Canadians Losing the Battle to Save For Retirement

Money WorriesPeople sometimes ask why I seem to be so focused on housing and its costs as a financial advisor, and I think the answer is best summed up declining rates of RRSP contributions. Currently many Canadians seem to be opting out of making a RRSP contribution this year, with both Scotiabank and BMO conducting separate and disheartening surveys about likely RRSP contribution rates. Unsurprisingly the answer most Canadians gave to why they would not be contributing this year was because they “did not have enough money.” These surveys also found that 53% of Canadians did not yet have a TFSA either for similar reasons. The expectation is that by 2018 Canadians will have over a trillion dollars of unused contribution room.

These kinds of surveys invariably lead to a kind of financial “tut-tutting” by investment gurus.

As one member of BMO’s executes put it, an “annual contribution of $2,000 to an RRSP… costs less than $6 per day.” which is true but does not really spell out a viable path to a retirement, merely the ability to make a contribution to a RRSP. While there is nothing wrong with the Gail Vaz-Oxlade’s of the world handing out financial advice and directing people to live debt free, Canadians simply do not live in some kind of financial vacuum where all choices boil down to the simple mantra of “can I afford this?” Frequently debts are incurred either because they must be (educational reasons, car troubles, etc.) or because it is not feasible to partake in an economic activity without taking on debt (like buying a house). Similarly it is not practical to assume that every decision be governed exclusively by a simple weighing of financial realities. It’s true it would cost less to live in Guelph, but many people do not wish to live in Guelph and would rather live in Toronto (Nothing personal Guelph!)

What we do have though is a precarious situation where the economy is weak (but maybe improving), which sets government policy through low interest rates. Low interest rates means borrowing for big ticket items like homes in places where supply is limited, like the GTA, or Vancouver or Calgary. This in turn keeps both house prices and debt levels high. It’s telling as well that a growing number of Canadians are beginning to look at their homes as a source of potential income in retirement. All of this seems to be happening while different financial “experts” argue whether the Canadian housing market is actually over valued, or not

This is where I get a chance to make a personal plug for the benefits of my role. While I don’t have much say in government policy, or even directing housing development in big cities, it is rewarding to know that financial advisors like me have a significant impact on the savings rates of those Canadians that work with us. A study called Value of Advice Report 2012 reported that Canadians that had a personal wealth advisor (that’s me) were twice as likely to save for retirement, and that the average net worth of households was significantly higher when they had regular financial advice from an advisor (again, me). The RRSP deadline this year is March 3, so please give me a call if you haven’t yet made your RRSP contribution. 

The Debt Ceiling Is Pointless

From the Washington Post, Tuesday February 11, 2014
From the Washington Post, Tuesday February 11, 2014

It would seem that the Republicans in the United States have been largely de-fanged when it comes to using the debt ceiling as a political lever. Yesterday Republicans agreed to a ‘clean’ debt ceiling vote, meaning that there were no poison pills for Democrats to swallow, and that political fighting and decisions would have to happen without the threat of a total global economic meltdown.

But the debt ceiling need not exist at all. As you may know, there aren’t any other major economies that have “debt ceilings” – instead the debt ceiling was a by-product of America’s involvement in the First World War, when Congress (the group authorized to allow for debt) needed to give the treasury room to borrow. The solution was the Debt Ceiling that we know today.

But the debt ceiling isn’t helpful and doesn’t do any of the things that people intend it to do. For instance, as a way of stopping or limiting borrowing it doesn’t work. Most of what the treasury is paying goes out automatically, like paycheques and benefits. Stopping borrowing doesn’t eliminate the debt obligation, it just puts you in default.

As a method to improve the financial health of the United States its hard to see how breaching the debt ceiling would improve the American economy. Far more likely it would tank the US and much of the global markets.

As a tool to fight for social change it is dangerous and undemocratic. The financial responsibilities of the United States sit on both party’s shoulders, not just one.

Lastly, the debt ceiling has prevented more useful conversations about how to help the American economy where both parties had something to offer. Have a look at this video by historian Niall Ferguson from 2011. The economy has improved since then and the economic outlook is better than before, but it is telling that the debt ceiling offers us little and distracts people from more useful political solutions.

It’s time to get rid of the debt ceiling.

It’s Official, Young Canadians Need Financial Help

I thought I had more saved!It must be terribly frustrating to be a twenty-something today. It’s hard to find work; you probably still live with your parents and a whole culture has developed around criticizing your generation. But beyond the superficial criticisms directed at twenty somethings, there are structural shifts going on within the economy that are making paupers of the next generation.

Some of these shifts do extend from things like a lack of good paying jobs in manufacturing and an increasingly reliance on service sector jobs. There are many university graduates that now find themselves in work that they are overqualified for and underpaid in. But some of the changes also come from an increasingly high cost of living that is making it financially untenable to move out of a parents’ home. This phenomenon has been dubbed “boomerang kids”, or “boomerang generation.”

The challenge that the Millennial generation is facing is that costs are rising as a proportion of their income. Consider the cost of a house in Toronto. In November of this year the average cost of a home sold in Toronto was $538,881, up 11.3% from November of last year. Assume you make the minimum downpayment to get a home, 5%, your downpayment would then be $26,944 (roughly).  Your monthly payment on a 25 year fixed rate mortgage would be $3,077 per month, or close to $36,924 per year. If we factor in real-estate tax and an average heating cost, that would bring annual costs to roughly $43,000 a year. That would mean that to qualify for the mortgage with a bank you would need to be earning at least $134,375 before taxes. The average income in Canada is $47,000.

We can quibble about how accurate these numbers are, but it would still amount to the same end. It costs a lot today to be like your parents. Buying a house for the first time is incredibly expensive and forces young people to make different choices about how to spend their money. For many millennials this has meant “postponing” growing up, financially as well as spiritually. But what today’s young generation actually need is a working budget that lets them get a big picture of their spending and allows them to set and reach financial goals. There are free services, like Mint.com (which I am very much in favour of), but even better is that young people should be encouraged to seek out professional financial help. People with a small amount of savings often feel discouraged about seeing a professional, but getting this guidance early on can lead to significantly better financial outcomes, comfort with the markets and wiser tax efficient planning!

Want to discuss your future planning?

That Latte Makes You Look Poor – Great Advice for Young Investors

full-leaf-tea-latte

In the long fight to encourage people to save money, there is a theory that the money we fritter away on small treats is actually bankrupting us. Coined “The Latte Factor” by David Bach, a personal finance guru formerly a Morgan Stanley broker, it caught on like wildfire after he appeared on Oprah in 2004. Already the author of the popular book Smart Women Finish Rich, David’s idea was that the small expenditures on things like Starbucks lattes, the occasional lunch out and other “treats” that we give ourselves were bankrupting our future.

But the devil was in the details. According to author and former personal finance columnist Helaine Olen, David Bach’s latte factor wasn’t true:

 It didn’t work mathematically. It didn’t work in terms of what we were actually spending our money on. And it didn’t take into account what life costs were actually rising or falling.

– From Pound Foolish: Exposing the Dark Side of the Personal Finance Industry

As the reality often is with personal finance gurus, they need a hook, and Mr. Bach had a great one with the “Latte Factor” (a term he’d trademarked no less). But to make his numbers more impressive he would fudge them and round up, forget inflation and taxes and grant a very rosy investment picture so he could demonstrate his luxury cutting routine could equal millions of dollars saved.

But while Helaine Olen may have sussed out Bach’s faulty math, I don’t think the idea is a total waste.

Lots of 20 and 30 somethings struggle with saving. Retirement seems so far away as to be in another galaxy. Debt is normally quite high, either because of student loans or because of mortgages and new families. In other words lots of money is being funnelled into cost of living and debt repayment and little money finds its way into direct investments.

But lots of young people do drink lattes. And go out on the town. And eat out. In other words people between the age of 20 to 35 do have lots of money that is being spent on small luxuries. Getting a hold of those costs could easily lead to small, but incremental investments.

Now is the time to turn away from flash finance gurus like Mr. Bach and towards the steady hand of  David Chilton and his seminal book The Wealthy Barber. 25 years after it was first published it still has some of the best advice about saving that anyone can take. Pay yourself first! Set up an automatic withdrawal on your pay-days and put it into your RRSP or TFSA. You won’t notice its even gone, and you’ll thank yourself later.

Need help getting control of those little luxuries? Check out mint.com – a free site that can help you budget, or give us a call to discuss some easy ways to save.