Times are volatile, but there are things NOT to do with retirement savings: Gordon Pape
We’re living through a public health crisis that has undermined Canada’s economy and made the stock and bond markets go topsy-turvy.
Noted financial author Gordon Pape, writing in the St. Catharines Standard, says that this situation is particularly frightening to those among us who are living on their retirement savings.
Protecting your health, he writes, is number one. But number two should be protecting your savings, he advises.
“Some older Canadians have a significant amount of money tucked away in their retirement plans, and they don’t want to lose it,” writes Pape. “They’re depending on those RRSPs, RRIFs, and LIFs to support them in the coming years.”
He notes that the stock market “has taken a beating,” and “there’s turmoil in the bond market,” leaving many with no idea “which way to turn.”
Don’t get frightened and put everything into cash, Pape warns. “I’d prefer to have cash reserves to cover two years of expenses and invest the rest in government-issued fixed income securities, high-quality, dividend-paying stocks, and some gold funds or stocks.”
Putting your investments in cash is problematic, he writes. You won’t earn much interest. But the return of inflation could erode the spending power of your cash, notes Pape – governments are being forced to spend more than expected during the pandemic and some economists feel we could see inflation rates of up to three per cent in just a few years.
A second, albeit unlikely scenario with cash investing is bank failure. “Don’t misunderstand me here,” he stresses, “Canada’s banks are well-capitalized and among the strongest in the world.” But there have been failures among smaller institutions in years gone by.
Be sure to take advantage of the Canada Deposit Insurance Corporation – you can put up to $100,000 per person in CDIC-backed savings accounts, so that in the unlikely event of bank problems, your money is insured, writes Pape.
Pape’s advice makes a lot of sense – he’s describing a balanced approach to retirement savings, with enough cash to cover your expenses for a couple of years, and then a mix of quality equities and government-backed bonds. For good measure, he also recommends a little exposure to precious metals.
There was a time, perhaps in the 1980s, when interest investing through GICs and high-interest savings accounts was seen as the right approach to retirement savings. But in those days, interest rates were far higher, at certain points of time reaching the mid-teens. Save with SPP remembers getting a $1,000 Canada Savings Bond that paid 16 per cent interest – and a car loan, from the bank, that cost 18 per cent interest! So the good old days weren’t always all that good.
The Saskatchewan Pension Plan’s Balanced Fund has an asset mix (as of December 2019) that features 29% bonds, 19% U.S. equity, 18% Canadian equity, 18% per cent non-North American equity, as well as exposure to real estate (10%), infrastructure (3%), mortgages (2%) and short-term investments (1%). Members who have holdings in this SPP fund are benefitting from diversification and professional investment management, with a goal of safe, low-risk growth. Check them out today.
Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing, classic rock, and darts. You can follow him on Twitter – his handle is @AveryKerr22
Today I’m interviewing accountant Dave Trahair for savewithspp.com. Dave operates his own personal finance training firm, and he is also the author of five personal finance books. He offers seminars based on his books to organizations, including CPA Canada and its provincial accounting affiliates. His most recent book is The Procrastinator’s Guide to Retirement: How YOU can retire in 10 years or less, and that’s what we’re going to talk about today.
Q: What portion of the population do you think is 10 years or more out from retirement and not saving enough?
A: It’s hard to pin it down to a specific percentage, but I would say the vast majority of people who don’t have defined benefit pension plans are in that boat. Unfortunately, this type of plan is going the way of the dodo bird, because with the low interest rate environment and what’s happening in the stock market, the people running those kinds of pension plans can’t save enough to fulfill their promise. It’s hard to come up with a precise number, but I bet you 80% of people without a defined benefit pension plan are nowhere near ready, financially, to fund their retirement.
Q: Why do you think so many people procrastinate when it comes to planning and saving for retirement?
A: Well, I think for some, it’s just that they’re bad with money, and they spend more than they make. They run on credit card debt, and they’re never really even thinking about getting their lives under control, financially. For many of the rest of us, even if we aren’t fiscally irresponsible, it’s just that life is expensive.
Think of people in their 20s who have just graduated from university. Many of them are saddled with student loan debt and they are having problems trying to find a full-time job in their field. Forget retirement savings. That’s so far down the road. They’ve got more pressing concerns at that stage in their life.
People in their 30s and 40s tend to do things like get married, have kids, and buy a house. These kinds of activities are very costly and therefore, many people find that there simply isn’t any money, at the end of the day to save for retirement. It’s not because they’re wasteful spenders.
Q: Continuing with the same theme, if you ask most people, they’ll probably tell you they’re tapped out. They don’t have extra money left over at the end of the month. Where can these people find the money to save?
A: That’s a very good question, and one of the key concepts in the book. I always tell people when I’m asked, “What’s the first thing you can do to help get your finances under control?” The answer is to somehow track your personal spending.
For effective financial planning you have to start with what’s happened in the past. That is your personal spending. Once you have a handle on where all the money went in the past, then you can take proactive steps to get your finances under control and probably find some areas where you could cut back and free up some spare cash for your retirement savings.
One of the big problems out there is revolving credit card debt. According to the Canadian Bankers Association, only about 60% of Canadians pay off their credit cards each and every month and, therefore, don’t incur interest charges. That means about 40% of Canadians can’t even pay off their credit cards, which means, essentially, that they’re spending more than they make.
Q: My first thought when I got your book was that it’s a great road map for saving in the last ten years before retirement, but the information is quite similar to most of the personal finance books I’ve read. What’s different about your book? What makes it a must-read for all Canadians and, in particular, those who are only a decade from retirement?
A: Yes, fair question. The first point that I’d make in response is that there is no magic bullet when it comes to personal finance. It’s really pretty basic. You could sum it up in one sentence.
All you have to do is live your life, spend less than you make, and do something positive with the excess money. The problem is most people aren’t doing that. There are books out there that play upon peoples’ wish to get ahead financially, easily or automatically. That’s just taking advantage of readers. The really good personal finance books out there, attack the root of the matter (as my book does) which is that your spending has to be less than your income.
What makes my books different — this one and the other ones I’ve written — is that I give away Microsoft Excel spreadsheets people can actually apply to their own situations. I use the spreadsheets as examples in the book, and then I say, “Look, go to the next step. Download the free spreadsheet, punch in your own numbers, and see what conclusion you come to about your life.”
Q: If readers are approaching retirement with consumer debt and a mortgage, where should they put their money first? Should they hold off on making RRSP contributions until they are completely debt free?
A: Good questions. I would say that it depends on the type of debt. If we believe the Canadian Bankers Association that at least 40% of Canadians have ugly credit card debt, the only thing these people should be thinking about is trying to get rid of that obligation. Forget paying down the mortgage. Forget making RRSP contributions. Even if there is a tax refund on RRSP contributions, they are effectively financing it at a very high interest rate because the alternative would be to pay down their credit cards.
There’s a chapter in the book on four people in that situation, which basically lays out the different options for getting rid of credit card debt. The problem is that it really requires a mind shift. It requires people to change their basic habits and it is really, really difficult to get them to do this.
Once a family has paid off their credit cards, the decision becomes “contribute to an RRSP or pay down the mortgage.” The first observation I would make in that case is that either option is a good alternative. You’ve got extra money, whether you pay down the mortgage or make an RRSP contribution, you can’t lose in either case.
However, with the ultra-low interest rate environment right now and assuming the person we’re talking about is in a reasonably high tax bracket, making $80,000 or $100,000 or more, it’s difficult to beat the huge economic benefit of a tax refund.
Q: To what extent should Canadians planning for retirement take future health and long-term care costs into consideration, and how can they quantify these amounts, for budgeting purposes?
A: That’s a very difficult question to answer and a very challenging thing for many people. We have provincial health plans in Canada, so we’re a lot further ahead than our neighbors to the south. The government plans aren’t perfect, but they’re a good basis for covering many of your health costs.
However, some other areas related to healthcare are not covered by the provincial plans, and this becomes a big problem for couples, say, when one of them has an ailment that requires him/her to go into a long-term care facility or nursing home. That can be very, very expensive. This is when people get into trouble with their finances due to health costs. In a lot of cases, it will be one of the spouses who needs long-term care and the other one is still living in the house, so it essentially almost doubles the family’s living costs.
Many people are able to cover the high costs of long-term care because they bought their home and own it out right. That is why I always encourage people who can afford a home to buy it and pay off the mortgage. Then you’ve got something worth significant money so you could sell and downsize or even take out a home equity line of credit to finance costs related to long-term care.
It really is an individual thing that requires a lot of thought and is difficult to pin down. It’s difficult to budget for retiree health care costs and yet the expenses can be onerous if you’re not prepared.
Q: I noticed you were recently interviewed for the “Me and My Money” column in The Globe and Mail. Your investments are very conservative – a high-interest savings account and guaranteed investment certificates. This is very contrary to what even independent financial advisors usually recommend. Why don’t you hold any equities?
A: I have no exposure to the stock market. That’s because I’m a very conservative accountant. I don’t like losses. I have spent a lot of time studying the stock market. I wrote a book on it called Enough Bull a couple of years ago.
If you look at long-term historical rates of returns, say, for the Canadian stock market, the S&P/TSX composite total return index which includes reinvested dividends, has done fantastically well — 9% per year. The problem is, for many reasons, most people come nowhere near what the ideal index has made.
That’s because they get emotional when the stock market crashes. They panic and sell at the wrong time. They sell low and buy high, which is the opposite of what you’re supposed to do. The other issue is that when it comes to personal finance, who has fifty years to go to retirement? You can’t assume that you’re going to earn the long-term, fifty year historical average rate.
I love fixed income products like GICs because they’re easy to understand; they’re guaranteed if you buy them from a financial institution, like any of the big six banks that are members of the CDIC (Canada Deposit Insurance Corporation); and, you can’t lose your money. The downside of course is they’re not paying very much interest. You’d be lucky to get about a two percent average rate of return.
The problem is most people using the recommended strategy of an investment advisor have a lot of exposure to the stock market. They think they’re making six or eight percent after fees and, therefore, laugh at GICs making two percent, but in many cases, they aren’t earning what they think they are.
Q: At age fifty-seven, you’re less than ten years from the normal retirement date of age sixty-five. Do you have a planned retirement date in mind?
A: I don’t really have a retirement date in mind. I mean, I love most of what I do. My plan is to slow down, do less hours, hopefully do some of the things I currently do, like writing and giving seminars, and earn some money doing that. I plan to slow down but I really don’t have any dreams about stopping work at sixty or even sixty-five, so again, that’s an individual choice.
Q: In closing, if you had one piece of advice for people who are ten years out from retirement, what would it be?
A: Well, first of all, I would say you have got to track your spending. I know it’s boring. I know it’s time consuming. I know not everybody is a specialist or likes dealing with spreadsheets. But that’s the most powerful information you can get because it’s personal. That’s what you need to start with: your family’s personal spending.
Q: Thank you, Dave. It’s a pleasure to talk to you today.
A: Thanks for having me, Sheryl.
This week we have a number of interesting blogs on a variety of topics relating to how you save and spend your money.
On Boomer & Echo Marie Engen asks How Safe Are Your Bank Deposits? Canada is widely considered to have one of the safest banking systems in the world. But several large financial institutions have failed in the past, so it is important to understand Canada Deposit Insurance Corporation limits for banks ($100,000/account) and provincial plans covering Credit Unions and Caisses Populaires.
Their tax saving will be used to pay down the mortgage unless they believe he markets will produce future returns of 7% or more. They will also allocate the remaining $300 per month to their TFSAs. This will give them flexibility to use savings in this account to pay a lump sum on their mortgage, top up their RRSPs or open RESPs in the future.
On Canadian Dream: Free at 45, Dave shares how he and his wife are living a (relatively) stress-free life. They live on one salary so if either of them loses his/her job they can still manage financially. The fact that they don’t have children or other dependants helps to make this a practical alternative.
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere. Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.