Inflation Rules - Inflation-adjusted

Summary

• No forward-looking assumptions are made for inflation in Evidence-Based simulations. UK Consumer Price Index (CPI) is used directly for adjustments.

• This rule ensures withdrawals are adjusted yearly based on inflation throughout the simulation.
• It provides a mechanism to maintain purchasing power over time.

​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.
​
The constant inflation adjustment strategy, first introduced by William Bengen in 1994, works by adjusting the withdrawals (either upwards or downwards) based on the annual inflation rate throughout the simulation. The rationale behind this approach is to ensure that the withdrawals' real value or purchasing power remains constant over the years, accounting for the changes in the cost of living due to inflation.

​Example

Let's say you start with a yearly withdrawal of £20,000. If the inflation rate for this year is 2%, the withdrawal for the next year would be increased to £20,400 (£20,000 * 1.02). This process would continue each year, adjusting the withdrawal amount based on the inflation rate.

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.