What about inflation?

abfabally

Hi

I do the calculations (with compound interest etc & regular payments) and plan to have £1 million saved by the time I am 55 to retire. 

But! This is 12 years away, so £1 million will be worth quite a bit less.  

If I was younger & projecting my future savings plans further into the future, the inflation would be even worse....

But none of the calculators on bank websites etc seem to take into account for inflation? 

Am I missing something? 

Someone at 21 planning the same thing would be in a much worse situation with £1m at 55, compared to someone retiring tomorrow at 55 with £1m. 

HedgehogRulez

Make it easy on yourself and assume equity growth matches inflation

OldScientist

As already mentioned, assuming 0% growth in real terms is easy to calculate and, over periods shorter than about 25 years is not unrealistically poor in historical terms. Average real returns for UK stocks, bonds, and cash over the last 125 years were about 5.3%, 1.4%, and 0.9% (e.g., see https://ub-sachdokpdf.ub.unibas.ch/9963586200105504/9963586200105504_D2023_Yearbook%202023.pdf). Of course, real returns over shorter periods were highly variable and could be a lot worse (e.g., 0%).

BikingBud

abfabally said:

Hi

I do the calculations (with compound interest etc & regular payments) and plan to have £1 million saved by the time I am 55 to retire. 

But! This is 12 years away, so £1 million will be worth quite a bit less.  

If I was younger & projecting my future savings plans further into the future, the inflation would be even worse....

But none of the calculators on bank websites etc seem to take into account for inflation? 

Am I missing something? 

Someone at 21 planning the same thing would be in a much worse situation with £1m at 55, compared to someone retiring tomorrow at 55 with £1m. 

Why £1million?

It's an arbitrary figure that you have selected for your circumstances.

I would offer that someone starting now age 21 might aim for a wholly different figure, not least because when they get to your current age, 22 years hence, they might already surpass that figure that you felt appropriate and have a wholly different understanding of their future needs.

YellowCarBlueCar

As above, if you assume inflation matches growth you can just work in today's money (both your fund and your needs will be greater by retirement, but by the same amount).

If you want to include compound growth, then you also need to include compound inflation.  Without a crystal ball both will be a guess.  Some assume growth will exceed inflation by X% - in which case you can still work in today's money but your compound interest will be your X% value, not the growth value.

Simplest and fairly conservative is X=0.

norsefox

Forecast using low, medium, and high returns.  Being 0% real growth, 2.5% and 5%.  These would all account for inflation, as the actual growth not controlling for inflation might be (for instance) 2.5%, 5%, and 7.5%.

As others have said, if you use 0% then that's a starting point, but a particularly pessimistic one.

If you net out inflation, then you can use £1m in today's money (or any value) and it doesn't matter if you're forecasting at 55 or at 21, the target always remains with a value of money as it is today.

And to add, £1m is somewhat arbitrary - is this just simply a large number, or have you worked back from it/to it?

MeteredOut

One thing to add, is consider how much of your £1M is in cash or cash-equivalent funds. We've seen a number of posts here where people have significant percentages of their retirement pots in cash.

Based on a quick google, apart from recently, the best cash return rates have lagged behind inflation. 

So, if cash-heavy, you might want to set your low forecast to -0.25% if you're particularly pessimistic.

El_Torro

You could assume that inflation matches investment growth. This is a pretty pessimistic view though, especially if you are looking 12 years out. For my projections I assume investment growth will be 2% above inflation. 

All the pension calculators I have used online do take inflation into account. With many you can even play around with the investment growth figure to get to a figure you think is more or less realistic. Regular investing calculators online don't tend to consider inflation, it's simple enough to factor in though. 

Moonwolf

El_Torro said:

You could assume that inflation matches investment growth. This is a pretty pessimistic view though, especially if you are looking 12 years out. For my projections I assume investment growth will be 2% above inflation. 

All the pension calculators I have used online do take inflation into account. With many you can even play around with the investment growth figure to get to a figure you think is more or less realistic. Regular investing calculators online don't tend to consider inflation, it's simple enough to factor in though. 

This is what I have done.

Predicting investment growth is difficult and you will usually get it wrong.

Predicting inflation is difficult and you will usually get it wrong.

I argue that predicting both independently of each other is therefore a fools game. Might as well just predict on figure, the growth above inflation.

I built my spreadsheets with this growth over inflation figure as a changeable parameter. I use 2% as a default but look at values from -1% to 5% with more attention on 0% and 1%. I then ask myself what I would do with the bad situations. Can I survive, when the answer was yes for all but the worst and least likely scenarios I was happy.

westv

abfabally said:

Hi

I do the calculations (with compound interest etc & regular payments) and plan to have £1 million saved by the time I am 55 to retire. 

But! This is 12 years away, so £1 million will be worth quite a bit less.  

If I was younger & projecting my future savings plans further into the future, the inflation would be even worse....

But none of the calculators on bank websites etc seem to take into account for inflation? 

Am I missing something? 

Someone at 21 planning the same thing would be in a much worse situation with £1m at 55, compared to someone retiring tomorrow at 55 with £1m. 

Wouldn't you just be better off saving as much as you can comfortably afford into a pension and worry about what you have closer to the time?

HedgehogRulez

Yes, assuming growth = inflation maybe seen as pessimistic, but I’d rather have more money than run out of money for my 30 year (read that as dying in my 50s…) retirement.