Savers you've never had it so good?

Androcles

Reaper wrote: »

tsmlion - that's not quite it. If inflation and interest rates were both 5% and you live off the interest then you are already reducing your capital by 5% every year without realising it.
If interest rates and inflation are both 0% then you can dig into 5% of your capital and be no worse off.
You are not being asked to take risks with your money.

At this moment in time you are right, but this argument seems to me to be ignoring an important point. The reason that many people living on interest are reluctant to dig into capital is that some of us understand how transitory these situations can be. I remember a previous Labour Government landing us with inflation rates into the 20% plus bracket and watching parents who retired on good pensions with a reaonable amount of capital seeing their "wealth" decimated in two or three years and spending the rest of their days living from hand to mouth.....

Sure, spend your capital and see how long it is before the COL by whichever method you use, (and let's face it, the variations in index are only political slants to give the best spin they can, they are nothing to do with statistics,) has eaten it away and when you need to pay for your care, there is not enough left. THAT is why people are reluctant to spend capital, it is caution based on experience, not the stupidity some correspondents imply!

gozomark

Androcles wrote: »

At this moment in time you are right, but this argument seems to me to be ignoring an important point. The reason that many people living on interest are reluctant to dig into capital is that some of us understand how transitory these situations can be. I remember a previous Labour Government landing us with inflation rates into the 20% plus bracket and watching parents who retired on good pensions with a reaonable amount of capital seeing their "wealth" decimated in two or three years and spending the rest of their days living from hand to mouth.....

Sure, spend your capital and see how long it is before the COL by whichever method you use, (and let's face it, the variations in index are only political slants to give the best spin they can, they are nothing to do with statistics,) has eaten it away and when you need to pay for your care, there is not enough left. THAT is why people are reluctant to spend capital, it is caution based on experience, not the stupidity some correspondents imply!

looking at savings in real terms, not nominal, works whatever the inflation rate - if inflation is 20%, then you need to keep adding 20% to your dsavings to stand still - preserving nominal capital is a pointless concept

roddydogs

I was getting 6.5% a few months ago........inflation 3.5%............does anyone really believe inflation will soon be 0%.....wait till you get you new council tax bill.im sure it will be 0% increase...not

gozomark

council tax is a tax, and so is excluded from CPI and RPI......

lukekelly_2

Paul_Herring wrote: »

This assumes that the CPI figures given are actually representative to the person looking at it. CPI is just an average unlikely to apply to most of the population (most will either be higher or lower.)

In any discussion of a non-trivial social issue we're going to have to use averages and generalisations. We should of course we aware that we're doing this but it is neither avoidable nor undesirable.

lukekelly_2

Androcles wrote: »

At this moment in time you are right, but this argument seems to me to be ignoring an important point. The reason that many people living on interest are reluctant to dig into capital is that some of us understand how transitory these situations can be.

No one who is disagreeing with you doubts that the current saving rates and CPI will change. The point is that spending 2% of your savings when inflation is -4% and interest rates are 0% is exactly the same* as spending 2% of your savings when interest rates are 4% and inflation is 4%. Everything is relative to inflation, and until you've controlled for that it is entirely meaningless to put your capital on one side as untouchable and unchangeable and your interest on the other side as something you can freely spend without eroding your wealth. You can make a reasonable argument that you shouldn't reduce the spending power of your savings under normal circumstances. This normally means spending very little of your interest as it will be needed just to maintain the value of your savings. If you spend all your interest in an inflationary environment then you are spending your capital. Not many people understand this, and so get absurd iron rules built into people's heads that interest is for spending and capital is untouchable. It is nonetheless true.

*Up to say 0.1% caused by slight scaling issues.

LesU

gozomark wrote: »

council tax is a tax, and so is excluded from CPI and RPI......

Well that's OK then. What a relief! For a moment I thought it was real extra cash going out of my bank account!

gozomark

LesU wrote: »

Well that's OK then. What a relief! For a moment I thought it was real extra cash going out of my bank account!

I'm not saying its right, just why its not relected in the inflation measures.

Androcles

gozomark wrote: »

looking at savings in real terms, not nominal, works whatever the inflation rate - if inflation is 20%, then you need to keep adding 20% to your dsavings to stand still - preserving nominal capital is a pointless concept

Sorry, Gozomark, but I think you are completely missing the point. What I was saying is not about some technical difference between nominal and real capital. It is about real people being concerned that just spending away their real capital based on esoteric concepts ultimately results in no real capital left. Even you must admit that if I have £100 saved and spend it, then real and nominal capital = £0 - bust - end of story.

This is about experience. Many people living on interest, having experienced heavy inflation, are reluctant to reduce their capital because if it returns, they can see no chance of replacing it once it is spent and it will be worth less as will the interest.

gozomark

but they are reducing their capital in times of heavy inflation, by not maintaining their real capital