Cash savings versus invest. Very basic question

[angus]

My investment strategy over the last 20 years has been very basic (non-existent some might say) and risk averse. It has consisted purely of bank savings accounts (60%) and ISA's (40%). My other asset is my home, which is paid for.

Coming up to retirement age in a few years, I'm wondering if it is too later, or worthwhile, to invest any of my cash savings in something else, that would give a secure return, and is better than what I currently have. I have always been averse to risk. However, I'm somewhat exposed to inflation by relying on living off cash savings in my retirement, plus state pension of course.

What is better and safer than cash savings is my basic question?

[bluedonkey]

You have to bear in mind that generally speaking risk and return are trade offs.

Lower risk normally means lower returns.

Some financial organisations try to disguise this in packaged products but the risk will still be there. There is no such thing as a "safe" 10% return!

If low risk is non-negotiable for you, then you are limited to cash (in its various forms).

What are your ISAs invested in?

[Adamski]

Hi, one can shop around online for the best savings interest rates. Example my cash savings pay on average 4.5%. I have regular savings accounts paying up to 7%. That alone should more than cover inflation.

If you have "spare" you don't need, or don't need access to for a number of years, then open an account with an investing platform.

I started in 2018 by just drip feeding regular salary amounts in by standing order. Dip your toe in. But have to bear in mind volatility of stocks, so have to be psychologically prepared for ups and downs.

[Urbandreamer]

What is better and safer than cash savings is my basic question?

Many here see a difference between "better" and "safer".

Some accept savings that carry costs. For example gold traditionally does not produce interest, but does incurre security costs.
Others trade risk for reward. At it's most basic, this is what insurers do. They accept premiums and pay out in the event of misfortune. They make money doing so.

Personally I have a very different attitude to you. Mine is best summed up by the phrase "cash is trash". I REALLY dislike cash savings.

Better? Well financing medical research might be considered "better". Funding improvements in energy security (there was no blackout recently when an interconnector was cut, due to battery storage). There are many projects that benefit society and provide financial returns.

Safer? Well short of government actions you are right to choose cash savings.

[kempiejon]

Coming up to retirement age in a few years, I'm wondering if it is too later, or worthwhile, to invest any of my cash savings in something else, that would give a secure return, and is better than what I currently have. I have always been averse to risk. However, I'm somewhat exposed to inflation by relying on living off cash savings in my retirement, plus state pension of course.

angus, welcome to the chat.
Probably not too late, could be profitable, might be stressful, on you'll know if you have the the mindset to know if it's worth it.
You can, at the mo, beat inflation with cash. This has not always been the case. There's history to suggest over the long term investments in stocks and shares will on average beat cash and beat inflation.

If low risk is non-negotiable for you, then you are limited to cash (in its various forms).

Aye, for cash savers this might make investing in things other than cash untenable. The value of your investment can and probably will go down. I have seen my investment in some companies fall to zero with no chance of getting any of it back. With decades of investing in stocks and other equity investments I am much better off even with my failures than I would have been if I had only used cash as a store of earnings.

[vand]

The problem with someone in this situation is that they cannot afford to make any mistakes. There is the world of difference between someone who has built up an investment portfolio and gone through the ups and down along the way, and just switching a large pile of savings into a portfolio, no matter how carefully designed.

You can, and probably should do several things:

- stock to low cost passive funds
- assume a very conservative asset allocation
- cost-average in over a year or 2

There are some very good portfolio strategies that have been devised, such as the "Permanent Portfolio" which are very well suited to retirement.

None of this may be optimal, but it comes from a "do no harm" approach first and foremost. I think that only after you've been through and out the other side of your first bear market should you try to tweak your portfolio.

Another perfectly valid option is to look at annuities.

[Boots]

I think your question is quite tricky, especially as you don't say how long until retirement, or how reliant you will be on this portfolio for your retirement.

Just by coincidence PensionCraft has just released a new video on De-Risking Before Retirement. I know that isn't the question you have asked, but that is the flip-side of your question. You may gain something from watching it. I hope it helps.

[Harry23]

The problem is, there's still risks in holding cash, namely inflation as you mentioned. With the likely lower growth rate of savings accounts, will your cash savings + state pension give you the income you want? Interest rates are hard to predict, like investment gains, but have you done some future budgeting to see how much you're likely to save up by retirement age and how much income you want to draw down from it? With any type of drawdown pot (cash or investments) there's the longer-term risk of running out of money before you die, and having a costed-out plan will at least help you determine whether you're on track to meet your goals. For example, if you're planning on retiring before state retirement age you can factor that into the calculations.

I have a simple budget (pen & paper) with monthly totals for my forecasts up to state pension age (I'll extend it further at some point) and check it against actuals each month to find out if I'm keeping up or falling behind with my plans. So far (after about 20 years of this) there's been no nasty surprises and I'm still slightly on track with my plans.

[Gerry557]

What is better and safer than cash savings is my basic question?

I think you need to look at time horizons and how low you think your cash minimum needs to be, what cash might be needed over the medium term and how disciplined you can be.

So if your planing to buy a car next year keep that amount in cash or other planned spending. You also need some emergency cash 6m outgoings is usual although when in retirement some might say a year or two.

Then I'd be looking to invest the rest for better returns, you can also get dividend income in cash if you need to top up said cash holdings.

How is your isa doing? Hasn't it's performance got you wishing you had done more.

There isn't anything better and safer than cash savings, government bonds maybe. Your cash should be guaranteed upto £85k for each banking house that is registered with the scheme.

So whilst seen as safe you can get returns lower than inflation so it's not really looking that safe anymore. Hopefully you have good fixed rates and regular savings and no tax to pay.

Better is investments, you need to look longer term. The values can go up and down much more so if not disciplined you might sell at a low rather that stick things out and wait for better times. Strangely the dividends tend to be more steady.

Often the dividends tend to increase with time so keep up with inflation over the longer term.

Ideally you could reinvest some of those dividends to compound your returns. A pension might give you another option but you can only access it when of age which might not suit your circumstances.

Obviously the bigger the pots the less of an issue this will be. Having no debts is also a good start.

Come back with more info and musings

[Dicky99]

The problem with someone in this situation is that they cannot afford to make any mistakes. There is the world of difference between someone who has built up an investment portfolio and gone through the ups and down along the way, and just switching a large pile of savings into a portfolio, no matter how carefully designed.

You can, and probably should do several things:

- stock to low cost passive funds
- assume a very conservative asset allocation
- cost-average in over a year or 2

There are some very good portfolio strategies that have been devised, such as the "Permanent Portfolio" which are very well suited to retirement.

None of this may be optimal, but it comes from a "do no harm" approach first and foremost. I think that only after you've been through and out the other side of your first bear market should you try to tweak your portfolio.

Another perfectly valid option is to look at annuities.

I agree with this. Most investors approaching retirement have already developed a thick skin through bitter experience and the knowledge that when times are bad good times eventually return, but for someone unaccustomed to investing even a conservative fund could feel like a roller coaster ride.
We don't know how much the cash and ISA amounts to but if it's a largish amount the OP's circumstances probably warrants seeking the advice of a financial advisor

[Urbandreamer]

Most investors approaching retirement have already developed a thick skin through bitter experience and the knowledge that when times are bad good times eventually return, but for someone unaccustomed to investing even a conservative fund could feel like a roller coaster ride.
We don't know how much the cash and ISA amounts to but if it's a largish amount the OP's circumstances probably warrants seeking the advice of a financial advisor

I totally agree. The issue of course is that traditional cash savers have never considered using a FA.

This sort of thing is or should be, bread and butter to them. Their job is not to produce superior performance, but advise methods to achieve objectives.

As has been said, with a short timescale or very significant funds, cash makes good sense.
The longer the timescale the more things may change.

One method, recommended in the book "The 100 year life" is to work until you die. The author of that book has the attitude that you can't "save" enough to support a 40-50 year retirement. It's a viewpoint that presumes money can not itself "work". The author also seems to not understand the concept of compounding or geometric returns.

I recommend that the OP read a few books on the subject. I'd like to recommend "The richest man in Babylon".
It doesn't tell you HOW to invest. Rather it try's to explain WHY to invest. Though the book should be read as a set of fictional short stories.

[1nvest]

My investment strategy over the last 20 years has been very basic (non-existent some might say) and risk averse. It has consisted purely of bank savings accounts (60%) and ISA's (40%). My other asset is my home, which is paid for.

Coming up to retirement age in a few years, I'm wondering if it is too later, or worthwhile, to invest any of my cash savings in something else, that would give a secure return, and is better than what I currently have. I have always been averse to risk. However, I'm somewhat exposed to inflation by relying on living off cash savings in my retirement, plus state pension of course.

What is better and safer than cash savings is my basic question?

Cash (savings accounts) are just inclined to offset CPI inflation, maybe less after taxes. CPI inflation is inclined to lag other assets price inflation, technological/scientific advances are inclined to make retail items price increases more slower to increase (single man in a machine harvesting a crop that previously took a army of manual workers to harvest).

Third in cash deposits (Pounds), US stocks (Dollars), Precious metals (non fiat commodity currency), split the PM third 50/50 gold and silver. Spend using a credit card and each month sell some of whichever is most above its target weighting at that time to pay off that months credit card(s) bill.

Multiple currencies and assets collectively are more inclined to smooth the total portfolio value progression compared to a single currency/asset such as GB£ cash deposits.

iWeb brokerage (low cost), XSPX (US stock), SGLN (gold), SSLN (silver) funds.

Historically, US data, something like https://www.portfoliovisualizer.com/bac ... qeaAxCRm72 i.e. some years may see nominal value declines, but that tend to be offset by adjacent years gains making up for that (and more). For the after inflation view scroll down to the chart and tick the "inflation adjusted" tickbox.

[yieldhog]

When most people near retirement they start to concentrate on how long their savings will last. But there may be other considerations such as do you want your spouse and after they die, your children, to continue to benefit from your funds?
When I started seriously looking at my SIPP (up until then I had invested mainly in fixed income debt) my objective was to generate a total return sufficient to cover my drawdown plus an amount to grow the fund for future beneficiaries (my spouse and then my two sons).
When I started, I took out the maximum tax free amount and then established a fixed drawdown of abou 4%. I have been doing this for about 15-years now. This years dividend income will be about 7.13%, which alone should ensure a real return of 5%+. Capital value hit an all-time high this year and barring any major market meltdown should add further to the real return. Last year's real return was about 11-12%.
To begin with, I invested in far too many positions (about 50 I think) on the basis that one failed stock would not seriously hurt the portfolio as a whole. I've since reduced the number of positions to around 15. Currently these are:
AEI, BRWM, BATS, NCYF, HFEL HINT IAT,JEGI,JGGI,LGEN,NAIT,PHNX,SMIF,VSL.
I would like to simplify even further but the problem then becomes the loss of yield which might reduce the overall return to below the drawdown rate and hence errosion of capital. That would not be a big problem for my spouse and me since we have both been diagnosed with terminal illnesses(I am 77 and my spouse is 75) Hopefully we will both be in remission for a few years yet but there are no guarantees.

If you are concerned with large fluctuations in your funds then clearly this is not a portfolio for you. However, there are many investment trusts that have very long track records (over 100 years in some cases) some of which you may get to feel comfortable with. If you want to be super conservative, you might want to look at the Vanguard family of funds which can give you exposure to domestic and worldwide markets for very low fund fees and low risk. The problem is that the yields will generally be so low they will not protect you against inflation.

Do a lot of research before moving away from the safety of fixed income but I don't know enough about your overall situation to recommend anything more specific. Personally, I like investment trusts because you can often buy into a collection of decent quality equities at a significant discount to net asset value, just beware funds that use excessive leverage to enhance yield.

Best of luck with your research and investing.

Y

[angus]

Thank you all very much for the considered replies and good advice. I appreciate it.

I will need to think more on this and consider my options.

A little more detail on my situation for those who asked. I'm 7 years off retirement age. The cash savings are fairly significant, enough to generate income for a few years in any case. I have a cash ISA, currently generating 5% interest, for 40% of the total, which I continue to add to each year. The remaining 60% incurs a tax liability annually, which pains me

Thanks again.

angus

[kernelthread]

The remaining 60% incurs a tax liability annually, which pains me

You could avoid most of the tax on that by investing it in short-term gilts. The yield on those is less than on the best savings accounts, but if you're currently a 40% tax payer it may be worth it.

[kempiejon]

The remaining 60% incurs a tax liability annually, which pains me

You could avoid most of the tax on that by investing it in short-term gilts. The yield on those is less than on the best savings accounts, but if you're currently a 40% tax payer it may be worth it.

Premium bonds are tax free, a likely >3% in winnings, paid monthly, on a full holding of £50k, my unsheltered cash is in PBs plus low coupon, short dated gilts held to maturity.

[mtk62]

One thing you can be happy about.
Your safe investments have not incurred any great losses.
Most of my investment choices weren't too awful - they could have been better/smarter.
My largest loss is 80%.
I have modified my portfolio having been guided by some of the wisdom to be found on this site.

[Oggy]

My two pence.....

Cash is a waste of time. Inflation will eat it away, especially in the socialist utopia that is the UK. How much has your utility/food/council tax etc. bill risen this past year. I'd bet my house far more than any interest on the cash, and it will only get worse.

Invest in low cost global trackers - there are many, and simple to set up via a SIPP with Bell or HL or some such. Within a SIPP, HMG gives back 20% of your own money and maybe even more if you are a higher rate taxpayer. What's not to like here?

Annuity - hmmm....rates have improved but I believe you cannot pass any remaining money in the pot on if you pass on - unlike drawdown. A regular fixed income can be comforting though.

[Twitterpane]

For someone who's been relying heavily on savings accounts and ISAs, it might be interesting to look into investments that offer a balance between safety and some level of growth potential. Low-risk bonds or dividend-focused funds are often good places to start for steady returns, especially as you approach retirement.

[vand]

Thank you all very much for the considered replies and good advice. I appreciate it.

I will need to think more on this and consider my options.

A little more detail on my situation for those who asked. I'm 7 years off retirement age. The cash savings are fairly significant, enough to generate income for a few years in any case. I have a cash ISA, currently generating 5% interest, for 40% of the total, which I continue to add to each year. The remaining 60% incurs a tax liability annually, which pains me

Thanks again.

angus

Reading this back, it seems your cash is not invested in a tax wrapper. Do you have any significant savings/investments within pensions? If not this MUST be prioritized over everything - it's incumbent upon every individual to learn and understand the benefits using your pension as a tax wrapper.