Live off the interest: a Boomer myth or just financial illiteracy?

[Notting Hell]

I apologise that this is slightly off-topic, however I recognise that members here will have some useful insight.

Several boomers have said to me over the years that they 'intended to retire and live off the interest'. Meaning they intended to have £x saved in their bank account earning r% interest. They then intended to live on the interest and not touch the principle.

Anyone who does not require donation of the family brain cell would realise that this strategy doesn't work as the rate of (consumer) inflation always outpaces the rate that retail banks will offer on cash savings.

However, my question is, has this always been the case? Was it ever possible to 'live off the interest' without the principle losing purchasing power, when the funds are deposited into retail accounts? Or is it just basic financial illiteracy that has been stated to me? A myth.

 

On to premium bonds next... the most ******** 'investment' I have ever come across... another favourite of the boomers... Nothing premium about them. Earning effective 1.25% or whatever it is in premium bonds, while inflation runs at 10%!!! 'But I get a win every month'

[2buyornot2buy]

Until about 10 years ago you could buy index linked certificates. NS&I sold them. They used to pay RPI + .001%. Then changed to CPI. Then withdraw altogether. 

 

[Si1]

They don't understand inflation. That is all.

[“Nasty Piece of work”]

Depending on what you count as “live”, and is the “principle” limited.

[Insane]

11 minutes ago, Notting Hell said:

Anyone who does not require donation of the family brain cell would realise that this strategy doesn't work as the rate of (consumer) inflation always outpaces the rate that retail banks will offer on cash savings.

Well when people retire they will have less outgoings no travel to work, no paying into a pension. They will also be drawing a pension maybe a company one on top of the state one. The capital will lose value over a period of time however whatever it earns can be a top up to what is coming in. 

No one lives for ever as people get really old their expenses in many cases will reduce further as they won't want to holiday as often if at all go out for meals so much or bother updating their homes. 

I think most people like to have  a nest egg even if it is losing value in real terms it gives a degree of comfort. 

[Notting Hell]

I think maybe I wasn't entirely clear.

The same idea is noted by Douglas Adams and his story about The Restaurant at the End of the Universe. Where due to the marvels of compound interest, 1p deposited in a savings account in the diner's own era pays for the fabulous cost of the meal at the end of the universe.

This of course, does not, and I assert has never, worked. Douglas Adams, or at least this story, represents financial illiteracy.

It is not possible for cash deposits to outpace inflation, and this has never been the case. Unless anyone knows otherwise?

Edited May 13, 2022 by Notting Hell

[Si1]

5 minutes ago, Notting Hell said:

I think maybe I wasn't entirely clear.

The same idea is noted by Douglas Adams and his story about The Restaurant at the End of the Universe. Where due to the marvels of compound interest, 1p deposited in a savings account in the diner's own era pays for the fabulous cost of the meal at the end of the universe.

This of course, does not, and I assert has never, worked. Douglas Adams, or at least this story, represents financial illiteracy.

It is not possible for cash deposits to outpace inflation, and this has never been the case. Unless anyone knows otherwise?

It was during the boomers main working lifetimes because the dependency ratio was lower so interest rates were higher.

[Notting Hell]

4 minutes ago, Si1 said:

It was during the boomers main working lifetimes because the dependency ratio was lower so interest rates were higher.

But did retail bank interest rates ever outpace CPI/RPI etc.?

[dpg50000]

17 minutes ago, Notting Hell said:

But did retail bank interest rates ever outpace CPI/RPI etc.?

According to https://www.mortgagestrategy.co.uk/analysis/historical-interest-rates-uk/ the BOE base rate in 2001 was 4%. I distinctly remember Halifax offering at least 5.5% back then on a current account, no strings attached, as I opened one.

CPI was less than 2% all year, apparently:

https://www.statista.com/statistics/306648/inflation-rate-consumer-price-index-cpi-united-kingdom-uk/

 

EDIT - to add, this says it was 4% on current accounts in Feb 2001. I'm pretty sure it went up after that though - I opened mine a few months later and, like I say, I remember at least 5.5%.

https://citywire.com/funds-insider/news/halifax-cut-intensifies-bank-fears/a219686

 

Savers didn't always get dry humped.

 

 

 

Edited May 13, 2022 by dpg50000
Add more info

[FANG]

I think the distinction should be to survive off the interest. 

Everyone has different circumstances I can easily survive in the UK on 10k a year. However I can live on 30k a year. 

Edited May 13, 2022 by FANG

[zugzwang]

4 hours ago, Notting Hell said:

But did retail bank interest rates ever outpace CPI/RPI etc.?

 

Until the GFC, most certainly. 

Indeed, they remained relatively elevated vs the base rate until the first of the Term Funding schemes arrived mid 2012 (FLS) when the need to attract deposits effectively disappeared.

Edited May 13, 2022 by zugzwang

[Notting Hell]

@zugzwang Thank you for the plot.

Has anyone made any prediction of trend reversal?

There is always a lot of discussion (generally, not just on here) about CPI vs bank rates, but actually there are 3 rates to consider. The additional being the retail deposit rates. Notice how they track the bank rate until GFC...

[kzb]

1 hour ago, Notting Hell said:

I think maybe I wasn't entirely clear.

The same idea is noted by Douglas Adams and his story about The Restaurant at the End of the Universe. Where due to the marvels of compound interest, 1p deposited in a savings account in the diner's own era pays for the fabulous cost of the meal at the end of the universe.

This of course, does not, and I assert has never, worked. Douglas Adams, or at least this story, represents financial illiteracy.

It is not possible for cash deposits to outpace inflation, and this has never been the case. Unless anyone knows otherwise?

I think if you go back through history since WW2 you may find periods where savings interest has indeed exceeded inflation.  Not by much and the periods where inflation exceeds the savings rate will certainly be in the lead.

As to Premium Bonds, Martin Lewis did an analysis a few months back.  If you can put a large sum into them, and given average luck, it was competitive with savings rates at the time.  Maybe not now, unless they start giving more prizes.

[winkie]

No way will they live off the interest......either capital or rents.

[kzb]

13 minutes ago, winkie said:

No way will they live off the interest..

Turns out savings interest has exceeded CPI from 1989 (at least) until 2008/2009.

https://swanlowpark.co.uk/savings-interest-annual

However you would've needed a lot of capital.

Interest Rates on UK Savings Accounts since 1980

Year	Annual Average
1980	10.50
1981	8.90
1982	8.54
1983	6.75
1984	7.00
1985	7.57
1986	8.65
1987	9.83
1988	9.31
1989	11.96
1990	13.56
1991	10.57
1992	8.19
1993	5.66
1994	5.36
1995	5.60
1996	4.54
1997	5.45
1998	6.33
1999	4.71
2000	5.47
2001	4.64
2002	3.68
2003	3.73
2004	4.56
2005	4.92
2006	4.68
2007	5.55
2008	5.09
2009	2.21
2010	2.80
2011	2.75
2012	2.80
2013	1.77
2014	1.48
2015	1.40
2016	1.23
2017	1.00
2018	1.18
2019	1.39
2020	0.64
2021	0.35

[Bruce Banner]

I retired 14 years ago and have been living off pensions, and interest on capital. My net worth is a smidge more than it was the day I retired and I have 14 years less to spend it, so it's working out okay.... Mind you, a hefty increase in IRs would be very welcome.

[kzb]

5 minutes ago, Bruce Banner said:

I retired 14 years ago and have been living off pensions, and interest on capital. My net worth is a smidge more than it was the day I retired and I have 14 years less to spend it, so it's working out okay.... Mind you, a hefty increase in IRs would be very welcome.

My pension pot has earned more than I have by working in the past few years.  It's not in drawdown yet though.  I am sure by the time that comes round, it will have crashed by 80%.

[Bruce Banner]

8 minutes ago, kzb said:

My pension pot has earned more than I have by working in the past few years.  It's not in drawdown yet though.  I am sure by the time that comes round, it will have crashed by 80%.

Nor's mine, I bought an annuity at 7.5% in 2008. Everyone said I was mad at the time, but I now have my money back.

[kzb]

Just now, Bruce Banner said:

Nor's mine I bought an annuity at 7.5% in 2008. Everyone said I was mad at the time, but I now have my money back.

Does that have inflation correction built in?

[Bruce Banner]

2 minutes ago, kzb said:

Does that have inflation correction built in?

No. I front loaded it because I had to wait 8 years for my state pension, which made sense at the time and still does. Interest on capital should have been, and was in the early years of retirement, by far my largest source of income and hopefully will be again. 

[danlee74]

The dream.

 

Warning: bad language.

 

[scottbeard]

I think for a lot of history it was possible, especially if “interest” is extended to “investment returns” and includes share dividends etc

However, it’s probably not an optimal strategy for most people since your income is not guaranteed to meet your needs (eg if as now you have a low interest / high inflation period) and most people’s expenditure is highest early in retirement. 

Probably some kind of blend of investment income, capital drawdown and guaranteed income like an RPI linked annuity or company pension is likely to be better I’d say. 

But how many people who “lived off the interest” truly did live off JUST the interest?  For Most people the state pension would have been their main income with the interest just a bonus.  And did they really NEVER dip into the capital?  Probably they did, making it more like my described blend strategy. 

[Horseradish]

They won't be living off the interest as there isn't any anymore. Instead they'll be living off their three BTL rentals, parasatising the millenial generation, leaving them with nothing.

[longgone]

You can live for decades on income drawdown, move around and hpi pays for it. 

[Pop321]

5 hours ago, Notting Hell said:

I apologise that this is slightly off-topic, however I recognise that members here will have some useful insight.

Several boomers have said to me over the years that they 'intended to retire and live off the interest'. Meaning they intended to have £x saved in their bank account earning r% interest. They then intended to live on the interest and not touch the principle.

Anyone who does not require donation of the family brain cell would realise that this strategy doesn't work as the rate of (consumer) inflation always outpaces the rate that retail banks will offer on cash savings.

However, my question is, has this always been the case? Was it ever possible to 'live off the interest' without the principle losing purchasing power, when the funds are deposited into retail accounts? Or is it just basic financial illiteracy that has been stated to me? A myth.

 

On to premium bonds next... the most ******** 'investment' I have ever come across... another favourite of the boomers... Nothing premium about them. Earning effective 1.25% or whatever it is in premium bonds, while inflation runs at 10%!!! 'But I get a win every month'

In the past it was possible to earn more in savings than inflation but that’s half the story.  The underlying capital also needs to increase each year otherwise in real terms the value of the capital and therefore the value of the interest drops.  

So you need to earn enough to pay me an income but also extra as well to add to the capital so next year I get the interest plus inflation on top of that interest. So that’s why investments eg shares have done better because they pay a dividend and the underlying value of the business although volatile in theory increases. So for example this year I get £100 dividend and next year I get £110 dividend. Whereas with cash I just get £100 a year and in 10 years that £100 each year isn’t enough. 

However interest rates right now are the lowest in real terms for centuries…so no, people currently cant just live off the interest unless they have huge amounts of money in the first place. And if they did it won’t be sat in cash.  

As an aside the interest rates we see now are completely unprecedented and it has created something that will blow up in our faces. We have avoided inflation by exporting manufacturing to cheaper parts of the world, that means the West consumes more than it produces….and that means they need to borrow. Borrowing has gone mad….the US gov owes huge amounts…indeed many parts of the world are wobbling and soon the macro economic picture will become more clear just how bad things are.  

Basically the Dutch, British and now the US reserve currencies eventually collapse and there will be a need to repatriate manufacturing to the West and that’s really painful for everyone….involves inflation, involves difficulty for the middle classes and can end in revolutions or what normally happens (to avoid revolutions) is countries find reasons to blame other countries.

The next few months or indeed it could be a decade (because it’s a long economic cycle a knowing the time is not easy) we will see significant changes and a struggle to ensure the new reserve currency still involves to some extent a dollar. If millennials thought the last 10 years were difficult then soon they will see just how shafted they have been. One glimmer of hope is that house prices will likely fall (certainly in expensive areas)…..but only because no one can afford them. The best way to protect your wealth is to invest in inflation hedges and also work in a job that the salary rises with inflation. 

It’s possible to print money but as inflation begins to hit and ‘money’ is worth less then governments are coming to terms with the fact that we can’t print more gas, oil, commodities or food. Eg If I am the only one with the food it doesn’t matter how much money I am offered….the food becomes becomes the thing of value the money becomes secondary.

Well….that’s my cheery Friday thoughts….🤦🏻‍♂️😂