How long will your savings last?

Please_explain...

Sorry, yes you're right, they are old fixes, tragically coming to their end soon though I'll still be able to beat RPI by quite a margin, and the new one is just the Tesco C/A which I'll leave £3000 in. But as an MSE you take out fixed rate products when you expect rates to fall and variable when they are rising so you're always ahead of the game. Or at least try to be!

Linton

If you had £600K you would be best advised to invest the money in equity (shares) via funds. Bank interest would at best barely cover inflation. Shares have a long history of exceeding inflation, given sufficient time. You can only get 3% or more interest at the moment because the banks are paying extra at the moment to gain customers. Its a loss leader - the commercial rate is perhaps 0.5%. That is why you can only get good interest rates on a limited sum of money, and it's a lot less than £600K.

Your other problem is that you dont know how long you are going to live. The more you take out in the early days the greater the chance of running out of money when its too late for you to do anything about it. This seems to me to be a fate worse than death.

So you invest your £600K in a wide range of shares how much can you safely drawdown inflation adjusted with virtually no chance of running out of money? Firecalc will give you a figure based on over 100 years of stock market data - it's about 3.5% of the initial lump sum, This can be exceeded if you are prepared to take less when prices are low and more when the goings good.

Please_explain...

bigadaj wrote: »

Well the consensus of opinion is that cash savings don't match inflation, and there's a huge amount of discussion on this.

The definitive reference point is normally the Barclays equity gilt study, which I think is available online for free now and updated annually.

This tracks the performance of equities, bonds and cash and started in 1890. The returns are dramatically greater for equities than for bonds with cash a little further behind. The source of their cash interest rates isn't clear, and they are unlikely to have actively been seeking the best rates and switching accounts regularly.

Still it would be unusual for cash savings to beat inflation over significant timespans, and also unlikely for them to match or beat returns from equities.

In my too long life I don't recall not being able to beat inflation with carefully chosen products, whereas I have fallen well short with uncarefully chosen equities. I think the usual stats seem to be based on instant access accounts. I have a regular savings account that lets me keep £20,000 in at 3.75% with no time limit/maturity date, and my everyday account gives 2.2% - not a fortune but well ahead of inflation. Anyway, my argument was only that we should match inflation and I didn't rule out stock market investments. All I said was that if you assume income matches inflation you can calculate how much of your savings you can blow each year, assuming a sensible guess at how long you will live - which can always be updated.

Please_explain...

Linton wrote: »

If you had £600K you would be best advised to invest the money in equity (shares) via funds. Bank interest would at best barely cover inflation. Shares have a long history of exceeding inflation, given sufficient time. You can only get 3% or more interest at the moment because the banks are paying extra at the moment to gain customers. Its a loss leader - the commercial rate is perhaps 0.5%. That is why you can only get good interest rates on a limited sum of money, and it's a lot less than £600K.

Your other problem is that you dont know how long you are going to live. The more you take out in the early days the greater the chance of running out of money when its too late for you to do anything about it. This seems to me to be a fate worse than death.

So you invest your £600K in a wide range of shares how much can you safely drawdown inflation adjusted with virtually no chance of running out of money? Firecalc will give you a figure based on over 100 years of stock market data - it's about 3.5% of the initial lump sum, This can be exceeded if you are prepared to take less when prices are low and more when the goings good.

I have nowhere near that sort of money! It was just an example that made the sums easy and I thought the average MSE would relate to. I don't have enough to gamble, let alone gambol, with.

If I run out of money aged 95, which was the age I based my own personal calculations on, and still have a state pension I'll count myself lucky. I'll sell the house if I have to go into a home then, though the thought is appalling and hopefully I'll have passed peacefully before that fate hits.


In conclusion, I am perfectly confident that I can at least match inflation - I currently have half my money in funds, more in pensions than in ISAs, and half in cash and will move towards cash as I grow more ancient - and have settled on an amount I can spend each year without much fear of running out of money; as I said, this can be adjusted if I find myself in unexpectedly good health at, say, 85. What I have learnt from this exercise is that I need not worry unduly abut spending that annual quota now, or if I do feel anxious, then at least a large part of said quota. I had, until now, been avoiding all unnecessary spending for fear of it all going long before my need of it had. I now realise that I was being overly cautious and am looking forward to spending some dosh with an easy conscience, though the sort of money I'm talking about is probably 'pin money' to most.

brewerdave

I have one (very) pessimistic spreadsheet which shows that we will run out of money by the time I am 91 and my wife 88.
Using the last few years increases in things like Council Tax,dental bills, energy costs ,insurance premiums etc etc I have built in cost inflation of nearly 7%:eek: -whilst I'm assuming only modest increases in pensions (1.5%), cash interest rates of 1.5% and growth in investments of 2.5%.
...means that in all likelihood, the "kids" will still get some inheritance:rotfl:

AnotherJoe

Please_explain... wrote: »

I have nowhere near that sort of money! It was just an example that made the sums easy and I thought the average MSE would relate to..

The issue is, it's a highly unrealistic example that invalidates your conclusions. You have said "look I can get 5% in savings account" and therefore live on 5% of £600k which is fine as long as you can subsist on 5% of whatever limited sum you can have in that account which is most definitely not £600k

. You'll,probably run out of high rate accounts at below £100k or less. What would you do with the other £500k? Whatever it is, if it's cash, it will drag your overall average way down most likely to well below inflation.

There's no point "making the sums easy", if they are invalid. You can't live on 5% of £100k and you can't live on 1 or 2% of £600k. If you want to match inflation, in the long term then shares at least will do that almost by definition. You haven't shown any evidence you can do that with cash for large sums and you need high returns on large sums for your cunning plan to work.

Eco_Miser

Your assumptions are OK for a first estimate, and how I decided I could afford to retire, BUT actually beating, or equaling, inflation using bank or building society accounts for the sort of money that will fund a nice, long, retirement over the duration of that retirement seems infeasible. Living to 120 is unlikely, but not unknown.
Yes, I remember getting 10% in regular savers, and even more than that, but only on comparatively small amounts.
That's why the majority of my money is in investments whose dividends should be sufficient for my needs, so the price doesn't matter much. My pensions should also be sufficient for my needs, so that's needs covered twice over, so can spend nearly half on wants as well.

redpete

Please_explain... wrote: »

as an MSE you take out fixed rate products when you expect rates to fall and variable when they are rising so you're always ahead of the game...

...and hope that your opinion on future interest rates is correct and that institutions setting fixed savings rates haven't already taken this into account.

chucknorris

I don't know what everyone else thinks about risk and where to have your money saved or invested, but at this point in time (I'm 58, and in good health) I am thinking along the lines of about 30-35 years left, and not leaving the stock market until my mid-late 70's, that may change depending on how my health pans out.

I want my portfolio be be something like this when I reach state pension age at 66:

12% investment property
50% shares - something like Vangaurd's VHYL ETF
12% corporate bonds (2 or 3 bonds, something safe(ish like utilities)
20% DB/fixed pension/annuity
6% cash

When I get to my mid 70's I will probably be looking for something like this:

0% investment property
10-20% shares - something like Vangaurd's VHYL ETF
50-60% corporate bonds (7 or 8 bonds, something safe(ish like utilities)
20% DB/fixed pension/annuity
10% cash

Stubod

I have been running an "early retirement" spreadsheet that can factor in various inflation and savings rates for comparison. There is also information on the web that shows the comparison between historical inflation v savings rates. (http://swanlowpark.co.uk/savingsinterestannual.jsp). This shows that there have been periods of interest higher than inflation, and t'other way 'round. I am not sure if there is a "natural" link between inflation and interest rates, but I guess that they are never that far apart? So I agree with the first post, however to hedge my bets (and play safe), I base my long term plans on 1% interest and 3.5% inflation.