Good news for householders

This was part of the headline on the news after the last meeting of the reserve bank. The rest was "Bad news for pensioners"

Now why would holding the Repo Rate steady be bad news for pensioners? It can only be because they fell into the grips of a financial advisor who sold them product which produces passive income based largely on interest. A bank, for instance. Do you hear those bank adverts? "My baby", "Watch your money grow", rubbish like that?

If a bank pays you 6 1/2% interest (and most of them don't), then they are offering you zero above inflation and that means that you can't afford to draw any of the money out, because if you do you are depleting your capital.

Look at it this way. If you "invest" R1m in such an account and draw out all of the interest, leaving only the capital, then your R1m will have purchasing power of only R500 000 in 11 years' time (72/6.5 = 11, see the post on the Rule of 72). So to maintain its value it has to double to R2m within 11 years. And R1m increasing at 6,5% will be R2m in 11 years (again the Rule of 72). Get it? That's what they are offering you! Zero real return on your investment!

Don't fancy that option? Then invest in shares for dividends or property for rental. The income from these investments should grow at least as fast as inflation and that means that the underlying capital is also growing at least as fast as inflation and you have planned to live forever. Well done!


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