Making sure the money we have saved during our careers can last our lifetime is crucial, but for 91-year-old Betty Johnson it has become a pressing concern.
She recently moved into a rented flat in sheltered accommodation in Hertfordshire to be closer to her family, selling her flat in Surrey for £200,000 to do so. She is concerned that the £2,000-a-month rent may wreak havoc on her finances.
A secretary for an oil company until she was 55, Ms Johnson then worked as a silver service waitress, finally retiring at the age of 80.
She has an additional £48,000 in savings and total pension income of £650 a month. While she lives modestly, there are still a few treats she enjoys, including going to the hairdresser, at least when she is allowed to again once lockdown ends.
She currently has the money in savings or current accounts that pay low rates of interest but would like to invest it somewhere that will give her a regular income.
Jeannie Boyle, chartered financial planner at EQ Investors, said:
Ms Johnson has enough cash to pay her rent for the next 10 years, although that doesn’t allow for any rent increases. She faces the same dilemma as many of us: how to make money when interest rates are close to zero?
Those with long periods before they need access to their funds can take the risk of investing in the stock market, but Ms Johnson has spending commitments in the form of her rent. This means she has limited capacity to take risk.
The ideal home for some of her capital would be a long-term fixed-rate account. Unfortunately, the best rate available for a five-year fixed term is 1.8pc from RCI Bank and that is not sufficient.
I suggest she set aside six years’ worth of rental payments plus potential inflation-linked increases. I’ve assumed rent increases of 2pc each year, which gives a sum of just under £152,000.
With this, she should subscribe the maximum £50,000 into National Savings & Investments Premium Bonds, where prizes are equivalent to an annual rate of return of 1.4pc on average.
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There is no guarantee that Ms Johnson will achieve this rate, but it is better than the one-year fixed rates currently available. The rest of the set-aside cash should be put in the NS&I Income Bond, which currently pays 1.16pc, as it benefits from the security of government backing and the money will be accessible.
This leaves Ms Johnson with a balance of £96,000, which she will need to draw on from age 97. This money needs to grow at a rate equivalent to inflation to make sure Ms Johnson can keep paying her rent.
Over a six-year investment period, we would expect a cautious investment portfolio to achieve this level of return. She should stick to a portfolio concentrated on investment-grade corporate and government bonds, with a smaller allocation to stock markets of around 35pc to 40pc.
This type of cautious investment portfolio should provide a return of around 3pc a year net of costs – enough to offset inflation. This plan ensures the money would last for at least the next 10 years after accounting for inflation.
Susan Hill, chartered financial planner at Susan Hill Financial Planning, said:
It would have benefited Ms Johnson to engage with a professional adviser at the start of the decision-making rather than part way through, as the disadvantage of selling your home is that you then need to use the proceeds to rent somewhere without knowing how long it could be for.
The Office for National Statistics says a female aged 91 has an average life expectancy of 4.3 years and at age 100 an average life expectancy of 2.2 years, so she should plan for at least 14 years to be safe.
Inflation is a stealth robber of the value of money. If rents rise by 2.75pc a year, which we have calculated for properties in Hertfordshire, the £2,000 per month becomes £2,623 in 10 years’ time.
Additionally, Ms Johnson may be healthy now but what if she ever needed to go into care? If she is living in a rented property she might have a problem with terminating the rental contract or could incur a financial penalty.
She may need all of her cash to provide for her basic needs and so cannot afford to run out of money. This removes the ability to invest in riskier assets such as shares.
Instead, Ms Johnson should consider buying back into property as this would give her a roof over her head whatever age she lives to.
Buying in Hertfordshire can be expensive, so if the money she has doesn’t cover the purchase price she should look at taking out a “lifetime mortgage” to cover the shortfall.
This rolls up the interest so she wouldn’t have to make any monthly payments. She could look at senior living accommodation, which provides the benefit of a gated community and a warden, although this type of property can be difficult to sell.
If she considers this route she should engage with a mortgage professional to help her find a suitable loan and should seek advice from a suitably qualified professional before taking any future action.