Interest rates so low - don't bother saving!

EdGasket

See the bit at the bottom of this article about today's inflation and Mark Carney the new BoE Govenor:
http://www.bbc.co.uk/news/business-20766392

Looks like they want to let inflation run to effectively devalue debt. This is very bad news for anyone with cash savings.

gadgetmind

EdGasket wrote: »

This is very bad news for anyone with cash savings.

Over half my cash is in NS&I linkers, some tied up for a year at 3.6%, but the rest is instant access so I can easily roll it into equities.

However, as my cash allocation is sub 10% of my holdings, I'm not too stressed.

pqrdef

The government blew our money, with help from the banksters, and we're going to have to service the debt one way or another. Inflation is just the relatively painless way of doing it.

grey_gym_sock

relatively painless?

it seems more like protracting the pain for as long as possible.

marathon_man_3

jimjames wrote: »

With potentially 30 years of retirement having savings/investments that keep pace with inflation is something that is worth thinking about so not being 100% in cash. In most situations it is the income that matters not the capital value that may fluctuate day by day.

You can still get decent returns on equity income funds and on bonds.

Neither my wife nor I want to put our capital at any risk although we are now having to eat into it to get by. I am aware of inflationary effects but, that apart, am happy to keep our nest egg in cash. With interest rates as they were a year or two back, we were doing fine.

Miss_Havisham

I save so that I've got some money stashed away for emergencies or the odd treat. Providing for a comfortable retirement is not saving - it's investing and I don't think putting money in the bank is a suitable method of building up a retirement fund for many years down the line.

Capital growth rather than interest income should be the aim for long-term building of retirement pots

le_loup

marathon_man wrote: »

With interest rates as they were a year or two back, we were doing fine.

Shows a basic lack of understanding.
Interest rates were higher a year or two back ... but so was inflation.
You are taking more risks with cash than you could be by having a diversified portfolio.
My mixture of income funds and bond funds, have this year made from 10.4% to 32.2%. I also have some cash in fixed rate savings and that has made 3.9% in 2012. All before 2.7% inflation.
I know which return I prefer.

gadgetmind

le_loup wrote: »

I know which return I prefer.

Agreed.

However, a more cautious retired person may prefer something like a Harry Browne permanent portfolio.

pqrdef

grey_gym_sock wrote: »

relatively painless?

it seems more like protracting the pain for as long as possible.

40 years ago people panicked about the national debt reaching £4bn. What a terrible legacy to leave to the next generation!

Well here we are and we still owe the £4bn. But it's small change now.

The theory behind index-linked gilts is that governments can service them because tax revenue keeps up with inflation. Likewise, Tesco can service index-linked bonds because their shop prices keep up with inflation. Other investments aren't explicitly index-linked, but a business that can't pay a positive real return on capital is really losing money.

Same would apply to mortgages if interest rates were RPI-plus.

Negative real returns aren't caused by inflation, they're caused by a depressed economy. Inflation merely disguises them as positive returns - and them somehow gets the blame when people figure out that their positive returns are an illusion.

But it's not like, if inflation fell to zero, banks would then pay us 3% on our savings and it would be a real 3%. We'd be lucky if they paid us 0.3%.

jimjames

marathon_man wrote: »

Neither my wife nor I want to put our capital at any risk although we are now having to eat into it to get by. I am aware of inflationary effects but, that apart, am happy to keep our nest egg in cash. With interest rates as they were a year or two back, we were doing fine.

Surely by using up your capital you are already putting it at risk even if you didnt see it dropping previously as a result of inflation? I'm still convinced that for most people the actual capital value on a specific day isn't particularly important if the income is still being generated.

As I posted elsewhere risk you can see is easier to understand than risk you cannot but the risk you cannot see can be equally if not more damaging.

I'd suspect that getting 5% income that beats inflation would be worth considering some risk for when that income is likely to continue around 5% level on the original capital regardless of current value.