Retirement plan Inflation assumption

grumpsthegit

Hi, in my retirement calculations, I had thought I was being reasonably pessimistic by factoring in 2.5% inflation year on year seeing's as the BOE target is 2%. However we seem to be consistently sticking above 3%. I was just interested what inflation figure you are factoring in at the moment in your plans? 

DE_612183

None - I work on the assumption  that any pensions I have will go up ( or down ) in line with inflation.

Cobbler_tone

Just reduce your spend on chocolate and inflation will sort itself out. 

I always work in today's money.

Pat38493

For a more serious answer - 

I am using an baseline assumption of 3% inflation and 5% growth (so 2% net growth) for long term planning. What really matters is how much growth you assume per year, net of inflation.  

I believe that long term, UK inflation has tended to be more like 3% than 2%, so if you are planning for 3 or 4 decades I guess we should be taking the long term figure rather than what happened in the last 10 years or so.

I also stress test my plan against historical scenarios.

Using 2% net growth will give results that are consistent with the "pessimistic" outcomes of stress testing tools from what I've seen, so they should be reasonably safe in most scenarios.

Scarum

In designing a spreadsheet for retirement, in which a failed pension in the PPF will eventually give a maximum annual increase of 0.6% per year, I took the decision to use inflation in my calculations.  I now know I could have reduced the real terms value of the PPF year to year and excluded inflation from all calculations but it's good to see how things increase over time.

To this end I use 3% inflation in my plan in order to stress the PPF proportion against other pension income.  My other DB pension will rise in line with inflation.

Household budgets increase at 3%, withstanding council tax which I increase at 5% per year.

Using inflation is a pain as income tax thresholds need to be taken in to account to work out net incomes, so to that end I have been even more pessimistic and in my calculations these will increase well under inflation at around 0.8% a year (when they eventually do start to increase).

Linton

For the past 20 years I have assumed 3% inflation and 4% gross return. I am very happy to report that both assumptions have proved to be pessimistic

SouthCoastBoy

I have a variable rate of inflation 3% for the next 7 years, then 2.5%, I will adjust the 2.5% as we get closer to that period, and will base it on my current thinking for inflation.

For the last 3 or 4 years I have been pessimistic about the inflation number and continue to be, it was at 4% but i have moved it 3% recently.

With regards to equity growth, I have that at 3.5% after charges, cash growth 1%, except the next 2 years which i have at 4% for this year, 2% for next year, 1% after that.

dunstonh

 However we seem to be consistently sticking above 3%. 

Consistant over what period?
People generally look at short term periods and assume long term views.

In reality, everyone's personal inflation rate is different depending on how they spend their money.  
UK average CPI over 20 years (annualised) is 2.82%.  That was a period of lower historic inflation.



here is longer term.  each line is 5%. Many believe the world and the UK are heading back to 1970s/1980s.  So, take your pick depending on your views. 

westv

I won't be making any assumptions about inflation. When the time comes, I'll probably start off with 3%-3.5% drawdown and see where it heads or maybe throw in some annuitisation too. 

leosayer

I use 2.5% in my model however here are a few thoughts:

• I just model flat inflation, not periods of high, low or negative inflation
• My model doesn't take account of tax thresholds not rising with inflation
• My model doesn't take account of the variable way in which slices of my DB pension will increase / are capped once in payment
• My model doesn't take account of the impact on my bond returns that a period of high or low inflation might have
• The numbers become very high after 15-20 years of inflation has taken effect, making them not relatable to our current spending

How complex is your model? If not then there's a lot to be said for calculating everything at today's prices. 

Peterrr

I assume 3% inflation and have 3 scenarios for investment growth: pessimistic 2.75%, mid 4%, and high 6%. Cautious relative to historic averages, but the next 30 years may well not achieve historic averages