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April 4, 2017 | Lessons

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.

We have a wrinkly crisis. I hear the same story every day. “We just found out that Mom and Dad saved, like, nothing. We thought they were okay, but since he retired they’ve been asking us for money – which we don’t have because of daycare – and it’s getting worse. They’re living on their CPP. That’s it. What can we do?”

Lots of lessons here. Some of them you don’t want to hear.

First, parents must be transparent about stuff like this with their adult offspring. Get over being authority figures and stop pretending everything is fine. It’s not. If you’re living on the public dole at age 70, you stand a good chance of being a burden to your kids for the next 15 years. So all of you need to talk and find a solution. If you own a house, sell it, invest and rent. That will free up capital, increase income and cut costs. And, no, GICs or bonds are not an investment option. Ditto for giving your kids money. That will solve nothing.

Second, adult children must change the relationship. The switch from being a dependent and taker to a guardian, protector and decision-maker is slow, subtle and difficult. But it’s usually inevitable. When your parents retire, set a power of attorney in place for them so you have the legal right to make tough choices on their behalf when necessary. If they refuse to sell the house, wanting to live on Meow Mix so they can pay the property taxes, take action on their behalf. If dementia sows its evil seeds, it’ll be your responsibility to offer logic and patience. Don’t wait until then to explain.

Third, face up to failure. Living six or seven decades, then having to subsist on what the government hands out is exactly that. The public pension plan was never designed to support people, just supplement their own savings and investments. Buying a house and paying it off is not a financial plan, because after retirement what people need is cash flow, not real estate. You can always rent a roof. You cannot rent an income. The sad reality today is that despite being massively better educated and informed, a whole new generation is working its way towards old-age penury. They have embraced debt, shunned financials, and adopted a one-asset strategy. So much risk. So much closer to failure.

Therefore (fourth) don’t let this happen to you. There’s no real safety net out there. In fact a new report from the eggheads at CD Howe Institute casts doubt on the Trudeau government’s vaunted ‘enhancements’ to the CPP. The only way today’s moisters are going to get slightly better pensions when they retire is if the pension plan administrator, after all fees and costs, is able to achieve a return of 3.4% over the course of 75 years. Given the fact government bonds currently pay 0.7% and the number of contributors will be going down as the recipients grow, this is no slam dunk. The report envisions circumstances in which benefits will have to fall.

It’s also inevitable the T2 gang (or the gang coming after that) will reach the same conclusion the Harper gang did – paying everyone OAS at age 65 is just nuts. The cost of that alone in a decade or two will be staggering – $109 billion by 2030 (compared to just over $40 billion a year now). Thus, it’s a safe bet today’s 25-year old will not be picking up a monthly cheque in 40 years the way retiring parents are now. And yet, she will be paying more in income taxes and CPP benefits. Probably lots more, given the rampant accumulation of new federal debt.

So, fifth, the sooner you trade the leveraged condo for a brimming TFSA, the better. If you can avoid spending formative years of your career making mortgage payments, do so (rent is cheaper). Don’t save. Rather, invest. Try to live a balanced and diversified life, understanding that when 70% of us have no corporate pensions waiting, you’ll likely need a chunky portfolio in order to cruise through two of three decades of retirement. And be realistic. The number of 32-year-olds I encounter who think they can retire at 40 is awesome. They can’t. They won’t – if they also expect the intervening years to bring babies and a house, mopping up their savings and saddling them with debt.

Watching parents struggle is wrenching. You have an obligation to help. You have a bigger one not to foist it on your own kids. So I fear what’s coming.

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April 4th, 2017

Posted In: The Greater Fool

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