30 years of rising prices

June 12, 2019

Thirty years might seem a lifetime, and to some extent it is. But I suspect it is the likely retirement span of a healthy non-smoking couple in their early 60s.

Imagine that three couples, the Andersons, Burns and Clarkes had all retired in 1989, all with £150,000 of savings and have only to buy one thing each and every year, a shiny new car, which for the purposes of this story will last only one year, will have no trade-in value and we’ll ignore tax.

The Andersons:

The Andersons take the supposed ‘safe’ route, placing their money on deposit with the local bank or building society which in 1989 paid 11.96%.

The interest each year (ignoring tax) initially would have been more than enough to buy them a brand-new Ford Escort (an XR3i, no less) every year all with no apparent risk.

Each year the price of the XR3i (and its later replacement the Focus ST) crept up and within a few years, the interest was no longer quite enough to cover the cost. They need to dip into their savings to buy one.

This continues year after year, with the Andersons dipping more and more into their savings until about 25 years later, when in their late eighties they run out of money and are forced to ask their children for help.

The Burns:

The Burns also take the ‘safe’ deposit route and, as with the Andersons, within a few years their interest is not quite enough to buy their yearly XR3i due to the rising price.

But rather than dip into their savings, the Burns choose to forego an optional extra or two, maybe the sunroof or metallic paint. Never mind they were happy that their £150,000 capital was ‘safe’.

This continues each year, with the Burns buying ever-cheaper models until today, thirty years later, they can no longer afford a new car at all. Instead they’ve downgraded to just a moped but at least their original £150,000 is still ‘safe’ in the bank.

What did the Andersons and Burns do wrong?

The problem is that they didn’t realise that they needed to protect their ‘real income’ not their capital.

They forgot that the price of virtually everything goes up each year. Slowly at times, so you might not really notice it at first, but almost relentlessly.

What did the Clarkes do right?

The Clarkes’ Independent Financial Adviser (IFA) explained that their friends were all looking in the wrong direction. Protecting their income against inflation was the issue and he advised them to invest in the greatest companies in the UK.

The Clarkes’ capital fluctuated over the years, as their IFA had explained that it would. However, their income remained fairly stable and grew steadily as did the profits of these great companies.

The IFA had to hold their hands a little with concerns such as leaving the ERM in 1992, millennium bug worries, Dotcom booms, September 11th, market crashes in 2002, 2008 and most recently Brexit worries. However, the Clarkes didn’t panic, and whilst share prices would have fallen at times they didn’t lose any money because they never sold.

Today, the Clarkes’ income would be in the region of £24,000 a year: more than enough to buy a brand-new Ford Focus.

Oh, and their capital would be around £650,000!

But why does this story about cars matter?

Who needs to buy a new car every year? True, but replace buying a new car every year with having to pay your council tax, utilities, grocery bills, going on holiday and you might then just see the problem.

As explained, the Andersons ran out of money five years ago and are now reliant on hand-outs from their children (who are themselves now in their 60s) whilst the Burns have had to economise to the point of poverty whereas the Clarkes’ live happily in Smugsville. Whilst past performance is no indication of future performance do you really want to side against the power of long-term investment in the greatest companies?

By the way, as the cost of a sporty Ford Escort / Focus has more than doubled over the last 30 years. What might it cost in the next 30 years?……………….£50,000?

If you’re thinking about how you might afford a 30-year retirement of rising prices please contact us for professional help and advice.


This is arguably an extreme example with the Clarkes invested 100% in equities which is unlikely to appropriate for most people. But, faced with the prospect of a 30-year retirement of rising prices, most people cannot afford to avoid investments (as opposed to savings) entirely and should speak to us about whether or not they need some investment exposure to help fund their retirement.

The interest rates are based on the figures from http://www.swanlowpark.co.uk/savings-interest-annual and the investment returns are based on the FTSE All Share Index.

No Individual investment advice is given, nor intended to be given, in this article and no liability will be accepted in respect of any action you make take as a result of receiving this article. If you are unsure whether any particular type of investment may be suitable for you, you are urged to take independent investment advice.

Warning – The value of investments, and the income which from them, if any, may go down as well as up and is not guaranteed; therefore investors may not get back the amount originally invested.