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September 21, 2016 | Braindead

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.


Will you outlive your money?

The odds of that happening have never been higher. Two good reasons. We now live, like, forever. On average three years longer than Americans, even. And women come close to being petrified – an extra six to eight  birthdays after the guys drop.

Second, savers are being crushed by low rates, lousy returns and high taxes. Sadly, most of us save rather than invest. Over 80% of all the money in TFSAs, for example is stuck in interest-bearing vehicles. Hideous ‘high-interest’ accounts. Braindead GICs. Bottom-feeding bonds.

The combination means the greatest risk (as I’ve said often) is not losing money, but running out of it. Unfortunately everybody is afraid of the first risk and ignores the second. It’s a fatal mistake. Meanwhile government isn’t helping much. The minor improvements to CPP payments announced this week will take 40 years to materialize.

So savers waiting for the good ol’ days of no-risk, high-interest assets to come back are SOL. It’s not happening. This week sure underscored that.

Stock markets, the dollar and oil loved it when the US Fed blinked again and kept interest rates low yesterday. It means more months of cheap rates, easy money and a lower American currency heading into the weirdest Presidential election campaign since ever.

Meanwhile our own central banker, Stephen Poloz, was busy giving a speech he titled “Living with Lower for Longer” in which he spelled out the reason rates aren’t budging – a crappy economy. Growth is so weak, job creation so anemic, commodity prices so low and exports so dismal that any rate increase would, he fears, turn Canada into Japan.

Meanwhile there’s palpable disappointment that the T2 government’s been in office for almost a year, and has done diddly about the economy. Yes, the rich were whacked with a tax increase, and the middle class got a weensy cut. The big money – dole for people with kids – just started a few months ago but has made no difference in spending. Household debt has shot higher, most job creation has been part-time, and no infrastructure projects have been launched despite the pre-election hoopla.

So, rates stay where they are. Savers are doomed. This is particularly tough since 32% of the population is entering or contemplating retirement, with more people hitting 65 each day than has ever occurred previously. The traditional route for retirees has been to stop working, start collecting a corporate pension and supplement that with income from a safe portfolio of fixed-income, boring stuff like bonds.

But today over 70% of workers don’t have one of those pensions, often retire with a mortgage in place and a Millennial in the basement, while interest rates have cratered making ‘safe’ stuff a joke. And did I mention we’re living way too long? A quarter century in retirement is hardly unusual, whereas a generation ago guys conveniently croaked within 7 years of leaving the office.

This s what Poloz was talking about a day or two ago: “I realize this may be cold comfort to those people who have to adjust retirement plans to a lower-for-longer world,” he said when pointing out that lower rates mean higher stock markets. “But the difficult reality is that savers must adjust their plans.”

They sure do. And fast.

High-yield bank accounts pay hardly more than half a per cent. GICs are at 2%. People get giddy and hormonal when they find a lender offering a temporary 3%. And yet it’s a mug’s game to chase yield. Face it: inflation is about 1.5%, and 100% of what you earn in interest is taxable at your marginal rate. So the best you can hope for these days is to preserve capital, not make it grow or create an income stream, which means you’d better retire with a honking big pile.

The better strategy is to invest money in assets that will take advantage of low rates and throw-off tax-efficient income. So the longer the cost of money stays in the ditch the more compelling the argument becomes to have a portfolio with growth assets in it – at least 50%, or better still, about 60%. The best choice here are low-cost, highly liquid and diversified ETFs. As for the ‘safe’ component of the portfolio, a small government bond exposure helps keep volatility down, but ensure you have higher-yielding corporates or provincials as well, along with a mess of preferred shares churning out a sweet 5% dividend.

Over the last six years a balanced, globally-diversified 60/40 portfolio has returned almost 6.5% – and two of those years were stinkers. Better still, money made collecting dividends earns you the dividend tax credit while capital gains come with a 50% tax discount. Even better, stick a hundred grand into TFSAs for you and your wrinkly squeeze and all of the income generated is taxless, non-reportable on your tax return, and won’t cause any of the meagre government pogey to be clawed back.

So, rates suck. You can’t change that. But you need not be a victim.

The risk of saving outweighs the risk of investing. Too bad most will never get that.

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September 21st, 2016

Posted In: The Greater Fool

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