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We’re turning Japanese, I really think so

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The headline in the Financial Times said it all: Britain’s over‑50s rethink plans as virus takes toll on retirement.
 
And while I’m not – for obvious reasons – seeing as much of my usual circle of friends, family, acquaintances, and fellow-villagers, those sentiments certainly do sum up the views of a good number of the people with whom I am in touch.
 
Covid-19, in short, has called into question many of the assumptions on which many people’s retirement plans were based.
 
For the foreseeable future, we seem to be heading for an era of higher taxation, lower investing returns, and greater job insecurity.
 
Which isn’t a great backdrop to an idyllic retirement. Forget strolling hand-in-hand along tropical sun-kissed white sands – the sort of irritating image that always seems to accompany retirement-focused financial products and media coverage. Right now, some people will be worried that Morecombe on a wet November afternoon might be a stretch too far.
 
But in fact, my view is that things are probably rosier than they imagine.

Spend! Spend! Spend! Not.

Lockdown did something remarkable for Britain’s consumers: it got them to stop consuming. And in particular, to stop funding that consumption through debt.
 
As I’ve remarked a couple of times in recent months, household balance sheets improved markedly post-lockdown, with bank balances swelling and credit card debt being paid off.
 
According to UK Finance, the banking trade body, credit card debt balances fell from £69.7bn to £59.8bn by the end of May. Deposits in banks and building societies rose by £37.3 billion in April, following an increase of £67.3 billion in March.

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To be sure, some of that was down to people being cautious: these were – and still are – uncertain times. But a lot of it was down to something more fundamental: with shops, hospitality venues, cinemas and sports grounds all shut, there wasn’t nearly as much on which to spend money. And forget blitzing it on exotic holidays: they weren’t on offer, either.
 
Simply put, Britain was saving. At the end of the second quarter, the official Bank of England household savings ratio – the proportion of earnings saved rather than spent – hit a remarkable (and record) 29%, according to figures recently released. As a guide, it’s normally around five percent.

Turning Japanese

Several things stem from this.
 
First, Britain is re-learning (if sometimes reluctantly) the virtues of thrift. The FIRE (Financial Independence, Retire Early) crowd would be proud of us: what they’ve been preaching for years has suddenly become a lifestyle du monde.
 
Put another way, we’re seeing how much we really need to live on. And it’s likely to be a lot less than many people imagined.
 
Put another way still, those in work are seeing just how much it is possible to save. Even those who have prioritised paying off debts are going to run out of debts to pay off at some point: enforced saving will follow.

Granted, that too won’t last forever – although it will likely last for as long as pubs, restaurants, shops and cinemas continue to feel unsafe. And by then, the consumption compulsion could be seriously weakened.
 
And put yet another way still, consumption-mad Britain is going to look rather like Japan, where stoically high savings ratios have for years been the post-war norm. (Hence this article’s title, by the way, for anyone who isn’t a fan of The Vapors’ 1980 hit.)

Opportunity knocks

What are we all going to do with these savings? Stick them in savings accounts earning less in interest than the current rate of inflation?
 
Some people – perhaps many people – will do this, I’m sure.
 
But a smarter option is to invest those savings in the stock market – particularly now, when share prices, as I’ve observed several times in recent months, are significantly depressed.
 
How soon the FTSE 100 will get back to a level of 7,500 or so is anyone’s guess – but as I write these words, it’s still below 5,900.

What difference could that make to the prospects of a comfortable retirement? Well, for a 50-year-old starting now and retiring at 67, saving an extra £400 a month over that period, and assuming a relatively undemanding return of 7% a year including dividends, that puts an extra £141,729 in the retirement pot. Save a bit more, get a better return… and the pot will be even bigger.

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