Wednesday Wealth Dilemma: Live for today.or tomorrow?

by Andrew Morris on 24 March 2010  |  8 comments
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A seemingly straightforward dilemma this week...should I splurge a £10,000 lump sum on having a good time or invest it for retirement?

A seemingly straightforward dilemma this week…..should I splurge a £10,000 lump sum on having a good time – while I’ve still got all my own teeth and marbles – or invest it for retirement, 10-15 years away?

I want everything…and I want it now

After being fiscally disciplined for far too long, the thought of splashing out £10,000 now on a few fripperies is quite appealing.

Here’s what I’d spend it on if I went down that financially frivolous route:

•  The telly is a few years old and takes up half the lounge in our small-but-perfectly-formed cottage. These snazzy new flat-screen TVs look really good and would allow us to indulge in a lot of cat-swinging….if we had one. We’ve been recommended the 37” Panasonic plasma – available online for around £460.
• A bellissimo holiday. Travel is one of our untouchable budgets anyway, but suppose we really push the boat out and sink £3,000 into a Sicilian adventure this summer, staying in accommodation a couple of rungs up from our usual rustic places and hiring a car with 4 wheels.
• I don’t drive much in the UK these days, commuting into lovemoney.com HQ by train, but the old heap on the driveway at home is over 10 years old and looks like Del Boy’s van amongst the shiny new motors in our genteel Surrey neighbourhood. How about £6,000 for a halfway decent second-hand car so that I can at least talk to the neighbours again
• We’ve just given the aforementioned lounge a bit of an overdue makeover - let’s say it will cost £540 for a couple of bits of old furniture more in keeping with our Victorian cottage than the current 1980s pine. 

Let’s be sensible

But if I stay true to my bean-counter and lovemoney.com principles, I’d stash the £10,000 away for my so-called golden years.

Read this earlier blog article for some insight into the pensions v ISA dilemma, but let’s assume I’d invest this lump sum as follows:

• £5,000 in an equity-based ISA
• £5,000 into my pension fund

Comparative returns

What would we get back from the ‘I want everything now’ spending spree?

• A better and larger picture of Spurs qualifying for next year’s Champions League…and a slightly less cluttered lounge.
• A great travel experience in Sicily, together with a bit of extra weight from all that amazing food…and raised expectations for future holidays from the missus.
• Another piece of overpriced, gas-guzzling, cost-incurring metal sitting on the drive.
• A nice warm feeling every time I walk into our lounge and see some worn old oak furniture instead of glossy pine

What would be the returns from the ‘sensible investment’ strategy?

•  £5,000 into the equity-based ISA could become £8,144* in 10 years time, when I’d be able to spend it on things more appropriate for retirement, or reinvest to generate an additional income.
• I’d get basic rate tax relief of £1,250 for £5,000 invested in my SIPP - £6,250 could grow to £10,181* in 10 years time which would provide an annual income of £509** for the rest of my life if I bought an annuity at that point. Or I could take a tax-free lump sum of up to £2,545 and get an income from buying an annuity with the balance

Assumptions: * 5% annual compound growth **5% annuity rate

The verdict

So what should I do….go crazy and live for today or squirrel this lump sum away for my semi-distant retirement years?

OK, I know I’m describing two extreme scenarios and that real life is not this polarized. Many other factors should also come into play…dependants, your health and life expectancy, other savings and investments, lifestyle needs and expectations.

But the general dilemma is worth thinking about - how do we know it’s worth being sensible and saving for the future, when we don’t know what that future might look like, whether in terms of quality of life, financial returns or longevity?

Assuming I’m still breathing in 10 years time, in theory I’d have to find an extra £18,000 from somewhere to replace the lost retirement lump sum from spending and enjoying the £10,000 today - so what should I do? And what are you doing to solve this tantalizing dilemma of living for today or saving for tomorrow? 

You can adopt our Get ready to retire or Build up your savings goals, or pose a question to lovemoney.com users on our interactive Q&A forum to help you make your own decisions - good luck! 

'It is better to spend money like there’s no tomorrow than to spend tonight like there’s no money' - P.J. O’Rourke

The small print

• Anything I write in the Wednesday Wealth Dilemma blog is my personal opinion, and not that of lovemoney.com
• I am neither qualified nor authorized to give personal financial advice
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