Index-Linked Gilts question

zagfles

MK62 said:

Which kind of confirms that the headline inflation figures are really nothing more than a guide and one's personal inflation rate might be quite different.

It's unlikely to be vastly different. It seems the general trend is that essentials go up faster than general inflation but discretionary spending (eg holidays, leisure activities etc) go up by less. If you have records going back 20-30 years, just look up how much you were paying for council tax, gas, water etc then compared to now. You may be shocked! 

So for people using gilts/annuities etc for essentials, as I intend to, index linking is vital. Equities will cover the discretionary stuff which won't leave me starving or freezing if they do badly.

masonic

I suppose that raises the question of when you should be buying these IL gilts to cover those essentials. If considering going long, you'd be buying them in say your 40s to mature in your 60s-80s. Is that sensible?

MK62

zagfles said:

MK62 said:

Which kind of confirms that the headline inflation figures are really nothing more than a guide and one's personal inflation rate might be quite different.

It's unlikely to be vastly different. It seems the general trend is that essentials go up faster than general inflation but discretionary spending (eg holidays, leisure activities etc) go up by less. If you have records going back 20-30 years, just look up how much you were paying for council tax, gas, water etc then compared to now. You may be shocked! 

So for people using gilts/annuities etc for essentials, as I intend to, index linking is vital. Equities will cover the discretionary stuff which won't leave me starving or freezing if they do badly.

Linton already gave an example of a significant difference........tax rates, allowances, behaviours, income increases etc all have a bearing too as well as the actual changes in the prices of the things you buy.
Over the last 30 years CPI and RPI have diverged significantly.....they can't both be right in terms of personal inflation.......

zagfles

MK62 said:

zagfles said:

MK62 said:

Which kind of confirms that the headline inflation figures are really nothing more than a guide and one's personal inflation rate might be quite different.

It's unlikely to be vastly different. It seems the general trend is that essentials go up faster than general inflation but discretionary spending (eg holidays, leisure activities etc) go up by less. If you have records going back 20-30 years, just look up how much you were paying for council tax, gas, water etc then compared to now. You may be shocked! 

So for people using gilts/annuities etc for essentials, as I intend to, index linking is vital. Equities will cover the discretionary stuff which won't leave me starving or freezing if they do badly.

Linton already gave an example of a significant difference........tax rates, allowances, behaviours, income increases etc all have a bearing too as well as the actual changes in the prices of the things you buy.
Over the last 30 years CPI and RPI have diverged significantly.....they can't both be right in terms of personal inflation.......

Obviously. The point is, everyone is affected by inflation, and any inflation measure will look at a "basket" of goods and services which obviously won't necessarily tie in with your "basket". CPI and RPI are calculated on different things and different methologies but the trend is similar, you don't get CPI at 3% when RPI is at 14%. And your trend will also be similar, not exactly the same, but similar. 

But it seems anecdotes of individuals saying their personal inflation was different to the official figures is used as an excuse to stick your head in the sand and ignore inflation just because there's no exact correlation between your costs and the official measures. A bit like people who think smoking is fine because their uncle smoked 40 a day and lived to 95. I'm sure you had people retiring in 1970 with a luxury £20 a week fixed income, about the average wage at the time, thinking that'll easily be enough, if inflation takes off I can reduce my spending, change behaviour etc. 

zagfles

masonic said:

I suppose that raises the question of when you should be buying these IL gilts to cover those essentials. If considering going long, you'd be buying them in say your 40s to mature in your 60s-80s. Is that sensible?

I doubt that would be viable for most people, there's not many in their 40s who'd have enough to buy enough to cover essentials in retirement, also they likely won't have much of an idea of what their other retirement income will look like. 

x44

MK62 said:

Which kind of confirms that the headline inflation figures are really nothing more than a guide and one's personal inflation rate might be quite different.

It used to be the case that the 'youngsters' who were generally buying stuff had a much lower rate of personal inflation than the elderely who were buying services.

This was because "stuff" was getting ever cheaper imported from China while services such as home help/carers and the rest that the elderely buy was getting much more expensive.

OldScientist

masonic said:

I suppose that raises the question of when you should be buying these IL gilts to cover those essentials. If considering going long, you'd be buying them in say your 40s to mature in your 60s-80s. Is that sensible?

AFAIK, no-one has done any serious modelling of this since inflation linked gilts have only existed for just over 40 years and the US equivalents, TIPS for only 25 years. Zwecher's book (Retirement Portfolios) looks at building income floors using inflation protected bonds and is well worth a read, but, IIRC, doesn't do any comparative modelling.

I have a (very) simple model (fixed real yields, 100% equities in risk portfolio) that, so far, I've only applied to the US case which indicates that buying TIPS with new contributions over the final 10 years of accumulation leads to a larger retirement income in the worst 5% or so of historical accumulation periods and a smaller amount in the other 95%, although fairly obviously, the real yields that the TIPS are bought at are critical.

One good thing about buying them over a period of time rather than all at once at retirement is yield cost averaging.

MK62

zagfles said:

MK62 said:

zagfles said:

MK62 said:

Which kind of confirms that the headline inflation figures are really nothing more than a guide and one's personal inflation rate might be quite different.

It's unlikely to be vastly different. It seems the general trend is that essentials go up faster than general inflation but discretionary spending (eg holidays, leisure activities etc) go up by less. If you have records going back 20-30 years, just look up how much you were paying for council tax, gas, water etc then compared to now. You may be shocked! 

So for people using gilts/annuities etc for essentials, as I intend to, index linking is vital. Equities will cover the discretionary stuff which won't leave me starving or freezing if they do badly.

Linton already gave an example of a significant difference........tax rates, allowances, behaviours, income increases etc all have a bearing too as well as the actual changes in the prices of the things you buy.
Over the last 30 years CPI and RPI have diverged significantly.....they can't both be right in terms of personal inflation.......

Obviously. The point is, everyone is affected by inflation, and any inflation measure will look at a "basket" of goods and services which obviously won't necessarily tie in with your "basket". CPI and RPI are calculated on different things and different methologies but the trend is similar, you don't get CPI at 3% when RPI is at 14%. And your trend will also be similar, not exactly the same, but similar. 

But it seems anecdotes of individuals saying their personal inflation was different to the official figures is used as an excuse to stick your head in the sand and ignore inflation just because there's no exact correlation between your costs and the official measures. A bit like people who think smoking is fine because their uncle smoked 40 a day and lived to 95. I'm sure you had people retiring in 1970 with a luxury £20 a week fixed income, about the average wage at the time, thinking that'll easily be enough, if inflation takes off I can reduce my spending, change behaviour etc. 

Nobody is ignoring inflation......but perhaps it's not as clear cut as saying buying IL gilts is vital.....nobody is claiming that they might not have a role to play though.
Perhaps some take the view that their SP will, to all intents and purposes, cover their essential spending......it is, after all, what it's designed to do....on average.

As for CPIvRPI, all what you say is true.......but while the trend is up for both (rather obviously), over 30 years the difference may well not be similar. Since 1995, the CPI index has risen 106%, whereas RPI has risen 170%.
In that time, the basic SP has risen 200% (NSP numbers are only available from 2016), the Personal Allowance has risen 256% (despite the freeze in recent years), BR income tax has fallen from 25% to 20%.......and on it goes.......it's the whole picture you need to consider, not just one aspect .....but granted, inflation is undoubtedly an important aspect (but which inflation though.... ). 

masonic

zagfles said:

masonic said:

I suppose that raises the question of when you should be buying these IL gilts to cover those essentials. If considering going long, you'd be buying them in say your 40s to mature in your 60s-80s. Is that sensible?

I doubt that would be viable for most people, there's not many in their 40s who'd have enough to buy enough to cover essentials in retirement, also they likely won't have much of an idea of what their other retirement income will look like. 

I figure even if the money were available that early, it could be put to better use. Which is why the focus is usually on shorter duration. With long, it seems holding to maturity is infeasible unless you live a very long time, and with state pension giving a boost, then budgeting for less spending in the final decade or so, there is less need. If not committed to hold to maturity, then interest rate risk comes in to play and could erode the inflation protection.

I can see the case for buying shorter dated ILG to bridge the gap between early retirement and SPA, and/or to top up SP if it wouldn't cover essenials. Though the shorter the duration, the less impact inflation would have, and the lower the premium over inflation currently.

gatters

I don't have any technical analysis, but a potential reason a retail investor could use ILGs...

A 40 year old set to receive state pension from 2053 could buy some ILGs maturing in the years beforehand to bridge the gap between retirement and state pension.

Based on Yieldgimp, today buying £8k of TR50, £7k of TG51 and £7.2k of TG52 would effectively buy 3 years of single lock state pension before age 68. 

I'm sure the money could be put to better use, but if ISA limits, annual allowance, taxes on taxable investments etc are limiting things it doesn't seem a completely stupid idea.