Calculate inflation

jimi_man

20122013 said:

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..   

Hi

There seems to be a bit of a misunderstanding over what you are actually asking. The answer to this question is pretty straightforward maths, if not exactly useful.

£40k net is around £47k gross at todays tax rates. So if you wanted £47k every year for 45 years and each year increasing by 3% inflation then this year you'll need £47,000; next year you'll need £48,410; the year after £49,862.... etc etc, all the way to 45 years where you'll need £172,558. So if you add all those yearly figures together you get £4,357,833 which is the sum you need to have now to give you £47k per year for 45 years increasing by 3% each year. 

An astronomical figure and not remotely useful since it doesn't take into account any investment return on your £4.35 million. To be able to save £4.35 million in 15 years (your time span) requires you to save about £14,000 a month, increasing by 3% each year and achieving returns of 5%. Few people have the ability to save that much and you don't need to either.

In order to have a pot that gives around £47k per year for the next 45 years is a different proposition and the replies above show you how this works. Using 3% drawdown, then a simple method is to multiply how much you want by 33. So £47k x 33 is around £1.5 million. The idea being that if you had a pot of £1.5 million then each year it's going generate a return. So you take your annual £47k, which leaves you with £1.453 million and then if you added 3% onto it for investment return you end up with £1.496 million. You then take £48,410 next year, add 3% investment return etc etc ... The idea is that you should have nothing left, though that's pretty unlikely.

To get your pot of £1.5 million in 15 years starting from nothing, you'll need to save around £5000 a month, increasing by 3% each year and achieving returns of 5%. 

Of course the problems start when you consider that in 15 years £47k at 3% a year inflation will now be £71k, so you then need to alter the figures to achieve that and the whole thing becomes unachievable. Personally I tend to go down the lines of investment returns equals inflation so I work everything out in today's money. The 3% drawdown example above and in other replies above will be ballpark figures and probably won't be far off.

Hope that helps.

20122013

TheGreenFrog said:

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.

I see. 
If the budget yearly spend to be £40K gross pa including minimum inflation. I would be interested to find out what the final total I need / how to the calculation would be -   (probably will not be easy for me to comprehend). 

QrizB

20122013 said:

If the budget yearly spend to be £40K gross pa including minimum inflation. I would be interested to find out what the final total I need / how to the calculation would be -   (probably will not be easy for me to comprehend). 

We don't understand your question, and so we've found three different interpretations of it and have offered three different answers.

1. Is your question "How much money do I need to stuff in a suitcase under my bed, today, so that I can take £40k from that suitcase annually (increasing with inflation) for the next 45 years?" If that's the qustion, jimi_man has calculated the answer to be 40/47ths of £4,357,833, which is £3,708,794.
2. Is your question "How much money would I need to invest, today, in order that I could draw £40k from those investments annually (increasing with inflation) with an almost-certain chance of never running out of money and a good chance of leaving my heirs a fortune?" If that's the question, Albermarle has calculated the answer to be £1,350,000.
3. Is your question "How much money would I need to invest, today, in in order that I could draw £40k from those investments annually (increasing with inflation) with zero chance of running out of money and nothing left at the end of it?" If that's the question, I calculated the answer to be £1,280,000.

Which of those versions of your question is closest to the one you're trying to ask?

jimi_man

20122013 said:

TheGreenFrog said:

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.

I see. 
If the budget yearly spend to be £40K gross pa including minimum inflation. I would be interested to find out what the final total I need / how to the calculation would be -   (probably will not be easy for me to comprehend). 

Hi

I have explained above in my post how the calculation is worked out. Perhaps you could identify which bit you don't understand and I/someone can refine it further for you. 

If you want £40k gross instead of £47k gross, then the total amount of cash you need is £3.7 million using the same method of calculation.

It would help if we knew what your goals are/what you are trying to achieve/how you are going to achieve it then more focussed answers could be given.

20122013

QrizB said:

20122013 said:

If the budget yearly spend to be £40K gross pa including minimum inflation. I would be interested to find out what the final total I need / how to the calculation would be -   (probably will not be easy for me to comprehend). 

We don't understand your question, and so we've found three different interpretations of it and have offered three different answers.

1. Is your question "How much money do I need to stuff in a suitcase under my bed, today, so that I can take £40k from that suitcase annually (increasing with inflation) for the next 45 years?" If that's the qustion, TheGreenFrog has calculated the answer to be 40/47ths of £4,357,833, which is £3,708,794.
2. Is your question "How much money would I need to invest, today, in order that I could draw £40k from those investments annually (increasing with inflation) with an almost-certain chance of never running out of money and a good chance of leaving my heirs a fortune?" If that's the question, Albermarle has calculated the answer to be £1,350,000.
3. Is your question "How much money would I need to invest, today, in in order that I could draw £40k from those investments annually (increasing with inflation) with zero chance of running out of money and nothing left at the end of it?" If that's the question, I calculated the answer to be £1,280,000.

Which of those versions of your question is closest to the one you're trying to ask?

Appreciate all you replies, even though my question was not very clear. All 3 interpretations are very helpful as I need an approximate 'total figure' so I can work out what level of risk I need to take with investments.

Hoenir

20122013 said:

QrizB said:

20122013 said:

If the budget yearly spend to be £40K gross pa including minimum inflation. I would be interested to find out what the final total I need / how to the calculation would be -   (probably will not be easy for me to comprehend). 

We don't understand your question, and so we've found three different interpretations of it and have offered three different answers.

1. Is your question "How much money do I need to stuff in a suitcase under my bed, today, so that I can take £40k from that suitcase annually (increasing with inflation) for the next 45 years?" If that's the qustion, TheGreenFrog has calculated the answer to be 40/47ths of £4,357,833, which is £3,708,794.
2. Is your question "How much money would I need to invest, today, in order that I could draw £40k from those investments annually (increasing with inflation) with an almost-certain chance of never running out of money and a good chance of leaving my heirs a fortune?" If that's the question, Albermarle has calculated the answer to be £1,350,000.
3. Is your question "How much money would I need to invest, today, in in order that I could draw £40k from those investments annually (increasing with inflation) with zero chance of running out of money and nothing left at the end of it?" If that's the question, I calculated the answer to be £1,280,000.

Which of those versions of your question is closest to the one you're trying to ask?

Appreciate all you replies, even though my question was not very clear. All 3 interpretations are very helpful as I need an approximate 'total figure' so I can work out what level of risk I need to take with investments.

Risk level doesn't guarantee a level of return over any given period. Markets don't rise in a linear fashion. 

20122013

jimi_man I have just seen your explanations and I hope others will find it useful, too

QrizB

Just to add another option into your calculations, if you were 55 and had exactly £1M you could buy an RPI-linked lifetime annuity that would pay out £40030 per year, index linked, until you die. This is potentially the cheapest of any of the options we've so far discussed.

Note that this wouldn't guarantee to pay out for 45 years, but would pay out every year until you die (which could be the day after you buy the annuity, or could be at the age of 110+).

https://www.hl.co.uk/retirement/annuities/best-buy-rates

20122013

QrizB  not 55 yet still great to have another option - will look into it
Edit: may I ask how do you find these information? as I would like to be able to do the same for myself. (may give me a headache but it is ok)

Albermarle

20122013 said:

QrizB said:

20122013 said:

If the budget yearly spend to be £40K gross pa including minimum inflation. I would be interested to find out what the final total I need / how to the calculation would be -   (probably will not be easy for me to comprehend). 

We don't understand your question, and so we've found three different interpretations of it and have offered three different answers.

1. Is your question "How much money do I need to stuff in a suitcase under my bed, today, so that I can take £40k from that suitcase annually (increasing with inflation) for the next 45 years?" If that's the qustion, TheGreenFrog has calculated the answer to be 40/47ths of £4,357,833, which is £3,708,794.
2. Is your question "How much money would I need to invest, today, in order that I could draw £40k from those investments annually (increasing with inflation) with an almost-certain chance of never running out of money and a good chance of leaving my heirs a fortune?" If that's the question, Albermarle has calculated the answer to be £1,350,000.
3. Is your question "How much money would I need to invest, today, in in order that I could draw £40k from those investments annually (increasing with inflation) with zero chance of running out of money and nothing left at the end of it?" If that's the question, I calculated the answer to be £1,280,000.

Which of those versions of your question is closest to the one you're trying to ask?

Appreciate all you replies, even though my question was not very clear. All 3 interpretations are very helpful as I need an approximate 'total figure' so I can work out what level of risk I need to take with investments.

The 3% drawdown figure I mentioned is calculated historically on a medium risk level, with between 40% and 60% equities.