter the numbers.