Generic advice on beating inflation during retirement?

Ignoramus

Hello moneysavingexperts,

I hope you can help me with 37 million (minus the one I just posted already) odd questions I have re investing for retirement, annuities yadayadayada...

I'm trying to help my mother work out what her options are re retirement, but as I have no experience of investing or the financial world, I'm relying on the internet to help me get up to speed.

Of course we're using IFAs as well, but my mother has had some dodgy experiences in the past and we would like to be as well informed as possible first.

My mother is in her late 60s, does not have a pension fund, but does have money tied up in her house which she is planning on selling. She would like to use that money to provide an income and a rainy day fund.

So given that basic background, what are the standard financial strategies to combat possible inflation in the future?

So far I've only come up with two:

1. Rising annuities, +3% or RPI linked.
2. Playing the long term/medium term/short term investment game.

Option 1:

• +3% annuities provide some protection, but aren't fool proof, if inflation is above 3%
• both +3% and RPI linked annuities only seem to "break even" compared to fixed level annuities after 20 years or so
• given low annuity rates generally, it seems an "expensive" safety option

Option 2:

• This would involve having a basic fixed level annuity income
• Other money would be invested in a) cash savings b) income for life investment bonds & dividend funds c) stock market tracker funds
• Initially extra income from b) would be used for growth
• If inflation started to bite, money would be taken from a), then income from b) would replenish a) and likewise c) to b)
• Would this be a more "efficient" but complicated method than option 1?

Do these two options make sense? Are there any others? What are their disadvantages/advantages? Does my reasoning make basic sense, or am I missing something obvious out?!

Thank you very much for any advice or comments you might have!

dunstonh

So given that basic background, what are the standard financial strategies to combat possible inflation in the future?

With investments there is no standard. Investing is largely opinion and use of a strategy based on objectives and risk profile.

Other money would be invested in a) cash savings b) income for life investment bonds & dividend funds c) stock market tracker funds

1st one will get hit with inflation badly. Second one; investment bonds are a tax wrapper. Not an investment fund. c) why just medium to high risk tracker funds?

You need to consider risk profile and what investment strategy to use. Random hit and hope rarely works well.

What is her tax position as the use of investment bonds may or may not be the most tax efficient. A cost/tax analysis should be done to compare investment bonds with S&S ISA and unwrapped investments (with potentially an annual bed & ISA transaction included and use of annual CGT allowance).

Ignoramus

Thanks for the reply dunstonh.

dunstonh wrote: »

With investments there is no standard. Investing is largely opinion and use of a strategy based on objectives and risk profile.

By standard read common, generic, I'm just looking for the common possible strategies, not the focused which investment fund to buy into advice.

Surely buying an RPI linked annuity could be defined as a inflation fighting strategy. For example I just thought of another one, buy to let. Presumably income from that is inflation proof. It clearly has disadvantages though, but I just wanted some initial generic advice which I could then look into further with more questions and research.

dunstonh wrote: »

1st one will get hit with inflation badly.

a) is for yearly extra expenses and is also the rainy day fund. The inflation beating stuff is supposed to happen in b) and c), but I thought it made sense to access that via a) and trickle down the funds from b) and c).

dunstonh wrote: »

Second one; investment bonds are a tax wrapper. Not an investment fund.

Yeah I am very sketchy on the details of all this! I do understand that you can get different funds in investment bonds... but maybe I'll leave that for another thread, I'm trying to drill down from generic, general questions to more specific as I better understand the issues involved!

dunstonh wrote: »

c) why just medium to high risk tracker funds?

Well that comes from my general cynicism about managed funds and the stock market in general:

1. I don't see how as an amateur I can choose individual stocks & shares better than anybody else.
2. I'm not convinced that professional fund managers can either (to any substantial degree).
3. Even if they can, I don't see how as an amateur I can choose better fund managers than anybody else.
4. I don't see how I can choose better IFAs who can choose better fund managers who can choose better stocks etc...
5. I'd rather keep it as generic as possible and avoid other charges and costs, hence tracker funds.

dunstonh wrote: »

You need to consider risk profile and what investment strategy to use. Random hit and hope rarely works well.

Could you elaborate the basic types of investment strategies? That's kind of what I'm looking for. As for random hit and hope, I have no intention of doing that.

dunstonh wrote: »

What is her tax position as the use of investment bonds may or may not be the most tax efficient.

Could you give examples of what the general tax advantages/disadvantages might be? I understand that the details would be far too complicated and would depend on my mother's exact financial situation, but what are the general concerns?

dunstonh wrote: »

A cost/tax analysis should be done to compare investment bonds with S&S ISA and unwrapped investments (with potentially an annual bed & ISA transaction included and use of annual CGT allowance).

Again could you give any further explanation on the generic pros & cons of each approach? If not could you suggest any resources on the internet or books that could help?

Thanks very much for your time.

jimjames

Ignoramus wrote: »

Well that comes from my general cynicism about managed funds and the stock market in general:

1. I don't see how as an amateur I can choose individual stocks & shares better than anybody else.
2. I'm not convinced that professional fund managers can either (to any substantial degree).
3. Even if they can, I don't see how as an amateur I can choose better fund managers than anybody else.
4. I don't see how I can choose better IFAs who can choose better fund managers who can choose better stocks etc...
5. I'd rather keep it as generic as possible and avoid other charges and costs, hence tracker funds.

I think tracker funds can be a good option for the reasons you list there. The only thing that they won't necessarily do is provide the highest income as they would include all shares not just those paying dividends.

dunstonh

Well that comes from my general cynicism about managed funds and the stock market in general:

1. I don't see how as an amateur I can choose individual stocks & shares better than anybody else.
2. I'm not convinced that professional fund managers can either (to any substantial degree).
3. Even if they can, I don't see how as an amateur I can choose better fund managers than anybody else.
4. I don't see how I can choose better IFAs who can choose better fund managers who can choose better stocks etc...
5. I'd rather keep it as generic as possible and avoid other charges and costs, hence tracker funds.

Problem with that is you are assuming one risk level. That is not the case as its a sliding scale. Plus, you would expect a higher yielding strategy to be considered as an option and that typically means using managed funds. So, whilst you may get low cost with a tracker fund, you are going higher risk than is necessary and compromising the investment objectives.

Loughton_Monkey

Just commenting on your original post (trying not to get too bogged down with subsequent detailed comments):

1. I simply do not see a 3% escalating annuity as anything whatsoever to do with beating inflation, positive or negative. An annuity is an annuity. Taking a 3% escalating (rather than flat) is simply an 'actuarial' realignment of how the money is paid. So in other words you are paying for that at time of annuity purchase. Were you (she) to take a level annuity - but recognise that some of this needs squirrelling away in the early years - to be tapped into later as inflation bites - gives you the same result. [Put another way, the annuity company has used exactly the same interest assumption to calculate the annuity - whether flat or escalating].

2. The last time I looked at a "true" RPI linked annuity (Canada Life, I think, offers one) I simply could not believe the miserable starting annuity rate. I did a few calculations and found that inflation would need to rocket considerably for it to be 'cost effective'. It can only be a matter of opinion, since none of us knows what inflation will be in the future.

3. Putting all this together, given today's savings/investment market, I have to say that the "holy grail" of a 'guaranteed inflation beater' strategy simply doesn't exist. Somebody would have found it by now. Of course equity investment (rather than savings) offers that chance but it would be a brave IFA who attempted to justify to a late 60's female to put the bulk of her capital into equities (or similar 'investments') that can go belly up as well as down.

4. Have you considered a strategy of renting out the house rather than sell? Maybe it doesn't meet needs, but the argument here would be based upon (a) at least it provides an immediate income, with little extra investment, and (b) the rise in value of the house would be expected to beat inflation (!?!?! Yes. An assumption that would take another 347 threads to discuss and argue!). But historically houses have tended to do that.

5. Another view I would put forward is this: "Given the extremely volatile and uncertain nature of the financial markets currently - so soon after unprecedented events - it is perhaps wrong to consider any strategy that locks you into a long term commitment." What I mean by this is that I simply do not believe anyone has a full and accurate idea of what mix of financial indicators will apply 2 or 3 or more years down the road. To put all one's eggs into a basket now (say into an annuity) is a bit dangerous.

Selling the house is indeed a big decision. She could, in 3 years time, be saying "Phew! Best decision I made, since it has dropped a further 20% in value). Equally likely is she could say "Phew! I sold that house for a song. Almost bottom of the trend. Current owners could sell it now with 20% profit."

Personally, I'm probably in a different position, but as a younger retiree, I too wish to protect myself against inflation. But I have long recognised that this is not necessarily possible. So currently I am 'marking time'. Existing pensions give me a 'core' income, with some RPI protection. My mortgage free home provides (I hope) substantial inflation protection in the longer term. As for the 'spare cash' in between, then I rely on a mix of roughly 25% into equities (under ISA wrapper), and 75% into savings (where, using longer term bonds and all the other 'goodies') I can achieve an average rate of 3.2%-ish before tax. Miserable, really, but I would at least be reasonably 'liquid' to make some of this up if/when we return to a more healthy market where inflation+ savings rates are again available.

Ignoramus

Sorry, it seems I hadn't subscribed to this thread so I missed your replies.

dunstonh wrote: »

Problem with that is you are assuming one risk level. That is not the case as its a sliding scale. Plus, you would expect a higher yielding strategy to be considered as an option and that typically means using managed funds. So, whilst you may get low cost with a tracker fund, you are going higher risk than is necessary and compromising the investment objectives.

I'm not sure I understand (not suprising given my moniker). Do you mean that tracker funds are higher risk than other S&S investments? Or that I should avoid S&S altogether.

Loughton_Monkey wrote: »

Just commenting on your original post (trying not to get too bogged down with subsequent detailed comments):

1. I simply do not see a 3% escalating annuity as anything whatsoever to do with beating inflation, positive or negative. An annuity is an annuity. Taking a 3% escalating (rather than flat) is simply an 'actuarial' realignment of how the money is paid. So in other words you are paying for that at time of annuity purchase. Were you (she) to take a level annuity - but recognise that some of this needs squirrelling away in the early years - to be tapped into later as inflation bites - gives you the same result. [Put another way, the annuity company has used exactly the same interest assumption to calculate the annuity - whether flat or escalating].

Thanks a lot for a really detailed and useful post! As for your first point, after poring over the numbers and sticking them into spreadsheets, I've independently come to a similar conclusion to you it seems. 3% rising seems to be more about an extra gamble that you are going to beat your life expectancy.

Loughton_Monkey wrote: »

2. The last time I looked at a "true" RPI linked annuity (Canada Life, I think, offers one) I simply could not believe the miserable starting annuity rate. I did a few calculations and found that inflation would need to rocket considerably for it to be 'cost effective'. It can only be a matter of opinion, since none of us knows what inflation will be in the future.

Yes RPI linked do seem very low. If I did go for this it would only be a very small amount as a last resort security/peace of mind strategy. As it happens, it seems that they are not available for PLAs so I don't even have the option.

Loughton_Monkey wrote: »

3. Putting all this together, given today's savings/investment market, I have to say that the "holy grail" of a 'guaranteed inflation beater' strategy simply doesn't exist. Somebody would have found it by now. Of course equity investment (rather than savings) offers that chance but it would be a brave IFA who attempted to justify to a late 60's female to put the bulk of her capital into equities (or similar 'investments') that can go belly up as well as down.

Thanks to peoples replies on this board I've come to realise that there isn't a guaranteed strategy. However hopefully I am at least investigating common approaches to see how they might work for us. As for equity, I am hoping they could provide a long-term inflation safety net. Of course they could rise or fall, but over the short term given that my mother should have a fairly large amount of capital she wouldn't need to touch them. It's just in the event we get sustained high inflation 20-30 years down the line, I'm hoping S&S tracker funds will provide some protection.

Loughton_Monkey wrote: »

4. Have you considered a strategy of renting out the house rather than sell? Maybe it doesn't meet needs, but the argument here would be based upon (a) at least it provides an immediate income, with little extra investment, and (b) the rise in value of the house would be expected to beat inflation (!?!?! Yes. An assumption that would take another 347 threads to discuss and argue!). But historically houses have tended to do that.

We have briefly thought about that strategy. +s include the fact that we could do it for 3 years and still not have to pay any CGT if we then sold. With the London Olympics coming up there's good reason to think we should get a better price then. -s include the fact that in order to rent we would need to move out and put a substantial amount of money into renovating the place. It's a shabby (by our neighbour's standards) house but in a very nice area. Unfortunately there are also family reasons which make this approach a little more difficult than it might otherwise have been.

Loughton_Monkey wrote: »

5. Another view I would put forward is this: "Given the extremely volatile and uncertain nature of the financial markets currently - so soon after unprecedented events - it is perhaps wrong to consider any strategy that locks you into a long term commitment." What I mean by this is that I simply do not believe anyone has a full and accurate idea of what mix of financial indicators will apply 2 or 3 or more years down the road. To put all one's eggs into a basket now (say into an annuity) is a bit dangerous.

That's also the view I've come to now. I'm looking at a small fixed level annuity for a feeling of security & the rest in a sinking investment fund.

Loughton_Monkey wrote: »

Selling the house is indeed a big decision. She could, in 3 years time, be saying "Phew! Best decision I made, since it has dropped a further 20% in value). Equally likely is she could say "Phew! I sold that house for a song. Almost bottom of the trend. Current owners could sell it now with 20% profit."

tbh, if it were a straight financial decision, the best way to combat inflation would probably be for her to just sit on the house & rely on lodgers & state pension for income.

Loughton_Monkey wrote: »

Personally, I'm probably in a different position, but as a younger retiree, I too wish to protect myself against inflation. But I have long recognised that this is not necessarily possible. So currently I am 'marking time'. Existing pensions give me a 'core' income, with some RPI protection. My mortgage free home provides (I hope) substantial inflation protection in the longer term. As for the 'spare cash' in between, then I rely on a mix of roughly 25% into equities (under ISA wrapper), and 75% into savings (where, using longer term bonds and all the other 'goodies') I can achieve an average rate of 3.2%-ish before tax. Miserable, really, but I would at least be reasonably 'liquid' to make some of this up if/when we return to a more healthy market where inflation+ savings rates are again available.

Ow. If inflation is between 3.1% (CPI) & 4.6% (RPI), a before tax return of 3.2% is pretty painful. In my spreadsheet I had set both inflation and my "medium-term" bond investments to 3% thinking I was being nice and conservative, but apparently not.

I also have a ratio of bonds to equities at about 3:1 (on my spreadsheet). Is that a sensible ratio for a 67 year old? (am I asking an impossible question?!

dunstonh

I'm not sure I understand (not suprising given my moniker). Do you mean that tracker funds are higher risk than other S&S investments? Or that I should avoid S&S altogether.

If you take the 2000 odd unit trust/OEIC funds, they all have different risk levels and invest in different ways. A FTSE tracker is a medium/high risk investment. Typically not suited to those that want income or are more cautious (unless you use a lower risk funds as well to bring the risk profile down).

Ignoramus

Thanks dunstonh, I think I understand. Given that any S&S investment would be a long-term growth consideration to offset possible long-term inflation disasters, I think tracker funds are still a good option.

Loughton_Monkey

Ignoramus wrote: »

I also have a ratio of bonds to equities at about 3:1 (on my spreadsheet). Is that a sensible ratio for a 67 year old? (am I asking an impossible question?!

Can only be opinion.

Most 'purist' opinions would advise an existing pensioner (possibly even an early retiree like myself) not to put much into equities at all, but if any, go for 'lowest risk'.

In my own case, however, I figure that only 30% of my wealth is in "cash" anyway. I am talking of 25% of 30%, which is 7.5% of my overall wealth. I happen to put them in what anyone would deem to be a bit unbalanced and risky. But I have so much faith in Asian/BRIC economies currently that I am more than comfortable with this ratio.

You simply have to analyse in advance what you would say if you woke up one morning, to find the markets crashing by 5%/10% a day. Possibly 20%/30% loss before you could physically liquidate....
If the impact would not be 'terminal' and/or if you still have time to wait for them to go up again, then go for it.

Linton

Ignoramus wrote: »

Thanks dunstonh, I think I understand. Given that any S&S investment would be a long-term growth consideration to offset possible long-term inflation disasters, I think tracker funds are still a good option.

I assume by trackers you mean a FTSE tracker rather than something more esoteric.

Such a tracker may be (arguably) considered as part of a balanced portfolio that includes Gilts and other income funds, perhaps a bit of higher risk to improve the returns etc. But to put the whole lot in one single area would seem to me very foolish. As Dunstonh has indicated, FTSE trackers are pretty volatile - look at the graphs.


Really as you are likely to be dealing with a large investment with the requirement to both provide an income and ensure long term security for someone other than yourself I think you should talk to an IFA. This is a complex matter and not something you should leap into purely on the basis of posts on the internet.