The Chocolate Bar Effect
Let’s say we’re working with a family on the cusp of their retirement. And let’s say their plan for a reliable income stream was to fix their portfolio into what they would describe as a safe investment – in the form of a fixed income or bond account.
Assume now that fixed income is always enough to cover their living costs at today’s prices (or even next year’s, and the year after that). In the very simplest terms: you’ll always have enough income to buy a £1 bar of Dairy Milk chocolate.
What will you do, as the years pass; the chocolate bar’s cost rises to £2, and then to £3, and then even to £4, and so on? When that happens, which it will, how would you categorise what’s happening with your money? And does it feel safe?.
The issue we’re raising here is the erosion of purchasing power during three decades of retirement, packaged in the form of a bar of chocolate.
The greatest ‘risk’ you face is running out of money. Rising prices, over three decades, will see to that result if you purely rely on a fixed income/bond retirement plan.
We say again, the greatest risk you face is running out of money. Therefore, a retirement strategy containing equities (or the great companies of the world) is a must, if you are to stand a chance of survival.
A PENSION IS A LONG TERM INVESTMENT, THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION