Something unexpected

If savings earned negative interest you would spend everything you earned, right?

Here is an interesting situation, almost unimaginable.

You are approaching your 60th birthday and are about to be surprised by an unexpected inheritance from a wealthy relative that you barely remember.

Many years ago your great Aunt who you only remember as being rather odd, left you some money. She stipulated that you could only access the balance of the funds when you are 60 years old, 40 years on from when the money was deposited.

The good news is that the initial capital she left was $10 million, a huge sum even if nobody quite knew how she came to be so wealthy.

The bad news is that the $10 million capital was poorly invested and has lost value to the tune of 1.3% a year. Not only did you have to wait 40 years to be rich, but each year there were 1.3% fewer funds.

Still, in a few months time when you reach 60 there will be a bank cheque for $6 million in the post, more than enough for a world cruise or two and an unexpectedly luxurious retirement.

Your younger brother was less fortunate. The dowager only bequeathed $1 million to him under the same rules. He has to wait longer for his funds and gets a much smaller cheque of $593,000. This is still a tidy sum for sure but not enough to fund his retirement.

Your three cousins, who soon find out about the unexpected inheritance, were also hoping for something from this distant relative that they only just realized they had. Sure enough she did not forget them and deposited $100,000 each for them in the same poorly chosen investment. When they reach their 60th birthday they get $59,250 — certainly better than a kick in the teeth but hardly a pension fund.

On the first of your world cruises, you mull over the odd situation of financial capital failing to appreciate. What if your retirement savings, that before your great slice of luck were your only means of support in old age, were being eroded at 1.3% a year?

Each year the amount you had saved up went down a bit, not much admittedly but it went down. Likely you would seek to reinvest your capital quick smart rather than run the risk of not having enough funds for your retirement.

And what bad news it was for your brother. If he had known about that $1 million all those years ago and invested it wisely he would have more money than you right now.

As you sip a G&T on the sundeck you can’t help thinking it funny what we take for granted.

And here is another unimaginable thing.

Soil scientists have estimated that the amount of carbon in agricultural soils in Australia has declined by 51% in the last 40 years — that is 1.3% a year.

Soil carbon is a critical environmental asset that drives plant growth because carbon fuels soil biological activity, promotes soil structure, aids infiltration and moisture retention, and supports nutrient exchange. It is a very handy material to have and not something to be squandered.

What is worse is that science has little idea about the initial carbon stocks [the capital]. It might have been the equivalent of $10 million in which case we can keep going for a while. We might even have time to reinvest by adopting smart agricultural practices and get the capital to appreciate again.

The worry is that we may be as uninformed and as poorly off as your cousins.

 


The original scientific reference

Zhongkui Luo, Enli Wang, & Osbert Jianxin Sun (2010) Soil carbon change and its responses to agricultural practices in Australian agro-ecosystems: A review and synthesis. Geoderma 155 (2010) 211–223.

 

 

 

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