Pension planning: Looking back to see into the future
We can’t see the future of our investments, but we can see how they might have done in the past
If you had invested in a savings of bonds scheme in 1983, would it still be keeping its head above water? Illustration: Getty Images
A survey published earlier this month by Bank of Ireland Life found that 95 per cent of people aged between 30 and 45 are looking forward to spending more time travelling or pursuing further education when their time comes to retire.
While that is a lovely thought, they’ll need to be able to afford it first and, to be honest, it’s not looking good for them. The same survey found that three-quarters of this cohort are pretty sure they won’t be able to live on the current State pension – which is just over €200 a week – but despite this certainty that they will be skint when they get older only half have started putting money aside for their future life of long-haul flights and life-improving literature.
But if you did have money – even a little bit – what should you do with it? People telling us what we should do with our cash are ten a penny, and banks, brokers and fund managers are all very quick to assure us that we will be better off if we entrust whatever cash we have to them. And maybe they are right. But how can we tell? It is impossible to look 20 or 30 years into the future and predict with any certainty what will become of us or our pension pot. But what about the past?
Although all the ads remind us that “past performance does not indicate future performance”, a look back to a time when politicians bugged journalists’ phones with impunity and racehorses disappeared at gunpoint may shed a bit of light on future money matters.
While rates of return are obviously important in any investment, so too are rates of inflation, so that has to be the starting point if we are going to find out what happened to the investments made 30 years ago.
So let’s start there. The annualised rate of inflation from the beginning of 1983 until this month stands at 2.9 per cent, according to the Central Statistics Office, so whatever investment our imaginary investor made back then will need to have performed better than 2.9 per cent or they will be in a very bad place right now.
The big investment for many people over the last three generations has been property. How has property fared since 1983? If we were answering this question five years ago the answer would have been “like a rocket”. We might have even capped up those three words and added a few exclamation marks into the bargain. Sadly, it is not 2008, so the returns on a modest property investment made in 1983 are not so impressive any more.
Let’s say you bought a four-bedroom house in a perfectly middle-class estate in Galway city for £58,000 and signed the papers in January 1983. The euro equivalent of that investment is €76,644. The property today is probably worth €300,000. It could be more or less, depending on how well is has been maintained and what other property is for sale in the area, but as a ballpark figure it is probably close enough. These numbers would put the annualised return on the investment at 4.8 per cent, which is not terrible. It is not, however, great either. A Dublin property may well have performed better but not a whole lot.