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July 2, 2015 | Happily Ever After

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

KIDS modified

Donna’s husband died fifteen years ago. Smoker. “Too early,” she says. “He never listened.”

Sam left the house and fifty thousand in RRSPs, so Donna – with only her government pension – invested the rest for a monthly income stream. Grand total: $425,000. “Don’t take any risks,” she told the advisor (whom I know). “I can’t afford to lose a cent.” But it seemed like a big pile of money to her, so she rented a nice place and drew off $2,500 a month – from a portfolio making just 4%.

For seven years he told her to lighten up. For seven years she would not. “No way,” Donna said, “will I ever outlive it.” Then 2008 happened. Her portfolio dipped by a third (while the stock market sagged 55%). Against the advice of her guy, she cashed in, crystallized the losses and put the remainder – now less than $200,000 – into a savings account at the bank. “Good move,” [email protected] told her. Her plan was to keep it safe, and dip as required

Last year Donna, now in her early eighties and quite healthy, ran out of money. The savings account is empty. Credit cards are maxed. She has to move into the kind of place she thought only downscale people lived. “I guess I am one,” she said this week when she called for help (her son reads this pathetic blog). It was wrenching when she cried.

Her mistakes were simple and common. Donna thought losing money was the greatest risk to guard against. It wasn’t. She allowed her emotions to overrule logic, selling at the worst moment. And she didn’t trust anyone with her money as much as herself. Now she’s old and poor.

You can be young, impoverished and happy. But never so at the end of your life.

This is sad, but destined to be common. There are over nine million Baby Boomers in Canada, and more of us turning 65 every year than at any other time in our history. Some are rich – about 5% of the cohort has a million in addition to their real estate. Most aren’t, with seven in ten devoid of corporate pension plans, the bulk of their net worth in real estate, and scant financial literacy.

This might not be a serious problem if we weren’t at a dangerous point in the economic cycle. But, alas, the perfect storm is gathering. Peak house means more and more net worth has been sucked into a single asset, even as the economy slags. Interest rates will be rising in the years ahead, impacting the market, reducing equity and scaring off buyers. Commodity prices have slumped, with oil back at the mid-$50 mark and a 79-cent dollar. The savings rate has tanked and 93% of people have not maxed their TFSAs.

So what are they thinking? That houses are safe, and the only thing they need own? Oh dear.

Well, as I pondered Donna’s situation a new poll on this subject popped up from Angus Reid. And it’s a shocker. We’re a little more screwed than we all thought, even without the Canadian economy now trying to slide into recession. The pollsters found 48% of retired people say they were forced to stop working by circumstances – usually job loss. Of that group almost a third said they “are struggling” to make ends meet. Another 46% report they get by, but can afford only essentials. In other words, about three-quarters are living meagre or deficient lives. Some retirement.

Half of these folks fear they’ll end up like Donna, outliving their money. They’re probably correct. But there’s more. The pollsters included working people, too, finding 74% of them are also worried they’ll deplete money before they exit life.

And this: among the retired, 57% say government pensions are their main source of income. That’s an average monthly payment of $618 for CPP and $564 for OAS, or $14,200 per year. Yikes.

So, here’s a concrete example of what happens when a government engineers low interest rates, and the central bank boss says he wants to encourage more citizens into real estate. People stop saving. They increase borrowing. They flock to houses, inflating prices and increasing debt. Everybody’s risk rises, especially in a society where the number of retired people will go from 6.4 million today to 15 million over the next two decades.

The politicians can ignore a few hundred thousand Donnas. They can’t look away from millions of them.

If I were, say, 30, this would scare me a lot.

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July 2nd, 2015

Posted In: The Greater Fool

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