I plead guilty
by Doug Brodie
Income is all we do, that and cashflow planning. Income is a way of investing and not just investing FOR income to live on. Back in 2009-12 almost all the money we were investing was in fixed income, items like bonds from BT, AXA, Allianz, Zurich, BP, Santander and even Goldman Sachs. The yields were generally between 9% to 12% so pretty much income for old rope.
Then of course interest rates collapsed as central bankers tried desperately to fend off a global collapse in ‘economic activity’, which they pretty much succeeded in doing. Inflation even went negative, with -0.6% in 2009, and now we’ve come a long way. It’s currently 4.5% as I write, but I suspect by the time you read this it’ll be 4.75%, and in the mortgage market it’s tough for the youngsters, getting tougher almost day by day:
In five days the two-year rate went up 0.17%, which is up BY 2.84%. Interest rates creep.
Inflation news is hot stuff at the moment, and it’s very relevant to us and you. Hopefully inflation will prove a big issue through your retirement as that will suggest a long retirement.
Inflation is embedded in our research metrics, and fortunately it’s such a big economic factor that it’s relatively simple to source data – ONS is very useful for such items.
You’ll have read this week that the UK inflation rate is currently 8.7% - that’s high, but not as high as the rate that we use. The rate being publicised is the CPI, which excludes housing costs. Hmm – we’ve got mortgage costs literally doubling and the headline rates excludes that?
We use RPI, the old-style inflation rate we all grew up with, which includes housing costs, and that, this week is 11.4%. Now that’s high, that’s old school as they say. We calculate our inflation figures on a five-year rolling basis, there’s no point and no value trying to plan income based on one year alone, not unless you’re only planning to be retired for one year.
The table below measures RPI versus dividend increases on a five-year rolling basis from 1986 to 31 December 2022. We have all the annual figures, and the story is the same wherever we look. Of the thirty-six years we monitor, RPI was higher than the dividend increases in only four, so 11% of the time. Remember, the trusts hold reserves, and we track all these as well – the reserves are the shock absorbers that enable the dividends to be increased each year – not guaranteed, but pretty damn reliable in all the periods we’ve seen.
Controlling inflation – what retirees actually do
The one big mistake people make in trying to squeeze an extra drop of blood out of their financial stone is to move their money into areas that were deemed NOT acceptable before. If it wasn’t good before, why would it now be when conditions are tighter?
One of my brothers rang me in October 2008 in a panic because he had his deposit money in Kaupthing Bank in the Isle of Man and the bank had gone bust. I asked him why he put his money into a bank whose name he couldn’t pronounce and he didn’t have an answer.
We can use annuities for those who want / need / prefer guaranteed security of income, guaranteed to grow in line with inflation. However, for a married couple to do that the current annuity rate is around 2.74% - and giving away your entire pension to get that rate is expensive. An annuity is not an investment, you get no capital back, and you have no idea how much income you’ll receive because you don’t know how long you’ll live. (With such questions ignorance is bliss).
Having worked with retirees and their money, the way they actually control it is by spending less; in general most folk have no mortgage (at worst a small one), kids tend to be grown up (I’m not daft enough to say ‘financially independent’), and so fixed expenses tend to be low, discretionary expenses high. One less bottle of wine, trip to the restaurant, extravagant shopping, journey driven or item of clothing bought and it adds up.
My wife and I can easily save £50 on fuel, £50 on wine, £100 on a meal out, £50 on (unnecessary) granddaughter items and £50 on magazines/books/whatever, adding up to (say) £300 a month or £500 of gross income. If we’re unsure of where money is going, it’s easier to ‘generate’ cash by not spending it rather trying to squeeze out more from the same £1 you started with. It’s called living on a budget, and most of our readers have probably not done that for a long time.
If you know your income is fixed it’s simple to budget against; if you are drawing retirement income on a ‘total return’ basis with the market going up and down at the same time as costs jumping up, you’ll simply have twice the worry. We can solve that for you, it’s what we do.
Doug