Savers you've never had it so good?

AlanW_2

So here we are talking about official measures of inflation - what about the 'MoneySavers' inflation? We have specifically avoided buying e.g. heating oil when the price was high. I havn't done the sums yet but my gut feeling is that as moneysavers we level out the inflation rate so while we had it relatively good a while ago we are now suffering higher than RPI rates while savings returns are at their lowest (ever?).

I am retired and savings interest is a big proportion of my disposable income.

gozomark

savings rates are only at their lowest ever in nominal terms - in real terms they are quite high, hence this thread

lukekelly_2

Androcles wrote: »

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?

This is entirely tangential. Of course if you spend more than your income then eventually you run out of money. This has not been disputed once on this thread. No amount of "being prudent" will enable you to buy 10 years care if you have enough money for 5 years care.

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.

Those arguing against you are not arguing on technical matters. Our argument is that we should ignore 'technical' categories such as capital and instead focus on purchasing power. People may feel that capital is a sacred object not to be touched, and indeed some do. They often feel this way for understandable reasons. That doesn't mean it's true. Financial realities should be explained in a sympathetic manner, but they must be explained in a truthful manner. This includes the fact that sometimes it is as prudent to spend capital as it is to spend your interest income in other times. It's absolutely not a technical matter, it's making sure you focus on what your savings can buy. The idea that you shouldn't concentrate on the buying power of your savings, that is, you should treat capital as an inviolable category, is the strange technical notion. Who cares about the capital as some fixed number? I care about what I can purchase! That means taking inflation into account.

If people don't want to erode the value of their savings then it is not enough to say "don't spend your capital". You must say "do not spend any capital or any interest needed to cover inflation". People may think that if they don't spend their capital they won't erode the value of their savings but that's entirely wrong. I can completely understand people with no income not wanting to reduce the value of their savings. Sometimes though you can maintain the spending power of your savings (again, spending power isn't some technical category, it's the only one which should matter to people) whilst spending capital. You are perpetuating the lie that spending capital always reduces the spending power of your savings and not doing so preserves it. All these categories must be adjusted for inflation or you end up dealing in abstract numbers, not purchasing power.

mean_momma

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.. ..(quote)

Right, I guess that the safety net of savings for pensioners is now full of rather large holes. Next stop, benefits. Hope the state will be getting prepared for a glut of 'distressed ex savers' with all mod cons.

lukekelly_2

It is no more and no less full of holes than it was previously. If your savings keep pace with inflation then they will buy (on average) the same amount of goods or services as they did previously. This has always been the case.

The increasing cost of caring for an elderly population is a huge problem in the Western world. That interest rates are low when inflation is low is not part of this problem.

Fred_Bear_2

Thank you Martin for starting this thread. It's not really surprising that so many people do not understand your argument when everyday we hear about 'suffering savers' in the media. I think it is mainly because of a lack of numeracy. Presumably to gain employment in the BBC you need a degree in English or Classics but not even a GCSE in Maths. If I were ever made Dictator of the UK (very unlikely I know) I would make a good pass at 'A' level Maths a requirement for BBC journalists. And that includes Declan Curry.

Androcles

lukekelly wrote: »

This is entirely tangential. Of course if you spend more than your income then eventually you run out of money. This has not been disputed once on this thread. No amount of "being prudent" will enable you to buy 10 years care if you have enough money for 5 years care.
Those arguing against you are not arguing on technical matters. Our argument is that we should ignore 'technical' categories such as capital and instead focus on purchasing power. People may feel that capital is a sacred object not to be touched, and indeed some do. They often feel this way for understandable reasons. That doesn't mean it's true. Financial realities should be explained in a sympathetic manner, but they must be explained in a truthful manner. This includes the fact that sometimes it is as prudent to spend capital as it is to spend your interest income in other times. It's absolutely not a technical matter, it's making sure you focus on what your savings can buy. The idea that you shouldn't concentrate on the buying power of your savings, that is, you should treat capital as an inviolable category, is the strange technical notion. Who cares about the capital as some fixed number? I care about what I can purchase! That means taking inflation into account.

If people don't want to erode the value of their savings then it is not enough to say "don't spend your capital". You must say "do not spend any capital or any interest needed to cover inflation". People may think that if they don't spend their capital they won't erode the value of their savings but that's entirely wrong. I can completely understand people with no income not wanting to reduce the value of their savings. Sometimes though you can maintain the spending power of your savings (again, spending power isn't some technical category, it's the only one which should matter to people) whilst spending capital. You are perpetuating the lie that spending capital always reduces the spending power of your savings and not doing so preserves it. All these categories must be adjusted for inflation or you end up dealing in abstract numbers, not purchasing power.

One last time, (Sigh!!!!)

1. I quite understand the principles of capital, interest and the impact of inflation you and others have carefully explained.

2. Unless you have some capital invested, you have nothing to earn interest on and nothing for inflation/deflation to work their magic or havoc on your purchasing power.

3. Once you have that capital and interest, then yes, your spending power is crucial, BUT SO IS YOUR RATE OF SPEND.

4. If you can see that your actual or likely rate of spend exceeds your spending power (i.e. You perceive 10 yrs care when you can only currently afford 5 years) then you need to devise a strategy to optimise your situation.

5. That means that you have to either conserve capital, and/or increase interest (assuming you are not in a position to earn additional income), or reduce spending and probably all three, since you can do absolutely nothing about inflation/deflation, and thus cannot control the spending power of your savings.

All I am saying is that people who have seen periods of high inflation are anxious to do the only things they can do to preserve their position for as long as possible, by manipulating the only handles available to them. Sneering at them for deciding to be prudent is not going to solve their problem.

KEVSART

MSE_Martin wrote: »

Shock news for SAVERS.
If inflation's at 0.1% you’ve never had it so GOOD!

Inflation's nosediving as the economy plummets, so savers must fundamentally change their thinking, to deal with the new savings reality. I hope my shocking, but not wholly inaccurate headline’s grabbed your attention, so please read & think about this...

Interest can't be considered in isolation, its interaction with inflation's crucial. In these three scenarios, I’ve done the maths over a year to make it easier to understand, though really things change monthly. Also I've used RPI inflation which for many isn't accurate - see below.

• July 08. Top Savings 6.5% . Inflation (RPI) 5.0%. Save £1,000 for a year and after basic tax you get 5.2% interest ie you’d have £1,052. Yet a basket of goods that cost £1,000 would now cost £1,050 due to inflation. Thus saving only increased your spending power by £2. REAL interest: 0.2%.

• Current: Top Savings 3.5%. Inflation (RPI) 0.1%. Save £1,000 for a year and after basic tax you get 2.8% interest ie you’d have £1,028. A basket of goods that cost £1,000 would’ve only increased to £1,001 due to inflation. Thus saving increases your spending power by £27. REAL interest: 2.7%.

• Possible future: Top Savings 1.5% Inflation (RPI) -2.0%. Save £1,000 for a year, and after basic rate tax you get 1.2% interest, ie £1,012. Yet a basket of goods that cost £1,000 would have DECREASED to £980 due to deflation. Thus saving’s increased your spending power by £32, meaning your REAL interest: 3.2%.

Is inflation really that low?

While RPI is 0.1%, the CPI rate which excludes mortgages is currently 3%. This variance has a huge impact on the numbers above, so do check your personal inflation rate. For some, who have very high rates, sadly you'll realise your money's doing even more badly that it seems right now. Yet hopefully at least this has explained the concept.

What about those living off savings income?

This is where it really has to hit home. Many have entrenched, psychological “don’t spend your capital" rules. Yet we may need to change that in coming climes. If we do get a true low interest deflationary environment, you CAN spend some capital to live off, without diminishing purchasing power – and in fact if you need to, you should.

My great worry is people will unnecessarily take hugely decreased lifestyles or even risk heat and food to protect their capital.

Max your interest Top Savings, Top cash ISAs



PS. I posted an earlier draft version of this and asked regular Forum users for feedback, as it's a thought piece. There were many useful and thought provoking comments (and a few rude ones as always). I've incorporated tweaked, and tidied the note above. Thanks to all for your help.

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Hi Martin
I personally think it's prime time for savers to actually SPEND their savings,since the earnings have dropped so low and it's still quite hard to get a loan in order to buy something.The only question is what to spend the money on : it will have to be something long-lasting and likely to appreciate (or not depreciate as quickly in other words) but as the saying goes "you can't take it with you".(If I can't take it with me I'm not going).
Regards

gozomark

@Androcles - all I am saying is that people who have seen periods of high inflation are anxious to do the only things they can do to preserve their position for as long as possible - absolutely

be prudent - great
be overly prudent because don't understand what low inflation means in terms of maintaining spending power - bad
be underly prudent because don't understand what high inflation means in terms of maintaining spending power - bad

past or future periods of high inflation are irreleavant to what people should do logically, and this is what people need to understand

ab48uk

sam2222 wrote: »

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...

Well, Martin was just one of many recommending the Icelandic banks. It seemed like a good idea at the time...

I'm a big fan of Martin - but remember he apparently does not give financial advice. It says so at the bottom of the page!

"This website is based on journalistic research. It does not constitute financial advice. Any information should be considered in regard to specific circumstances. All tips are followed at your own risk and should be followed up with your own research ."

Martin, most of that disclaimer seems sensible - but this site obviously does constitute (incredibly good) financial advice. After all it is called MoneySavingExpert.com.....