personal investment blog

Investing for our old age

Investing for our old age

16 Jan 2017

Here are two pieces of great news for the citizens of relatively rich, relatively developed, relatively Western economies. Women can increasingly combine career and motherhood rather than having to choose between them: and improved healthcare (if not exercise and diet) mean that people on average are living to greater ages.

Fifty years ago, the UK average birthrate per woman was 2.9 (over her fertile life, not per pregnancy, obviously). Now it is 1.8. No doubt this is down to a combination of reasons which you can work out for yourself.

Given that medical science has not yet worked out how to allow men to give birth you might imagine, if the UK’s experience is typical, that in the long term the global population will decline, on the rough basis that each woman should on average have two babies to replace those falling off the perch at the far end of life’s journey. Were it not for the fertility of some African countries, where birthrates of >5 per woman are quite common, mankind might become an endangered species. 

According to the World Bank, the average fertility of women in the world was 2.5 in 2016 and the necessary “replacement rate” is 2.1. So the human race looks as if it will walk on for a while. Yet the story for developed nations is quite different.


France (2.0), the US (1.9) and the UK (1.8) are doing their best (all, note, countries with histories of racially diverse immigration). The EU, which only promotes immigration from within itself, is overall at just 1.6 and Germany (1.4), Italy (1.4) and Spain (1.3) are below average. China, just unwinding its one child policy, is at 1.6 and Japan, perhaps the world’s most notorious ageing nation, is at 1.4.

But the populations of established nations like the US, Germany and the UK are certainly not declining yet. Instead we have decades ahead in which the population will continue to grow but will age significantly. This is important for all kinds of financial reasons, none of them good.

The last time that the fertility rate in the UK was at the “replacement rate” of 2.1 was in 1972. At some point this should feed through to a decline in the indigenous population: perhaps when the 1972 generation starts dying in large numbers.

According to the Office for National Statistics (ONS), between 2015 and 2030 the UK population will rise from 65.1 million to 71.35 million. Of these extra 6.25 million people, more than 5 million will be net additions to the age group of 60+ (I hope to be one of them myself). Net additions to the major earning and taxpaying years of 30-59 will be 292,000 or a mere 20,000 per annum.  

I have extracted two lines from the ONS population forecasts. They show the annual changes expected in the two age groups, 30-59 and 75+. (Note that these are net additions i.e. it is the number of people who become 30 minus the number who become 60 and the number who turn 75 minus the number of people who turn dead).It seems that 2017 is expected to be a noteworthy year in which around 100,000 people join each category. After that, it all goes significantly unfavourable from an economic point of view. From 2023, the population in the 30-59 range will be declining year by year.  


This should perhaps be the most important political issue of our time but you will do well to hear it discussed by anyone who needs to run for election.

As we are not running for election we can move straight on to the investment implications.


Let’s get housing out of the way first. 75% of UK citizens over the age of 65 own a property. Assuming that the government doesn’t completely cave in over inheritance tax and allow any amount of wealth to pass from one generation to another (thereby taking us back to Victorian times), there is going to be a flood of homes coming up for sale (either sold by people downsizing or by their executors who will often be facing HMRC demands for hundreds of thousands of pounds in cash).

Go back to the chart above. Assume for the sake of argument that everyone downsizes at the age of 75. In 2022, 75% of 336,000 people will be downsizing. That’s 252,000 people who, we can assume, mostly own houses as couples. On that basis there will be 126,000 properties for sale from this source and another 100,000 the next year. That is, unless prices start to tumble and vendors begin to panic, in which case there could be a whole lot more.

We can say with some confidence that the vast majority of buyers of family homes will be aged 30-59. They will be a shrinking group. They will be paying interest on student loans and being asked to fund the needs of the rapidly growing retired class. Average house prices were once 5x average earnings but are now 10x. A reversion to mean seems possible if not probable.

My message to today’s newly issued adults is – be patient and when the time comes be mean. It could be one hell of a buyers’ market. You should have seen how badly behaved your parents and grandparents were when the market was going up (and up).


People over the age of 75 spend less and cost more. Around 89% of retired people receive more in benefits than they pay in taxes (including indirect taxes). In 2013, the over 75s on average spent £15,900 a year compared to £44,100 for 30-49 year olds.

In 1997, 46.7% of households received more in benefits than they paid in taxes. In 2015, this group had become the majority (50.8%). Which raises the interesting question: is it the primary responsibility of a government to look after the recipients of benefits or the funders of benefits? 

But if you think we have problems with pension liabilities, and health and social care for the elderly now, we are living in a time of plenty compared to what seems to lie ahead.

I have reproduced the last chart but substituted new additions to the 60+ age group for the 75+ age group. The 30-59 line is of course the same.



Everyone over 60, on average, will spend less and pays less in tax than those in the 30-59 range. Each year until 2030, on average, the 60+ group will grow by 336,000 compared to 20,000 for the 30-59ers.

Fortunately, there is only one Chancellor of the Exchequer and it’s not me (and probably not you – but hello Philip, if you’re reading this) so we can wait to see what he (or in the future she) comes up with. But a budget crisis affects us all.


It is of course not a secret that we face an ageing population and many people have pointed to the experience of Japan where the fertility rate has been below 1.5 since 1995 and the population has actually declined since 2010. In 2014, 12.5% of the population was 75+ compared to 8.1% in the UK. Japan’s GDP has hovered around 1% for around 25 years. Its monumental national debt is financed by savers – presumably mostly old – who buy government paper at minimal or even negative interest rates. More recently, the Bank of Japan has stepped in with its own version of QE and is now the biggest owner of its own government’s debt.

If this is signalling the way we are heading, we are going to have to get used to historically low GDP growth and we can stop waiting for a significant rise in interest rates. Personal debt will continue to rise and savers will continue to moan.

The low spending or even hoarding behaviour of older people will also carry on. Keynes wrote of the paradox of thrift, by which economic nervousness causes people to increase saving which in turn depresses the economy which causes more nervousness and so on.

As an investor, the first message I take is that I will not build my portfolio around the assumption of higher inflation and higher interest rates. It may happen, but one should bear in mind that it is much harder to construct an investment portfolio around lower growth and continued deflation and you will probably never hear a professional investment adviser pushing that as a strategy.  

Much of the comment about the implications of changing demographics has focused on how unfair it is that the financial burden of the baby boomer generation will fall on its children and grandchildren. The title of David Willetts’ book, “The Pinch: How the Baby Boomers Took Their Children’s Future – And Why They Should Give It Back” says it all. Unfortunately, saying that it’s unfair is one thing and doing something about it is something else.  “Unfair” and “Give it back” are examples of playground language, not often heard in considered discussion.

One development that I expect, though I am not sure how it will go about it, is that the government will try to get older people spending. One way would be to charge them for things that are free now though, given the laudable propensity of older people to vote, that seems improbably brave for a politician.

A better way, though many people are incomprehensibly (in my view) hostile to this idea, is to tax inherited income properly. This would be a good incentive for the old to adopt more of a “you can’t take it with you” attitude.

I am trying to build a portfolio of shares in companies that should benefit from spending by older people. The point has been well made by people like Merryn Somerset Webb and Paul Hodges that businesses make remarkably little effort to attract the spending of the fastest rising part of the population and are far too obsessed with fighting over whatever passes for the disposable income of the young.   

I have picked these three shares (I need more).

McCARTHY & STONE (162.5p)

The demographics in favour of this, the UK’s #1 builder of retirement homes, are so favourable that it is quite laughable. There will be more than 100,000 people joining the 75+ age category every year  The total number of retirement units in existence is 141,000.

It is a fair bet that the average price of retirement homes will do better than average property overall. According to McCarthy & Stone the average price of a retirement unit rose from £70,000 in 1997 to £259,000 now. That’s +270%. According to the ONS the average UK property has risen by 234% over the same period (£65,000 to £217,000).

McCarthy & Stone’s target is to build a mere 3,000 new homes a year.  Following its latest IPO in November 2015 it has net cash on its balance sheet, it can finance growth from cash flow and pays a dividend (2.7% yield). It is tempting to ask what could possibly go wrong.

An answer to that question is partly provided by the history of the shares since it was offered for sale at 180p 14 months ago. On the first day of trading it closed at 207p. Notice that it is now (163p) below both those prices.

McCarthy & Stone was previously stock market-listed until it was bought by a consortium headed by HBOS in 2006. That name and that date tell us that the company was highly geared and now owned by a bank that was spectacularly wrong about the state of the property market and appropriate risk. HBOS was then rescued by Lloyds which in turn was rescued by the government and McCarthy & Stone ended up, in 2013, being bought by a consortium headed by Goldman Sachs.

This consortium re-floated the company in 2015 and unloaded £246m of stock in the issue (at 180p per share). Barely six months later, the consortium sold another £200m of stock at a price of 235p a share.

There is a view held by some that you should never buy anything that Goldman Sachs (aka the Great Vampire Squid) wants to sell. These cynical types were vindicated a few weeks later when McCarthy & Stone warned that the “uncertainty” caused by Brexit might cause it to miss its forecasts for the year. Given that this happened a mere five days after the result of the referendum was known, the stock market understandably feared that “Brexit uncertainty” was a euphemism for “management cock up”. By 8th July those shares that had been placed on 27th April at 235p were worth just 143p.

As it turned out, the financial year to August 2016 held no further terrors. The company talked of a more “measured” approach to investment due to the threat of Brexit but it has more than four years of land for development and it is being successful in selling out new developments off-plan. The share price reflects continued mistrust in the management which is understandable but the scope for screwing up looks limited, given the demographic impetus, and with minor reservations I am buying the shares.

SAGA PLC (192.3p)

Saga, which specialises in insurance and travel for the over 50s, is increasingly looking at covering the waterfront for services for older people. Its “emerging” businesses include financial services (including share dealing) and homecare.   

Since its IPO at 185p in May 2014 the shares have been enjoying an extended nap. The obvious reason for this is that a 68% shareholder, a private investment vehicle named Acromas, has drip fed its entire holding into the market through secondary placings, at prices from 185p to 205p. The last huge slug (32%) was sold in April 2016 at 195p. This must have hung like a cloud over the share price but it should be dispersing.

There has been nothing obviously wrong with the results since the shares were listed. Free cash flow easily covers the dividend and at today’s price the shares yield a friendly 3.9%. This looks like a buy for the long term. Who knows, this year might even see the thrill of a share price increase.

PETS AT HOME (236.2p)

It seems probable to me that as the number of older people rises, pet ownership will go in the same direction. It is not patronising to say that responsibility for caring for tame animals can both improve the quality and even extend the lives of the elderly. If you doubt me, read the superb book Being Mortal by Atul Gawande.

My own observation is that many people will more readily spend money on their pets than they would on themselves. Established retailers of household and human goods (I’ve just invented a new retailing category) will struggle to achieve operating margins of 6% (food supermarkets will be lower). Pets at Home trots along awfully well with margins of 12-13%.

The IPO in March 2014 priced the shares at 245p. Despite basically sound results and a raised dividend, the shares trade slightly below that price nearly three years later. Around 6% of products are purchased in dollars which might squeeze margins slightly. More puzzlingly, the company in its first half results last November, mentioned Brexit as a possible threat to the UK economy. Not only does this not appear to have happened yet but pet care does not look particularly vulnerable to “economic uncertainty”.

Pets at Home is comfortably the UK market leader and is basing its strategy on the more developed US market where there are 0.46 dogs or cats per person compared to 0.28 in the UK. You might not be surprised to learn that North American pet owners are bigger users of higher nutrition food and grooming services.

For a market leader in a sector with such solid growth prospects, a dividend yield of 3.4% seems generous. The dividend is easily covered by free cash flow and looks set to grow. This is another share to tuck away in your cosy financial basket.  



One comment

  1. Cherith /

    I work with people who are sometimes 40 years older than me, and am 52. Even in their 90′s they never consider themselves old.
    I have three adult children and I know of many who are aged 20+ whose parents are paying their rent and general living costs. So, in effect those 50-somethings are spending still.
    People love to shop, regardless of how old they are and there is a fantastic retail industry out there. I would invest in that!

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