Is It Time To End The “Senior” Citizen?

Margaret Wente is both enjoying the perks of her
Margaret Wente is both enjoying the perks of her “seniority” and worries that we may be undermining the future.

Over the weekend one of my clients posted an article from Margaret Wente about the many privileges bestowed upon seniors in Canada. Listing an almost unbelievable number of perks for “elderly” Canadians, which ranged from discounts at drug stores and movie theaters to government pensions and new federal tweaks to retirement programs, in every way seniors in Canada have it pretty good.

So good in fact that Margaret Wente has begun to despair. Not for herself, but for the future. The younger generation is definitely having a tougher time than their parents. And while none of this predicts that the Millennial’s will be poor, it does go to the heart of the uneven balance about finances that exists between generations.

Who has the most money and assets in Canada?
Who has the most money and assets in Canada?

One of the big changes in the federal budget was a reduction in the mandatory RRIF withdrawals that will effect everyone over 71. Putting the final nail in the coffin of the often heard and mostly pointless “RRSP/RRIF tax trap” the Conservative government has slowed the income coming to retirees from their long term retirement savings. This is being lamented as little more than “tax avoidance” for one generation by Carleton economics professor Francis Woolley, who has her own piece in the Globe & Mail about RRIF and Taxes. It’s a good read but if I may, her essential point is: “people don’t like to pay taxes.”

What’s happening is that we live in unprecedented times. Unprecedented in the life span of those living, the material wealth we have available to us, and the inverted demographics that comprise many countries around the globe. Everywhere people are richer, living longer and getting older. Many of our concerns about the economy, the cost of living, or the security of programs like CPP, or Social Security in the United States, are born directly from our success at creating a higher standard of living. Higher wages, better medicine and  a declining birth rate make us materially richer, until they don’t.

Courtesy of Gapminder
Courtesy of Gapminder

What you are looking at in the above chart is the changing nature of both Canada’s and the worlds age. From 1950 on Canada briefly saw a boom in the birth rate that has since reversed itself. The number of Canadians over 60 (the y-axis) is now better than 20% of the total Canadian population, while the number of children (on the x-axis) has been steady at about 5%.

“So, we’ll give them a little money to tide them over until they die, which will only be in a couple of years anyway, no long term financial entitlements for us!”

All the goodies that benefit the senior class of Canadians are getting more costly both because Canadians are living longer, but also because the tax-base needed to support many of those services is shrinking. But are seniors “too rich” as Margaret Wente thinks? Probably not. While Canadian poverty rates for the elderly are some of the lowest in the world, people who retire at 65 need to make all their savings last them until they are ninety, or older. You try and figure out what you are going to spend for the next 20-30 years. When Otto Von Bismark introduced the worlds first old age pension, it was for people who were 70 years old and their life expectancy was for maybe two more years. Today people retire and they live another lifetime. As we’ve previously said, when you’ve retired you’ve earned your last dollar. That can be a pretty scary thought.

The solution? There isn’t one. As I said these are unprecedented times. We still treat retirement like those who hit 65 are “old”. When my grandfather was 12 he had finished school, worked in

This book was written in 1997. 1997! It's taken 20 years for it to be relevant.
This book was written in 1997. 1997! It’s taken 20 years for it to be relevant.

a factory and eventually fought in the Second World War. By the time he was 65, suffering from lung deterioration after a life time of smoking, his face bore every year like the rings of a felled tree. My father on the other hand just had his 70th birthday and looks barely 60. That isn’t good genetics, that’s the product of good living. This trend is global, affecting everyone from China to Canada, and it will be with us for a long time. For many years people have been sounding the alarm about the demographic storm that is approaching, but such storms are slow moving. This is the beginning of a much larger set of conversations that will begin to address how we perceive retirement, savings, economic growth and government programs like the CPP. How we ultimately address and resolve the burgeoning conflicts about age and wealth will put many of us, and our retirement plans, to the test.

What Being Poor Should Mean to a Millennial

Last night I was kindly invited to speak at an event for the “Millennial Generation” hosted by AGF Investments. It was an interesting and fun evening filled with a lot of great questions and great food. But of all the questions sent to the advisors at the front of the room the question that I failed at was “what do you tell a poor client?”

Somehow this became my image of the millennial generation.
Somehow this became my image of the millennial generation.

This question took me off guard because when I looked in the room I didn’t see any poor people. I saw a lot of young professionals that weren’t yet at their peak earning potential, but that is part of growing up. These people weren’t poor, they just didn’t have a lot of money.

That distinction may seem academic to someone sitting at home on a Friday night who can’t afford to go out. After all, what is it to be poor if a lack of money doesn’t define you? But poverty is about a permanence of state, and not earning enough money can be temporary. Real poverty is about having a lack of options.

For instance, most Canadians would likely say that don’t have enough money, which isn’t the same as saying they are impoverished. It is simply a reflection of how our wants increase and grow with our incomes. In 2014 the research firm YouGov, Inc. did a survey looking for people to identify how much they needed to earn to be “rich”. Unsurprisingly as people earned more their idea of what constituted “rich” grew with their income bracket, which is why so few people self-identify as being wealthy.

Rich You can read the whole story about that from the New York Times. But for young Canadians who are fresh out of university, the climb up the financial ladder to long term wealth can seem daunting to say the least, and living in big cities can make modest salaries seem virtually impoverishing.

This place is awesome but it costs a fortune!
This place is awesome but it costs a fortune!

But that doesn’t make you “poor”.

Poor means a lack of options, or opportunities to change your situation. Well educated young Canadians in junior professional roles have lots of opportunities. But there is also a reason that we say youth is wasted on the young. Because young Canadians who don’t start saving, defer starting RRSPs and TFSAs, find that they are scrambling in their 40s and 50s to save for their retirement. They do have fewer options and are a great deal poorer for it. This isn’t a hypothetical; lots of Canadians are finding themselves in exactly this situation. Saving isn’t just about putting money aside, it’s about keeping options open in the future.

Globe & Mail Senior

The other day the Globe and Mail talked about the growth of debt among seniors, a move that was described as making seniors “Financially Fragile”. The core of investing revolves might be described as revolving around this principle: avoiding fragility. Frequently we represent investing as freeing people to enjoy their retirement on the beaches of Cape Cod, with sweaters draped over shoulders. But investing and saving is about being able to deal with all the rough spots in life.

Is this your retirement? Commercials for retirement planning frequently feature retirement as one of endless vacation.
Is this your retirement? Commercials for retirement planning frequently feature retirement as one of endless vacation.

Unexpected costs like new furnaces or car repairs can undo vacation plans and cottage retreats. Saving early doesn’t just help plan a life of leisure, it insures that your best laid plans aren’t upended by all the other things that life throws at you. It is far easier to be poor in old age once you’ve earned your last dollar than it is when you are younger and millions of opportunities await you.

So if you were one of the young Canadians worried that you don’t make very much, keep in mind that it is temporary. But if you want to avoid being actually poor in the future, start saving today so you aren’t panicking tomorrow.

Don’t want to defer your saving any longer? Drop us a message!

 

It Doesn’t Matter if There Isn’t A Real Estate Bubble

Last week I published a piece on the dangers of the housing bubble in Canada. It caused a stir with a number of clients and followed many articles over the past two years about our concerns with the Canadian economy.

Debt-Shackle-Charlotte-Bankruptcy-Lawyer-North-Carolina-Debt-Attorney

But on Wednesday I was at an industry lunch with another group of advisors talking about the Canadian housing market and was met with a curious objection over whether there was any real danger at all. Another advisor happily pointed out to me that while the indebtedness of Canadians may be high, it is still affordable, and we should be mindful of the famous investors you have been hoisted by their own doom saying petards.

While it’s true that many doom saying predictions don’t come to pass and we should be careful before signing on to one particular points of view, arguing that lots of debt is affordable and therefore no threat is similar to a drug addict arguing everything is under control because they still hold down a job. The job is irrelevant to the problem, although it’s absence is likely to make matters worse.

calgary1

This is why it is somewhat irrelevant to worry about the Canadian housing market. Whether you believe there will be a soft landing, a hard landing or no landing at all, what Canadians have is a debt problem. Only it’s not a problem because it’s affordable. Also it’s a problem.

If that last sentence is confusing, don’t worry. It sounds worse coming from the Bank of Canada, who in their December Financial Systems Review pointed out that debt levels continue to climb but the relative affordability of the debt remains consistent. And while an economic shock to the system could make much of that debt unserviceable, for now that seems unlikely. They concluded this section of the report identifying the risk to Canadians as “elevated”.

This is non-committal nonsense. In economic terms there is a bomb in the room that needs to be diffused, has no timer but will go off at some indeterminate future point. The problem is that Canadians can’t seem to help by adding more debt to the pile. In January Canadians added another $80 billion of debt through mortgages, lines of credit and credit cards, a jump of 4.6%. Our private debt is now over $1.8 Trillion, larger than our GDP. Household saving’s rates are at a five year low, 3.6%. But in 1982 the savings rate was 19.9%. In other words we’ve had a dramatic shift away from savings and towards debt.

Savings rate

While 30% of Canadian households have no debt, almost every demographic is susceptible to the growing debt burden. Even seniors have a growing debt issue. Canada is now unique in the world for having debt levels in excess of the peak of the American debt bubble in 2008, and is currently only surpassed by Greece. Traditionally I am highly cautious about grand pronouncements about market doom and gloom, but in this instance I am of the opinion that ignoring Canada’s debt problem is willful blindness.

How to best handle this problem will have to be left to others. There is no simple solution that will not trigger the bomb, and the goal of any government is to slowly reduce the average debt burden without hurting the economy or deflating the bubble. For my part I tend to advise people to pay their debts down, shy away from things they cannot afford and encourage saving rather than debt spending to limit risk. When it comes to saving for the future there is no reason to make many people’s problems your problems.

You Won’t Believe How RRSPs Can Ruin Your Retirement!

h64ocNo seriously, you won’t believe it. That’s because RRSPs really can’t ruin your retirement, and yet every year someone, somewhere writes an article about the RRSP Tax Trap! This year’s contribution is from the Globe and Mail, which was also the source of last year’s main entry (also by the same author). The argument in these articles is that your RRSPs can become a taxation nightmare, forcing up your annual income and making you pay a higher marginal tax rate in retirement than you did in your working years! Cue panic.

Wondering why you don’t hear this complaint more? Why you don’t see lots of special reports on the nightly news of some sad-sack sitting at his kitchen table opening letters and then explaining to the camera how he “never foresaw the tax nightmare he’s in” happening? That’s because this particular issue is often overlooked as being one of having too much money, and is not widely regarded as a significant problem by most people (in fact the opposite for most Canadians is true). And while it’s true that being wealthy can create more complexity in investment strategies the “mo’ money, mo’ problems” aspect here has yet to stir a vast number of people to forgo their wealth and move to a commune.

The crux of these regular articles however (the reason why your average middle class Canadian should worry) is because RRSPs don’t save you taxes, but DEFER them. This emphasis on deferral, that your taxes will come back to haunt you is the kind of half truth that the media cheaply peddles without much thought for whether it does any real harm to the investor reading the article. It’s also bad math, because in addition to the taxes you deferred by contributing to your RRSP, there is also all the taxes you didn’t pay over the lifetime of the investment.

Let’s create a simple scenario to better illustrate what I mean. Assume the following things:

  1. You are 50.
  2. You currently earn, and will never earn more than $125,000 from now until you are 71.
  3. That you contribute every year $22,000 to your RRSP
  4. That your investments will return an average of 6% per year.
  5. That you start your RRSPs at age 50 with $100,000
  6. You invest $5500 of your tax refund into a TFSA with a 6% ROI

Let’s also create a second scenario, identical to the first, but instead of saving in an RRSP you do it in an unregistered savings account, splitting the $22,000 contribution between that and a TFSA, with a taxable rebalance triggered every 5 years. In all other respects the scenarios would be identical. What would happen?

Well thanks to excel it would look something like this:

20 Year Savings Plan

That gap in returns is the compounding difference of avoiding ongoing taxes from rebalancing and investing a portion of your tax refund into your TFSA. In essence you made each dollar travel farther over that twenty years by utilizing your RRSP more than you did without out, to the tune of nearly 25% additional savings.

There are a lot of ways to play with this, with numerous avenues to improve or refine this scenario, but no matter how you slice up these hypothetical scenarios there will never be a version where having less money is inherently better than having more. Having more is the whole reason you’ve been saving in RRSPs in the first place.

h64pl

That isn’t to say that you shouldn’t be mindful of taxes in retirement, or that your retirement strategies shouldn’t include things like debt reduction or trying to maximize different investment pools, like TFSAs. It also doesn’t mean that there aren’t ways to be more sensible with your savings for retirement. What it does mean though is that realistic threats to your retirement are unlikely to come from having saved too much, and that concerns over your taxes being too high because you were good at saving your money is the literal definition of a first world problem. In short, don’t worry that your RRSPs are going to ruin your retirement when they will likely underpin a successful retirement plan.

Why it’s so hard to see a financial correction when its staring you in the face

If you’ve been following this blog, you’ll have noticed how I am regularly concerned about the state of the Canadian economy. And while I maintain that I have good reason for this; including fears about high personal debt, an expensive housing market and weakening manufacturing numbers, the sentiment of the market isn’t with me. As of writing this article the TSX is up just over 14% YTD, spurred on by strong numbers in the small cap, energy and banking sectors.

Screen Shot 2014-08-21 at 12.36.09 PM

All this illustrates is the incredible difficulty of understanding and seeing the truth in an economy. Is an economy healthy or unhealthy? How do we know, and which data is most important? Economies produce all kinds of information and it’s frequently hard to see the forest for the trees. But even with all the secrecy around the bank’s and regulators financial misdeeds prior to 2008, the writing was on the wall that the US housing market was over inflated and that savings rates were too low and debt rates too high. And while you could be forgiven for not really understanding the fine points of bundled derivates and just how far “toxic debt” had spread, it wasn’t as though the banks had hidden the size of their balance sheets or the number of outstanding loans. It was all there for anyone to see. And people did see it and then shrugged.

One of the big fallouts of the financial meltdown was extensive criticism directed at the professional class of economist and business reporters who give regular market commentary and missed the total implosion of the financial and housing sectors. After all, how good could these “professionals” be if they can’t see the financial freight train like the one that just came through? . But I would chalk that up to overly positive market sentiment. It’s not that they didn’t see the bad news, they just assumed that other better news was more important.

Look at these two articles from yesterday’s (August 20th, 2014) Globe and Mail:

Canada losing steam in its push for an export boom

&

Bump in shipping a boon to Canada

While these two articles aren’t exactly equal, (one is talking about Canada right now, the other is talking about prolonged growth of Canadian shipping over the coming decades) it’s interesting to note that they sit side by side on the same day in the same newspaper. For investors (professional and individual alike) it is an ongoing challenge to make sense of the abundant information about the markets without resorting to our “gut feelings”. Do we tend to feel good about the market or bad? Which headline should be more important? Here is a third article from the same day: (Click the image to see the full size article).

photoIts plain to see how I feel about the state of the Canadian market (and which news I place value on), but its also possible that I’m the crazy one. Lots of Canadians disagree with me quite strongly and it is shown everyday the TSX reaches some new high. Which brings us back to investor, or market sentiment. Described as the “tone” of the market, it might be better thought as human irrationality in assessing odds and errors in estimating value. Investor sentiment plays a significant role in valuing the market over the short-term, far in excess of hard financial data. And it isn’t until that sentiment turns sour that we begin to see corrections. Coincidentally, holding an opinion contrary to the popular sentiment is quite lonely, and many portfolio managers have been criticized for their steadfast market view only to be proven right after they had acquiesced to investor complaints about poor performance.

Following a correction, once the positive market sentiment has been washed away, it seems obvious to us which information we should have been paying attention to. But that doesn’t mean being a contrarian is automatically a recipe for investment success. I may be wrong about the Canadian market space altogether (it wouldn’t be that shocking), and in time I will regret not placing more value on different financial news. What is far more valuable to investors is to have a market discipline that tempers positive (and negative) sentiment. An investing discipline will reign in enthusiasm over certain hot stocks, and keep you invested when markets are bad and the temptation is to run away. Sometimes that means being the loser in hot markets, but that may also mean better protection in down markets.

Environmentalists Don’t Get Economics, and That’s Dangerous for Everyone

From the Toronto Star
From the Toronto Star

The Keystone Pipeline has enraged many people since it was first announced. Traditionally framed as a conflict between environmentalists and oil executives, the Keystone Pipeline is 1897 km of 36 inch pipe running from Hardisty, Alberta to Steel, Nebraska and for several years it has existed in limbo. Caught in the cross hairs of politicians, environmentalists, various national interests and corporations, it has been six years of waiting and becoming more unlikely that it may ever get built. A definitive win for the champions of the environment.

Or is it? In simple terms, NOT having a Keystone Pipeline does indeed impede the growth of Tar Sands industry, hampering the longer term ability to send extracted oil to be refined. But it doesn’t stop it. In fact, not building doesn’t stop the oil companies from shipping at all. The Keystone Pipeline has become a symbol of social angst about the environment, but in its place a number of much more terrible and dangerous options have been pursued. For instance, if you live int he city of Toronto you may have noticed that the CP Rail line that runs through the heart of many residential neighbourhoods is actually carrying hundreds of thousands of oil tankers destined for the same location as the proposed pipeline.

In response to constant deferral Canada’s rail lines have picked up the slack, moving as much oil around as the proposed pipe would have. This first came to my attention around a year ago at a lunch where a portfolio manager for an energy fund was explaining that even though Keystone had stalled, a new pipeline had indeed opened. The difference was that it was actually the railway system. Since then it has slowly been gaining wider acknowledgement that in place of a relatively safe oil pipeline we instead now have hundreds of trains travelling through neighbourhoods and schools and towns carrying vast amounts of highly toxic oil, among other dangerous things.

All this leads to the hard truth about difficult economic decisions. Sometimes the big bad business is still making the best decision. Opposing development, no matter how well intentioned, rarely changes the underlying needs that feed those projects. Worse still, not recognizing the economic drivers behind controversial projects like this only leads to the kind of unintended blowback that creates future messes. For environmentalists the likely outcome will have been to have slain a largely symbolic dragon, while in reality they have set the stage for future environmental disasters on a much greater scale than they had ever intended. They haven’t changed the direction of the energy market, or the need for oil. But they have undermined a good economic proposal in favour of a bad one.

Crude Oil YTD

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.