Why Your Grandfather Lived Off His Savings And You Cannot

Your grandfather retired on $500,000 in savings. He never touched the principal. The interest paid him enough to live on, take a holiday once a year, and leave the lot to your parents when he died.

You will not retire that way. Not because you saved less — adjusted for everything, plenty of people your age have done as well. You will not retire that way because the deal the bank offered him is not the deal the bank offers you. The same $500,000 today would pay you a small fraction of what it paid him, and you would eat into the principal to live.

This is not boomers winning a lottery. This is a structural change in what banks need from depositors. If you’ve read Money From Nothing, The Cup Of Water, and What The Bank’s Credit Card “Risk” Actually Is, you already have the mechanism. This post is what the mechanism did to your grandfather’s retirement, and to your future one.

The Deal The Bank Once Offered Savers

In 1985, an Australian commercial bank was, structurally, an intermediary. The textbook story was true then: the bank took deposits from savers, paid them interest, and lent that money to borrowers at a higher interest rate, keeping the spread.

If the bank ran out of deposits, it could not make new loans. Deposits were not a “byproduct” of lending; they were the raw material of lending. Without them, the bank had nothing to put on a borrower’s chequebook.

This meant that banks had to compete for deposits. They had to advertise. They had to send people to talk to retirees at golf clubs. They had to offer term deposit rates that were attractive — high enough to draw money in.

In 1985 in Australia, a one-year term deposit paid about 12% per year. Inflation was around 7-8%. The real return — what your purchasing power actually grew by — was roughly 4-5%.

That is enough to live on. A retiree with $500,000 of saved labour, sitting in a term deposit, was paid $60,000 a year just to keep it there. That $60,000 paid for food, the house, the holiday, and the discretionary. The $500,000 stayed intact. The retiree’s children inherited the $500,000, often plus more, when the retiree died.

That is what “living off your savings” used to mean. It was the normal, expected, designed outcome of saving for forty years.

The Deal The Bank Offers You

Today’s bank does not need your deposit.

When a borrower walks in for a loan, the bank does not check whether enough savers have come in to fund it. The bank types the loan into existence. The mechanism is the one the Bank of England documented in their 2014 paper — a loan creates a deposit, not the other way around. The bank’s lending capacity is constrained by capital requirements and demand from borrowers, not by the supply of savers’ deposits.

Because the bank no longer needs your deposit to make loans, the bank no longer has to compete hard for it. The bank does still want your deposit — it lowers their funding costs slightly, and it gives them a low-cost float to invest. But “want” is not “need.” And the price of a thing the buyer wants but does not need is always low.

A term deposit rate in 2025 is roughly 4%. Inflation is roughly 3-4%. The real return is approximately zero. Sometimes negative.

The same $500,000, sitting in the same product, at the same bank, with the same fundamental purpose — to fund your retirement — is now paying you about $20,000 a year. Before tax. Before inflation. After inflation, in real terms, that’s a few thousand of actual purchasing power, if you’re lucky.

$20,000 a year does not pay for retirement. Not in Australia. Not in 2025.

Why The Boomers Bought The Houses

This is where it gets uncomfortable for the generational discourse, because the boomers did not “steal” the housing market. They were chased into it by a banking system that stopped paying its savers.

Picture a retiree in 1995. They have $400,000 saved. The term deposit they relied on for the past decade just dropped from 10% to 6%. By 2000 it would drop to 5%. By 2010 to 3%. By 2020 to under 1%. By 2022 they were earning 30 dollars a year per $10,000 saved.

What do they do? They cannot live on it. So they look around for an asset that grows.

The asset that obviously grew, year after year, was Australian residential property. Houses had been growing 6-8% per year for two decades, fuelled (we now know) by the very same bank credit creation that had made the retiree’s savings useless. So the retiree sold the savings out of the term deposit, put a deposit down on an investment property, took out a mortgage — at a much lower rate than the bank now charges them, because they were a high-quality borrower — and the rent paid the mortgage, and the property went up.

Then they did it again with the next $200,000 they could lay hands on.

By the time the same retiree was 75, they owned three houses. Their children’s generation could not afford one.

This is not a defence of every behaviour exhibited by every boomer. Some boomers are arseholes. So are some millennials. The point is structural. The boomer-with-three-houses outcome is partly a downstream consequence of the bank’s switch from intermediary to creator — the same switch that made the boomer’s savings stop paying.

The young person looking at the boomer with three houses and feeling priced out is not wrong about being priced out. They are wrong about who priced them out. It was not the boomer. It was the banking licence that paid the boomer’s savings nothing and then funded the boomer’s property purchase at low cost.

The boomers did not steal the housing market. They were chased into it by a banking system that no longer pays its savers.

— The single sentence the generational discourse should turn on.

Who Won, Who Lost, Across Two Generations

What This Means For You, If You Are Saving Today

If you have saved diligently, working extra hours, putting money into a bank account, and watched it earn essentially nothing — you are not doing it wrong. The system is doing it to you. The mechanism that took your grandfather’s deal away is the same mechanism that means the next forty years of saving will not buy you what forty years of saving bought him.

There are individual moves to make. Holding real productive assets — equity in productive companies, real estate, gold, or your own small business — partly shields you from the loss of saver-purchasing-power. Holding cash, by definition, does not.

This blog does not give financial advice. None of the above is a recommendation. It is observation about what the structural change has done and is doing.

The right structural answer is, of course, to change the structure. The Chicago Plan, the Vollgeld referendum, sovereign money — all of them propose returning banks to the intermediary model that paid your grandfather’s deposits. Under those proposals, banks would again need savers, and would again have to pay savers what saving is actually worth. The constructive arm of this blog covers those proposals in detail. None are mystical. All have been seriously argued by mainstream economists.

Three Questions Everyone Should Ask

The savings-rate collapse is built to make these three questions impossible to dodge.

Frequently Asked Questions