Investors in their fifties and over may look back with nostalgia to those heady days in the 1980’s when a simple Building Society deposit account could yield double digit returns. But do not be fooled by the apparent safety of this type of savings medium. A Building Society deposit account will protect you from capital loss, but in real terms the interest rates on offer rarely protect your capital from the effects of inflation.
Even today, current rates of interest barely covers the loss in the real value of your money and if you need that interest to live on, then you are probably eroding your capital value.
While there will always be a place for an easy access emergency fund, investing all your savings in the highest paying building society account on retirement will almost certainly guarantee financial problems later in life.
Inflation has long been the biggest enemy of everybody living off fixed income investments – and especially those who are retired and who may have no way to save in order to further increase their wealth. Never be fooled into thinking that a high apparent rate of return will provide you with what you need to live on. If nominal rates are high the chances are that inflation will be high too – eroding the real value of your money and leaving you increasingly impoverished.
Even today, the current low rates of interest barely cover the loss in the real value of your money and if you need that interest to live on, then you are probably eroding your capital value.
Whatever your investment, it is vital to consider “the total return” – that is both the capital growth and the interest or dividend yield. A high initial yield on an investment may indicate that your capital is being eroded in order to maintain an artificially high stream of income. Good quality equity investments which increase both in yield and capital value over time will always outperform Building Society rates of interest over the longer term.
Click here to view a table that provides guidance on the effect of inflation on £1,000 of capita invested over a stated period of time.
First published in March 2000 and still relevant today.