Competing for Investment

Stephen will be retiring in five years' time and is reviewing his investments.

In addition to his company pension, he has built up investments in shares and savings accounts worth 120,000. The current income from the investments is about 8,400 per year. Stephen is not happy that this will be enough and feels that 10,000 income per year is needed to meet his requirements.

What options are open to Stephen?

There are a great number of possible alternative actions he could take in terms of buying and selling investments. But his possible actions boil down to two main alternatives:

• save more, increasing the amount he has invested

• seek a higher return on the money he has already invested.

His current rate of return is seven per cent per annum (8,400 120,000 100). So, if he wants an income of 10,000 per year, at seven per cent he must invest around 143,000 ( 10,000 0.07).

If he is able, he would much prefer to get a higher return and have more money to spend. For 10,000 income from savings of 120,000 he would need a return of 8.3 per cent per year.

Your company is competing with other companies for Stephen's money. If you can offer Stephen a higher return, then he will invest with you.