The Eternal Message for 2025

This is a recurring February piece. Each year the figures will be updated. Why? Because while the numbers will change around the edges, the message is eternal!

Friend,

Straight to it: a typical retired couple may well see one partner live for three decades or more. Based on typical UK inflation, over such a long period, the annual cost of Lifestyle could easily triple¹: an example Lifestyle cost of £60,000 per annum at retirement could, 30 years later, escalate to £180,000 or more a year, just to keep standing still, to keep buying the exact same “stuff”.

If you really must, some prosaic evidence: 30 years ago a First Class stamp cost 25p. Now? £1.65. See the detailed graph below:

For the overly literal amongst you: I am not suggesting you are going to spend your entire retirement capital solely on postage. That would be weird. It's a proxy.

The big risk to a dignified, independent retirement Lifestyle is the destruction of purchasing power via inflation. Like carbon monoxide, you can't hear it, smell it, see it, taste it. Yet inflation will silently, stealthily kill your wealth. Year-on-year your cash will buy you less and less, its purchasing power hollowed out from the inside like a house infested with particularly hungry termites.

Inflation is to retirement what carbon monoxide is to health

The Cure

If the malady is inflation, what’s the solution? Without giving bespoke, individual advice, might I suggest The Cure is a combination of optimism, fortitude and possession of a Financial Plan fueled by ownership of The Great Companies of The World (GCOTW): equities. Stuff your various tax-wrappers (ISAs, personal pension plans etc) chock full of these beauties, sit back, cross your fingers, and enjoy the ride.

Why so? Here are some nuggets to lessen the gloom (past performance is no guarantee of future returns etc):

• Three decades ago, at the start of 1995, the S&P 500 (The Great Companies of The USA) was valued at 466.

• 30 years on, at the end of last year, The Great Companies of The USA were valued at 6,011.

• In three decades, these Great Companies have grown in value by a factor of 13.

• In addition, the dividends paid by these Great Companies have risen six-fold in those 30 years².

These numbers don’t just keep pace with inflation; they knock it into a cocked hat. But these superb returns come at a price: to capture them, you have to be prepared to ride an emotional rollercoaster that can, for some, prove too much.

The declines are temporary, the advance is permanent

To reap the superior returns offered by The Great Companies you have to stand pat when everything appears to be going a bit “Pete Tong”. The last three decades have seen seven "get me out of here I can't stand it anymore" global bear markets and numerous smaller temporary declines³.

Source: https://am.jpmorgan.com/gb/en/asset-management/adv/insights/market-insights/guide-to-the-markets/?slideId=equities/gtm-uk-en-wrldbullbear

Once every four years or so on average, your investments would have temporarily declined by 20% or more - sometimes a lot more - before resuming their permanent advance.

For some, this is a rollercoaster ride too far: near or at the very bottom of the run, when their lunch is leaving through their nostrils, they bail out, just before the ride picks up and shoots north to new heights. Those who bailed at the bottom look on as the rollercoaster soars upward once more. In missing out on the spectacular ascent - for stocks can rise as well as fall - those left behind settle for a diminished retirement.

These poor saps (mis)behave this way because their whole lifetimes have been inculcated with the misconception that, in retirement, preservation of capital is paramount, when in fact preservation of purchasing power is the only metric that matters.

And that’s the problem with The Cure. It's really really hard to stick with your plan and stay invested through the horrendous-but-always-temporary-declines. The cure for The Cure? Having a tough-loving, empathetic counsellor to stand between you and "the big mistake".

Self-serving? You bet. The truth as I see it? Bet the (termite-free) house.

The Cure in practice

Since 1995, UK Retail Prices Inflation (RPI) has grumbled along at around 3.4% a year⁴. Over the last three decades, our preferred low-cost, massively-diversified Great Companies of The World investment solution has returned around 9.6% per annum. Capturing this 30-year compounded premium is the difference between a dignified, independent retirement, where the money outlives the people, over one where the people outlive the money.

Are these returns guaranteed going forward? Absolutely not. But if history doesn’t always repeat, it certainly rhymes; over almost any meaningful timeframe, The Great Companies of The World have delivered an inflation-busting return as a reward for sitting through their stroppy patches. That’s all I can say. That’s my story.

If you know of a better way to preserve your purchasing power in retirement whilst also building a meaningful legacy for those you have to leave behind, crack on.

Having stated the problem, and maybe scared you witless, I hope the above figures give you optimism and a glimpse as to the only rational solution for a healthy couple facing a three-decade plus retirement.

If you have the stomach for it. Buckle up.

1. https://erikasgrig.com/calculators/rpi-calculator-inflation/

2. Source for US market figures here. Why US data and not the UK? Because the Yanks have this kind of thing publicly available and we don't - yet. Also, the US market is enormous. By comparison, the UK market - at under 5% of worldwide market capitalisation and shrinking - is tiny.

3. https://am.jpmorgan.com/gb/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

4. Source for all figures in this paragraph : Dimensional Fund Advisors (sic). Investment returns are net of estimated annual fund charges but gross of advice fees, custodial costs etc, which vary on a client-by-client basis.