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Inflation Historical Rates in Timeline Planning

Summary

  • No forward-looking assumptions are made for inflation in Evidence-Based simulations. UK Consumer Price Index (CPI) is used directly for adjustments.
  • Advisors are empowered to stress-test retirement plans using historically observed inflation environments and realistic projections.

Description

A unique aspect of Timeline Planning's simulation models is the integration of UK Consumer Price Index (CPI) rates. These rates are crucial in stress-testing each historical scenario.

The average calendar inflation rate in the UK since 1926 stands at approximately 4%, but historical fluctuations have been significant, ranging from a high of 23% to a low of -8%. This wide dispersion is critical in understanding the real-world impact inflation can have on retirement savings and long-term spending sustainability.

Timeline offers two different approaches to stress testing a financial plan:

  1. Evidence-Based (Historical) Simulations: In this approach, no assumptions are made for inflation. For each rolling historical scenario, the actual corresponding sequences of returns for the UK Consumer Price Index are applied for the same period. This ensures full consistency between market returns and inflation conditions as they historically occurred.
  2. Monte Carlo Simulations
    In Monte Carlo, the adviser can select custom capital market assumptions for inflation (expected return and volatility) or rely on historical values as the backbone of the simulation. This provides flexibility while still allowing inflation risk to be modelled explicitly.

Conclusion

Timeline Planning’s dual approach, incorporating UK Consumer Price Index rates within both historical and Monte Carlo frameworks, offers a comprehensive and realistic way to incorporate inflation in retirement outcomes.

By embracing these methods, advisers can:

  • Provide more accurate projections in real terms.
  • Effectively manage inflation risk.
  • Stress-test plans under extreme historical conditions.
  • Guide clients with greater confidence.

This ensures that retirement planning reflects not only market uncertainty, but also the powerful long-term impact of inflation.