We’d like to remind Forumites to please avoid political debate on the Forum.
This is to keep it a safe and useful space for MoneySaving discussions. Threads that are – or become – political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.
The impact of inflation - yikes!
Comments
-
I suspect all those people on here who go on about the "real" return on their portfolios would have something to say about this. They are all investing to beat inflation (however you measure it) so they'd be very disappointed if they failed to achieve that.
1 -
Exactly. If you are following the 4% rule keeping up with inflation is baked in, but you must start with a sufficient pot and appropriate asset allocation to sustain your spending over your anticipated range of life spans, the range of inflation and range of investment returns. If you have an annuity or a DB pension then inflation linking is obviously important. It's also important to have a plan to cut spending if inflation is eating into your income more than anticipated.
If you want to feel better about this be glad that you don't live in Argentina which has 33% annual inflation. Just calculate (1+0.33)^N where N is years and weep. After 10 years you will be spending 17x more than in year one.
And so we beat on, boats against the current, borne back ceaselessly into the past.1 -
You are spot on, I have adopted a natural yield approach with an actively managed portfolio of stock market investments/ bonds, cash , together with a commercial property providing rental income.
With that approach one has to grow the capital to effectively grow the underlying income, so it is a rather old school traditional approach to income generation in retirement where there is no DB pension foundation.
The Sipp has deliberately remained untouched and growing for the 11 years post retirement, and represents a fallback to replace rental income if/when the commercial tenant walks away at end of lease with no replacement occupier. The Sipp has a natural internal yield of around 4% currently, but I will be able to tweak that up or down depending on how other non sipp income assets are performing.
I also have a mortgage, since I dislike having a vast amount of capital sitting in a non income producing asset merely providing a roof over my head. However again I accept that runs contrary to prevailing wisdom.
In my situation diversification is key especially since growing underlying capital supports my interest in acquiring art/ antiques. Therefore my focus is not concerned with basic needs but expensive discretionary 'wants'.
As @Cobbler_tone identified ones lifestyle dictates personal rate of inflation, which depending on your 'wants' could diverge substantially from the average.
However I accept ( on reflection) my approach to retirement income provision and the reasons for real term capital preservation, clearly would not apply to the vast majority of retirees intent on a simple uncomplicated retirement.
2 -
"so that it grows with the market, ie with inflation"
The equity market is not the same as inflation. Inflation is measured as a basket of goods and services not a basket of equities.
0 -
Yes even the more cautious contributors, seem to generally plan on beating inflation by 1 or 2 % a year on average long term.
In fact recently it has been possible to beat inflation with cash savings, so would be a bit disappointing if riskier investments did not do any better.
1 -
Interesting comment re the capital in ones home. Owning obviously has tax advantages, sell and invest and you are paying tax on the interest/gains before paying rent out of them.
However suppose you have a £1m property, sell and that pot could give an income of 35k pa based on SWR. Probably puts you into 40% tax so lets say 21k net which would cover £1750pm rent - perhaps that money in house equity is not such a bad investment after all…..
I think....0 -
You're right of course, though I'm not sure how it could be any other way. If the ONS is tasked with producing a single, headline, "THE rate of inflation", then it's inevitably going to be based on the spending habits of a typical/average/median person. An inflation rate for the poor would need to attach more weight to basic goods than the headline figure; one for the rich would have to attach more weight to high end restaurants and expensive skiing holidays.
That said the ONS does also calculate and publish inflation rates for different income groups, as well as for categories like renters vs owner occupiers, or retired vs working age people. Currently there is actually very little difference between any of the categories.
Household Costs Indices for UK household groups - Office for National Statistics
Of course, most people on a forum like this one will be looking to retire on significantly more than the breadline, so the headline rate of inflation is going to be a better one to use in planning than one calculated for the bottom 10% of the income range anyway. I'm not sure that you can get an annuity with inflation protection targetted at your particular income bracket - maybe there's a gap in the market there?
2 -
If you want to get money out of the equity you have in your house you can always do equity release. I'm not a fan of that so I bought a two family house and rent out the downstairs. It helped me pay off the mortgage and now provides some nice income that I have raised in recent years, but not at the rate of inflation because my tenant is good. If she leaves I'll bring the rent up to the market rate.
And so we beat on, boats against the current, borne back ceaselessly into the past.1 -
The real secret to inflation is that despite the common wisdom that it's a measure of how much the cost of maintaining the same standard of living is changing, it isn't that at all. It's more a measure of how much it costs to keep up with the Jones.
If we as a country become dramatically poorer, then the way we spend our money changes. As a result, the contents of the inflation basket change.
If we all stop buying caviar and start eating gruel, then caviar drops out of the basket, even if the reason we're not buying caviar is that enough people were priced out.
On top of the fact that people's personal inflation will always be different, we also need to account for the fact that food inflation over five years may say 20%, but hide the fact that we've all switched to store brands and only eat cardboard on a Wednesday.
5 -
Yet, there have been historical periods where total returns from equities have been less than 0% (I think the earlier example above was the capital value just keeping up with inflation after spending the dividends, but I could be wrong).
For example, over 10 year rolling periods the worst case for UK equities was an annualised total return of -7.4% (a period starting in 1911, so including WWI) with some rolling periods starting in the 1960s and 1970s also having annualised real returns less than 0%.
Going to longer periods improves the worst cases, e.g., over 20 year rolling periods the worst annualised real return was -1.3% (still below 0%).
2
Confirm your email address to Create Threads and Reply
Categories
- All Categories
- 355.6K Banking & Borrowing
- 254.8K Reduce Debt & Boost Income
- 456.1K Spending & Discounts
- 248.2K Work, Benefits & Business
- 605.7K Mortgages, Homes & Bills
- 179K Life & Family
- 263.5K Travel & Transport
- 1.5M Hobbies & Leisure
- 16.1K Discuss & Feedback
- 37.7K Read-Only Boards