Calculate inflation

QrizB

20122013 said:

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's is the simplest; it's 40000/0.03.

The gilt ladder cost came from https://lategenxer.streamlit.app/Gilt_Ladder

The annuity option was using the table from https://www.hl.co.uk/retirement/annuities/best-buy-rates

Jimi_man has explained his calculations, I think?

20122013

I am looking at options to utilise the money I have, ideally with lowest risk.

The option I can think of is to sell all my S&S ISA and turn it into CASH ISA and put them in a 2 year fixed ISA  at 4.1% (no tax or fees to pay I think).

If  the funds return is about 5% net (not guaranteed) and these are higher risk funds, would it make more sense to have my money in a 2 year fixed Cash ISA account?  or would this been eating up by inflation? 

I would love to start to investing now but I cannot get my head around investment including looking at the gilt ladder and bond etc   Also, because my  current S&S ISA could have done better possibly most of the gains have been  eaten by the fees.

When I start investing, if I take an income every month and leaving the capital, would this beat inflation? I hope to can live off the capital when when i am near the end ... 

20122013

jimi_man said:

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.

Appreciate your detailed explanation, as it is very useful.

 '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.'

I see that 3% is the draw down figure, where does the 33 figure come from?  As this may help me to understand how to calculate different scenarios using different numbers, please.

westv

20122013 said:

jimi_man said:

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.

Appreciate your detailed explanation, as ' it is very useful'

 '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.'

I see that 3% is the draw down figure, where does the 33 figure come from?  As this may help me to understand how to calculate different scenarios using different numbers, please.

Or just use this calc - X/3% (where "x" is the income you want.)

QrizB

20122013 said:

I see that 3% is the draw down figure, where does the 33 figure come from? 

If you want to draw 3% from a pot, that pot needs to be about 33x aa big as the amount you want to draw.

3% of £100k = £3k

£3k x 33 = £99k (almost £100k).

It's just arithmetic.

20122013

@ QrizB 

A sceanrio:

If I want to draw 2% from the £100K  pot.

2% of £100K = £2000  per year

£2000 x 22 (??) = 44000?

I am still not sure where the '33' come from ? as it is just repat the digit? ie:

2% will turn to 22?

4% to 44?

westv

20122013 said:

@ QrizB 

A sceanrio:

If I want to draw 2% from the £100K  pot.

2% of £100K = £2000  per year

£2000 x 22 (??) = 44000?

I am still not sure where the '33' come from ? as it is just repat the digit? ie:

2% will turn to 22?

4% to 44?

It;s because QrizB is multiplying instead of dividing. 

Cobbler_tone

20122013 said:

@ QrizB 

A sceanrio:

If I want to draw 2% from the £100K  pot.

2% of £100K = £2000  per year

£2000 x 22 (??) = 44000?

I am still not sure where the '33' come from ? as it is just repat the digit? ie:

2% will turn to 22?

4% to 44?

Try multiplying by 50...i.e. 2% is a 50th of 100%.

Where is Carol Vorderman when you need her?!

TBF the 'x 33.3333' probably didn't help to explain it to you.
The easiest way is to work out your return from a lump sum and then that is what you can roughly take to stay on an even keel.

£100k x 1% = £1,000
£100k x 2% = £2,000
£100k x 3% = £3,000 etc

I'm sure someone will be along in a moment to complicate it further. 

NoMore

Easier example is using 4% that will require 25x the amount.  Its 1 divided by the percentage withdrawal to give the multiple needed. So 1 divided by 4% is 25. In Jimi_mans example it would be 1 divided by 3% is 33.33 which he shortened to 33.

westv

I thought my calc was the simplest (or the one using 0.03 if you calculator doesn't have a % button or you don't know how to use MS Excel).