Thursday, 11 July 2013
Financing the future: live long and prosper. Plan for an extended future.
With the economic crisis leaving interest rates sitting below the level of inflation, independent financial advisers can help us change the way we look at savings.
For decades in the run-up to the financial crisis, most people took a safety-first approach to saving and investing for the long term.
And for good reason. Putting their savings into a deposit account or long-term savings bond offered the safest of traditional safe havens – they could relax, confident that their money would be secure and would grow.
But piling up cash in these once-safe havens is no longer the one-way bet that it used to be. The places we have long thought of as havens are rather less safe today than they used to be, for two main reasons.
The first is that as the financial world has shifted, so have the risks that we face. In the past, you could put your money on deposit at a bank or building society, or use it to buy super-safe government bonds, and be confident of earning a rate of interest that would allow your capital to grow faster than prices were rising. That enabled you to preserve the purchasing power of your money over the years while keeping it safe.
It might not grow as fast as it would if you had chosen other, riskier sorts of investment – but at least inflation wouldn’t erode the value of your nest egg.
But you can no longer rely on that old certainty. Savings rates on virtually all deposit accounts and yields on government bonds are stuck well below the rate of inflation, which changes the picture enormously. Prices are now rising faster than your savings can grow, which means that year by year your money can buy less – and therefore one of the main attractions of these traditional safe-haven investments has vanished.
The second big issue is that, for most of us, the long term is getting a lot longer than was the case for previous generations, with life expectancy rising rapidly. According to the Office for National Statistics, in 1981 a man of 65 could expect to live another 13.1 years. By 2009, this life expectancy had risen to 18 years. For women, the equivalent figures were 17 years in 1981 and 20.6 years by 2009.
The conclusion is obvious: longer life is nothing if not a blessing, but the money we salt away is going to have to work harder and support us through old age.
In a world where savings earn less than the rate of inflation and will have stretch further, sitting on cash looks a less viable option. By the same token, buying government bonds, even though they are backed by the Treasury’s promise to repay your capital in full, looks increasingly risky given that the yields they offer are also well below inflation.
For people who know they need to plan for an extended future – and one in which the easy answers do not work as well – this is a challenging time.
So over the coming weeks, the Telegraph will offer ways to reconsider long-term financial plans, bearing in mind the risks that inflation and miserly interest rates now pose to savings.
Many will want to take financial advice to help decide how to approach these issues, but will also want to feel confident that they know enough to have a proper conversation with their adviser.
This series will equip them to ask the right questions – what investments should they be considering to balance their need for growth with their appetite for risk? What are the merits of passive investing versus active management of their money? Should they be looking to international markets to help improve their returns? Where do they invest for the additional income they need?
For most people who are trying to build a fund for the long term but at the same time do not want to take on excessive risks, the answer to these problems is going to involve some combination of working longer, saving more and investing their money in different ways.
Inevitably, that means we are all going to have to accept rather more risk when investing for the long term. Therefore, a key element of the series will be to help people to dig deeper when they talk to their adviser and make sure that they understand the kinds of risk that go with the various investment options that are open to them.
The financial crisis and its after-effects have changed the rules of investing for many years to come. The old ways of doing things no longer represent a risk-free option – we need to take a different approach.