Savers you've never had it so good?

gozomark

Reaper wrote: »

The crucial point you are still missing is inflation. It is no good keeping a fixed sum of capital to fund future residential care if inflation puts the price out of your reach. Nor is it worth leaving the capital intact if deflation makes it "cheaper" than you expected.

I've tried to explain the concept as clearly as possible (as has Martin) and I can't think of any further ways to get it across, so I'm going to duck out and leave Gozomark, lukekelly and others to see if they can do a better job.

I'm ducking out as well on to the debate on real v nominal capital - can't see what else I can add to convince those who don't get it

lukekelly_2

Primrose wrote: »

It's one thing to ask savers who are still in a job and earning to spend their capital because they have the facility to replace it. For those who are retired and no longer have an earning capicity it's a completely different thing because with increasing longevity, the majority of us could need that capital in later life to fund residential care.

You can't talk about capital without considering inflation. If there's 20% inflation and 20% interest then spending your interest will mean that as an absolute sum your savings remain the same but in real terms your savings will become almost worthless. In times of deflation it goes the opposite way, you can spend your capital and not reduce your spending power.

Have a look at Martin's and other's posts on this thread for some clear and lucid explanations of this.

If you want a concrete example there are plenty on this thread, Martin's car example is particularly good. Here is another one.

At present suppose you have enough savings to pay for 100 months of residential care. If that care increases in cost by 10% then you'll now only have enough money left for 90 weeks. If at the same time you earn 10% interest you could add it to your savings and would still be able to afford the same length of care. If you spent that interest, even if you left the capital alone, you would have reduced the amount of care you could afford. If it was the other way round, care decreased in cost by 10%, then you would have enough money for 110 weeks of care. Even if you earned no interest you could spend £10 of your capital and still be able to afford 100 weeks of care. It's not your capital that matters, it's what you can buy with it.

(All these numbers are very slightly wrong, but if you can see why they're wrong then you'll know that it doesn't really matter and if you can't it also doesn't matter!)

lukekelly_2

gozomark wrote: »

I'm ducking out as well on to the debate on real v nominal capital - can't see what else I can add to convince those who don't get it

Indeed. These boards, especially the mortgage related ones, provide a strong argument for high-quality teaching of basic financial concepts at school.

A.Jones

What I don't really understand is this.

Say goods / foods that you usually buy from Europe / US are now much more expensive as the pound is weak. You do not buy premium brands, but go for cheaper alternatives (or forego things like new electrical goods altogether). If everyone does the same, the cost of living goes down, so inflation is negative. Are we better off? We cannot afford to buy things, so we don't and inflation drops.

Androcles

lukekelly wrote: »

You can't talk about capital without considering inflation. If there's 20% inflation and 20% interest then spending your interest will mean that as an absolute sum your savings remain the same but in real terms your savings will become almost worthless. In times of deflation it goes the opposite way, you can spend your capital and not reduce your spending power.

Have a look at Martin's and other's posts on this thread for some clear and lucid explanations of this.

If you want a concrete example there are plenty on this thread, Martin's car example is particularly good. Here is another one.

At present suppose you have enough savings to pay for 100 months of residential care. If that care increases in cost by 10% then you'll now only have enough money left for 90 weeks. If at the same time you earn 10% interest you could add it to your savings and would still be able to afford the same length of care. If you spent that interest, even if you left the capital alone, you would have reduced the amount of care you could afford. If it was the other way round, care decreased in cost by 10%, then you would have enough money for 110 weeks of care. Even if you earned no interest you could spend £10 of your capital and still be able to afford 100 weeks of care. It's not your capital that matters, it's what you can buy with it.

(All these numbers are very slightly wrong, but if you can see why they're wrong then you'll know that it doesn't really matter and if you can't it also doesn't matter!)

I don't know what technical planet you guys exist on, but it isn't the same one as the rest of us.

You are making some very rash assumptions. If I have a capital sum and keep spending it, sooner or later, inflation or no, I will run it down and have nothing left. Interest may alleviate the problem somewhat, but it is the rate of spending that I need to make which is the crucial point. To pick on your example, what concerns people is not about having enough money for 100 months of care, it is about having money for 100 months of care but needing 200 months of care!

So let us suppose I have £100,000 and inflation is at 10%, and interest 10%, but my care home fees are costing me £30,000 per year. At that rate at the end of year one I will have £80,000 left, and it will buy less because my care home fees will now be £33,000 per year, Soo I spend that out of my £88,000 leaving me £55,000 and so on. Before too long, I have no capital left on which to earn interest and inflation is irrelevant. If I still expect 5 years of care, what happens then?

As I keep trying to say, this is not a technical argument - it is about people feeling that with no means of replacing capital, they are reluctant to eat it away too quickly, in case they end up with nothing - it is a state of mind and being prudent.

patsyb_2

Pensioners do not normally still have mortgages and so the RPI is not relevant to their savings, only to their income as their pensions are usually tied in to this for annual increases. So, they will be doubly shafted by the higher CPI rate of inflation on their living costs and the low RPI which means that their pensions will see little or no increase if the September figure is around 0%.

gozomark

patsyb wrote: »

Pensioners do not normally still have mortgages and so the RPI is not relevant to their savings, only to their income as their pensions are usually tied in to this for annual increases. So, they will be doubly shafted by the higher CPI rate of inflation on their living costs and the low RPI which means that their pensions will see little or no increase if the September figure is around 0%.

true, but for the last few years they have benefitted by being linked to RPI as its been higher than CPI Over time RPI is expected to average 0.5% higher than CPI, so RPI is generally favourable to pensioners.

Andy_L

A.Jones wrote: »

What I don't really understand is this.

Say goods / foods that you usually buy from Europe / US are now much more expensive as the pound is weak. You do not buy premium brands, but go for cheaper alternatives (or forego things like new electrical goods altogether). If everyone does the same, the cost of living goes down, so inflation is negative. Are we better off? We cannot afford to buy things, so we don't and inflation drops.

No, the basket of goods adjust to reflect changes in spending habits eg if wine doubles in price people switch from wine to beer so the the weighting favours beer.

Depending on you point of view that's either sound statistics or a government conspiracy to fiddle the figures

gozomark

CPI has a more efficient substitution mechanism than RPI, one of the reasons long term RPI is higher than CPI.

sam2222

Does Marin Lewis want to apologies to those who lost thousands after he encouraging the members of this site to invest in the Icelandic banks last year due to the rates of high interest on their savings accounts?

As a self confessed ‘financial expert’ he seems as caught of guard as the rest of the bankers he is quick to criticise.

If something seems to good to be true...