Drawdown spreadsheet; question about state pension

[bownyboy]

Morning all,

I have a simple spreadsheet that takes our combined pot of £700k and makes some assumptions on yearly withdrawal (£36k), inflation (2%) and growth (7%). This numbers can or course be adjusted to check different scenarios.

All good so far.

Now in 11 years time my wife will get her state pension which is currently £9,115 a year, which I’d like to add to the sheet, so that it then reduces what we need to take from our pot.

Do I make the assumption that the £9,115 has grown by 2% inflation for 11 years so I enter it as £11,333?

Similarly when I get mine another 7 years later?

Thanks!

[vand]

Drawdown spreadsheets won't be very useful unless you can simulate in some portfolio volatility. If you assume 5% constant real growth as per your numbers then you can theoretically withdraw at 5% and never worry about touching the principle, so already its way beyond what the 4% rule would suggests.

The triple lock on the state pension currently guarantees inflation-beating rises. Whether or not you think this is sustainable it makes it very essy to  factor into you sums.

[cerat0n1a]

Do I make the assumption that the £9,115 has grown by 2% inflation for 11 years so I enter it as £11,333?

At the moment, it is rising at whichever is highest out of :-

Average earnings increase
Consumer Prices Index (CPI)
2.5 per cent

which has meant that in recent years it has gone up faster than either inflation or wages. So your 2% may be a little pessimistic. As vand pointed out, this "triple lock" is under examination at the moment. It is a Conservative party manifesto commitment, so in theory, it should continue to be true until 2025. I think the most likely outcome after that time is that it goes up at the same rate as inflation.

[PhilB]

I would definitely recommend doing your spreadsheet in today's money,  ie real terms values rather than nominal ones.  Not only is it simpler, but it makes the answers a whole lot more understandable - it's hard to have any idea what say £40k in 15 years' time means without converting back to real terms.

I put state pensions in at their current level ie I implicitly assume that they will just rise with inflation.  Anything else would be a bonus.

[norajean]

I just put an inflation variable in my spreadsheet and apply it as required to every number that needs it (income like your pension, spending, etc).  I can also input whatever inflation figure I like, including 0%, to see what all the future figures look like. 

For inflation-adjusted returns, you should enter the historical worst case (30 years starting in 1964) which was 4.3% or just round that down to 4% for safety.

[MisterA]

I have a drawdown planning spreadsheet. I don't take account of inflation, at all. Mine assumes that state and DB pensions will rise by inflation (so inflation is cancelled by index linked benefits), and my investment growth prediction is based on above inflation growth. So I ignore inflation, it is accounted for, and my numbers are meaningful as they are in today's values.

Is this a good approach? I can share it, if anybody is interested.

[bownyboy]

Thanks everyone. I’ve decided to keep the sheet in real terms as suggested by PhilB. Makes it a whole lot easier!