Are the investment returns inflation adjusted?

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NoRegretsCoyote

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I don't really understand the economic assumptions in the document. They talk about a 4.0% net investment return over the long term, but it's not clear if this is inflation-adjusted terms or not. Indeed the terms "inflation", "real", "nominal" don't appear at all.

The average annual income in wages assumption is 1.5% - which is below a reasonable assumption for inflation of 2% - so I can only assume both wage and net investment returns are both in inflation adjusted terms.

Does this sound right?
 
I think it's 4% per year ignoring inflation, "net" is only relating to charges.

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The pension authority states for their calculator
"All values shown are in present day money terms, i.e. the calculations aim to take account of inflation between now and your retirement date."

I do not think the examples given in the AE document show all values in in present day terms, e.g. when you check the footnote 25 year old Jack earning 25k ends up on a salary of 46k and a fund worth 375,000 . I admittedly haven't checked their calcs for this but I suspect that fund is worth something closer to present day values (375,000 * 25k/46k) = 203,000.

On one side they're bumping up the final fund by inflation adjusting the salary - they're using inflation as a positive. Not balancing it by showing the inflation effect on the pot.
 
ashambles said:
I do not think the examples given in the AE document show all values in in present day terms, e.g. when you check the footnote 25 year old Jack earning 25k ends up on a salary of 46k and a fund worth 375,000 . I admittedly haven't checked their calcs for this but I suspect that fund is worth something closer to present day values (375,000 * 25k/46k) = 203,000.
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The numbers are correct. A €25k salary growing 1.5% for 40 years gets you to €46k. Contributions at the rates outlined and a 4.0% net return get you €370k by my calculations, so basically correct.
 
It's not so much I think their numbers are wrong - it's the presentation of the numbers.

I can get to a figure of 375,420 - not sure if I've the right formula (anyone anything better) - but very close to their calculation. Net investment return presumably is 3.5%.

(25,000*.14) * ((1.035)^40 - (1.015)^40 ) / (0.035 - 0.015)

375k in the year 2062 clearly would not be worth 375k today.

My first reaction to the document was I couldn't understand how someone earning 25k could build up 375k, then I saw the asterisk mentioning salary inflation prediction - but no indication the final fund they're showing is going to be hammered by the same inflation.
 
ashambles said:
(25,000*.14) * ((1.035)^40 - (1.015)^40 ) / (0.035 - 0.015)
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You have to adjust the contributions downwards the first 9 years. It's a quarter of the 14% years 1-3, a half years 4-6, three quarters 6-9, and then the full 14% from year 10 onwards.

ashambles said:
then I saw the asterisk mentioning salary inflation prediction - but no indication the final fund they're showing is going to be hammered by the same inflation.
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But this to me clearly means all the numbers are in inflation-adjusted terms. It's not plausible to assume a 1.5% annual increase in earnings through your working life if inflation is 2%. People generally don't earn less in real terms over a career.



This worker earns from €25k to €46k through a working lifetime. So on retirement he gets a €13k state pension and has an AE pot of eight times his final salary. This will leave him in net terms with an income of maybe 75% of his final salary in retirement. I know this is a valuable policy objective, but there are other objectives you could point to like having a mortgage paid off for example.
 
NoRegretsCoyote said:
You have to adjust the contributions downwards the first 9 years. It's a quarter of the 14% years 1-3, a half years 4-6, three quarters 6-9, and then the full 14% from year 10 onwards.


But this to me clearly means all the numbers are in inflation-adjusted terms. It's not plausible to assume a 1.5% annual increase in earnings through your working life if inflation is 2%. People generally don't earn less in real terms over a career.
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For simplicity and the purposes of the examples they're doing the calculations based on the scheme being fully in place. For example they state
"Jack and his employer both contribute 6% of gross salary p.a., the State contributes 2%."

The simple FV calc above approximates their examples, but have just looked at their "model" and they use 4% return wound down to 0.5% in the 10 years to retirement (that by coincidence is ~3.5% over 40 years).

The 375k figure for a current 25k earner is not inflation adjusted, at least not to my interpretation - I'd also like to see the present value of the fund - as it's the present value of the salary they show. (Though in this case it will be a useful pension anyway - as you say - at 8x final salary).
 
As a layman i would like a simple yes or no answer to this question."are investment returns inflation adjusted.?.Thanks
 
DK123 said:
As a layman i would like a simple yes or no answer to this question."are investment returns inflation adjusted.?.Thanks
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Impossible to answer that with a yes/no.
What investment returns?
What's the context?
Where are they stated?
What do you mean by inflation adjusted?
What measure of inflation are you referring to?
Are you talking about index linked returns?
 
ClubMan said:
Impossible to answer that with a yes/no.
What investment returns?
What's the context?
Where are they stated?
What do you mean by inflation adjusted?
What measure of inflation are you referring to?
Are you talking about index linked returns?
Click to expand...
I suppose i am thinking about in real terms after inflation. Sorry about my lack of knowledge.Thanks,
 
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