We held a Retirement Seminar for dentists at our office recently. This being part of an ongoing series of educational talks and workshops to several groups of dentists in the north, and which also takes us to North Wales next year.
It was good to see familiar faces in attendance, as well as new, with specialist dental accountant Alan Suggett also chipping in with a slot on the value of Practices and the complexity of Incorporation.
Part of what we covered was how volatile the markets have been this year, and also how inflation can play havoc with your wealth over time.
It is sometimes not appreciated how, over time, inflation can really damage wealth creation and preservation, and with inflation very high at present it is worth looking at this in more detail.
Of course, the context here is the real value of money. When we talk about the ‘real return’ on your money, it means the return that you get (or don’t get) over inflation.
So if inflation is, say, 5% pa, and you are getting a return in the bank of 3% pa before tax, and 2.4% pa after basic rate tax, then you are not getting anywhere near a real return on your money.
If this were to happen over many years, then the real value of your money would reduce markedly.
In fact, with present rates at around the 5% mark and with many experiencing a salary freeze, some people will be seeing a fall in their standard of living.
Let’s take a look at the impact of inflation on some consumer items, as well as salaries, pensions and debt over a recent 10 year period.
PRICE COMPARISON 1999 – 2009
Price in 1999 Price in 2009 % change Source
Milk (pint) 34p 45p 32.30% ONS
White Loaf 51p £1.26 147% ONS
Sugar (kg) 61p 88p 44.20% ONS
Pint lager £1.93 £2.79 44.50% ONS
20 Cigs £3.37 £5.39 60% ONS
Petrol / l 63.6p 90.4p 42% Petrol Prices
Ave salary £18,396 £20,900 13.60% ONS
Weekly state pension £66.75 £95.25 42.70% PAS
Level of UK consumer
debt (billions) £565.4 £1457.4 158% BOES
Price of oil per barrel £8.80 £28.70 226% WTRG
Bottle of wine £3.55 £4.18 18% W&STA
Ford Focus £15,500 £16,095 4% Ford
McDonald’s Big Mac £1.90 £1.99 4.70% McDonald’s
Source: This is Money
So those of you who like a pint and a fag while munching on a white bread sandwich will have reasons to moan!
Whilst the wine loving burger fans may well have a smile on their face!
For a bit of fun (answers below), have a guess at the price of these items in 1960 compared to the 2009 prices below:
1. Fish N Chips – £4.50
2. A Mini – £12,345
3. Petrol – 86p (was it?!)
So we can see that just 10 years can seriously erode the value of money, never mind 20, 30 or 50 years!
So what is the best way to combat inflation with your savings and investments?
The first thing to say is that there is no magic answer, and that there are 3 rules to investment return:
1. Risk and return are related
2. Risk and return are related
3. Risk and return are related
Other factors are accessibility, tax and the time period you have to invest.
Of course, in our opinion, the only reliable way in which you can find out what rate of return you need longer term so that you can be on track to achieve your goals in life is to devise a proper strategy, and have your own financial map called a cash flow forecast.
This will be able to calculate what returns (and therefore risk) you need to take, with the aim to minimise any risk perhaps a sensible option.
What such a plan will give you is how much to invest in the various asset classes, with each having their own expected rate of return & risk (standard deviation).
So getting the right mix is vital.
We covered some of this at the seminar, and using figures from a Scottish Widows UK Financial History graph ( Barclays Index data), we could see that returns from some major asset classes made interesting reading.
What one pound invested in 1950 to 2010 would be worth:
Building Society (Cash) – £1,560
Gilts (Government loans) – £6,146
Equities (Stocks & Shares) – £117,500 (dividends reinvested)
Retail Prices Index – £2,680
Other methods would be to utilise products that give a return over a period that is guaranteed to be above inflation. Even Tesco had launched such a bond a little while ago – but as is the case with any investments/savings accounts, watch out for the small print.
Of course, the past is no guarantee of the future, but what do these figures tell us?
Well, the most important one we feel is that in the longer term, say 10 years plus, it is important that any investments you have show a real return. That is a return that is higher than inflation.
To give you the best chance of this, having a relevant risk assessed investment portfolio that has the right ‘blend’ of asset classes that lets you sleep at night on the one hand, and yet give you the return you need on the other, is a tried and proven route.
Talking about inflation, we came across a couple of quotes to share with you:
By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
- John Maynard Keynes
And on a less serious note:
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”
- Sam Ewing
Mini Quiz answers:
1. 6p – a 7,400% rise
2. £496 – a 2389% rise
3. 5p – a 1620% rise
Source: National Statistics.
The first one really is a surprise. The chip shop owners must have been salting their profit away for years! (sorry)
Really think about what you want in life and by when.
Then measure the cost of this, and compare it to what assets you have.
If you don’t know where you are going, how do you know when you’ll get there?!
Use cash flow forecasts – how does it look for you?
If you have an adviser, ask them to create you your own cash flow forecast. If they don’t know how to do this, then maybe it’s time to find a financial planner that does!