MAGICAL INTEREST REVISITED — BEWARE OF MAGIC
(Investigator 174, 2017 May)
Personal Finance Writer Anthony Keane has criticized the Federal
Government's recent idea of giving people who don't own a house access
to their superannuation money to use as a house deposit.
He calls it a "super-silly idea" because spending one's super now would
put a huge "dent" in the future wealth of savers by reducing the effect
of "the magic of compound interest".
Keane considers the case of a 20-year-old whose $20,000 in a
superannuation fund compounds at 7½ per cent yearly. In 50 years
he will have $841,000!
Wow! Who wouldn't want to have $841,000!
Previous comments about "Magical Interest" were published in
Investigator Magazine #39 and
The problem with magical interest is that it might be thwarted by an
opposing magic called "inflation".
Let me get personal here and share my experience. It covers a similar
period as Mr Keane's example — i.e. almost fifty years.
In 1969 my
mother remarried and sold her house. I argued: "Keep the house and rent
it out; that way we won't lose even if Australia experienced rapid
inflation." My mother ignored the possibility of inflation and said
it's easier to let her money grow in the bank. Then, if her new
marriage were to fail she would have more money and can purchase a
better house than the one sold.
Six years passed and the oil crisis that began in 1973 changed finances
and values of assets worldwide.
The $5000 from the 1969 house-sale compounded to about $7000 in 1975.
Some people might consider this to be "magical" except for the fact
that the price of an equivalent house had increased to $18,000. Today
the same property is worth about $350,000.
My mother never did buy her better house. But she learned her lesson
and invested in properties. One vacant block of land she purchased for
$6000 in 1982 sold for $12,000 in 1984. Another purchased in 1990 for
$5000 sold for $55,000 in 2008.
The above comments do not constitute advice to invest in property as
that could go wrong too. You've probably, for example, seen news
footage of houses collapsing into the ocean or down a sinkhole — events
that insurance may not cover! The point I'm making is that we cannot
control the future and things sometimes go wrong quickly — much more quickly than 50 years!
We do not even know what level future inflation will reach. What if in
50 years the $841,000 postulated by Keane as a magical jackpot happens
to be the price of a loaf of bread? That would be a disappointing
result, and more so if one paid rent for 50 years in preference to
buying a house.
Also affected by inflation, besides superannuation, are investments of
cash. These may attract establishment fees, commission, maintenance
fees, financial adviser fees, government charges, and taxation.
Sometimes fees together with inflation can dent the value of
Don't put all your trust in magic but consider your options carefully.
Keane, A. Home ownership scheme simply a super-silly idea, Sunday Mail
2017, March 19, page 72
Magical Interest, Investigator
Magazine #39, pp 9-11; #40, pp 4-5.
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