Inflation Risk in Plans with Nominal Pensions

somebody's portfolio balance is

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relatively low compared to their

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non-portfolio income so usually pensions

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um especially if those pensions are

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either not adjusted for inflation

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or not joint life

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um or or both actually so here's a

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situation where it looks like early on

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I'm not going to spend any of my

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portfolio and in fact I'm going to be

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saving money from my pension so these

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are two joint life pensions

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but they're not adjusted for inflation

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um

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so a lot of people might look at this

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I've also seen ones where you might you

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know withdraw a very small amount of

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portfolio early and then that goes away

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what's back later no I've I'm looking at

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this in nominal terms if I look at it in

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real terms we can get a glimpse of

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what's really going on here so the issue

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is that um

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that in in real dollar terms these

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pensions are actually getting smaller

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over time because there's no adjustment

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for inflation you'll even see a similar

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thing if you got a two or three percent

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Cola so in high inflation periods you

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know this can still matter so the

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question when you have this much pension

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income that's not adjusted for inflation

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is just hey how much of this can I

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actually spend and how much do I have to

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put away to make up for the chances that

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inflation will really eat into my

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purchasing power in the future and under

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the the settings of this plan you know

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the answer is you know at first fourteen

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thousand a year then it's going down

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right over time until I'm going to start

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drawing

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um from that so it you know you could in

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order to see the effect of inflation and

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and basically planning to make up for

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all of your inflation risk you can

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actually change one or both of these

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income streams and and say no let's

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let's measure this was adjusted for

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inflation

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um

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and now what you're saying is no no

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we'll just keep we we want to spend all

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of that pension but we're going to

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adjust our spending

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to make up for the Lost

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um The Lost purchasing power right so

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now you're saying that we're going to

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retain inflation risk for that one

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pension

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um so I know it seems strange to Mark

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the pension as adjusted for inflation in

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order to do that but that's kind of the

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way to to say hey don't you know it's to

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tell the software don't don't try to you

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know figure out how to uh

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cover inflation risk here don't don't

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tell me how much to save from this I'm

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just gonna absorb all the inflation risk

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from that part of my plan so you can see

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now this allows me to spend more the the

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caveat is though I'm going to have to

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absorb all of the inflation risk

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now this combined with the other video I

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did on on mortality risk which you know

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is exactly the same concept where the

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where the software is trying to figure

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out hey well what if one or the other

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person dies you know how much less

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should I spend now in order to make up

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for that risk

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um that that of course those two go

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together sometimes right so

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um if I went back and I made these

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um

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made these single life pensions

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um and not adjusted for inflation we're

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going to see a an even uh even lower

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spending level because now we're going

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to have to adjust for inflation and the

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chances that one of these is gone

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um some way through the plan because

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because you know it's not it's not

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incredibly likely that both spouses will

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will go that long so now you can see

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we're spending even less of the

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portfolio at the at the end of the plan

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we're adding more at the beginning to

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make up for that

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um and and that's what we're seeing here

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now the fact is as the plan plays out

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and you make adjustments and you see

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what inflation experience really was and

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you see whether both people are still

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alive this won't really be how

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everything plays out right that they may

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reach an earlier point at which they're

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able to spend from their portfolio

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um and so on but this is basically

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saying well if you never adjusted based

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on the inflation assumptions of the of

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the plan this is what you would have to

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do

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so I hope that helps thanks a lot