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August 29, 2019 | What are we Thinking?

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.

Let’s bust some myths. Like: plopping interest rates will set housing ablaze. Or: if I grow a million I can retire at 40.

It’s time to understand most Canadians are pretty much pooched. The next decade will make that obvious. So it’s a good time to avoid the fate lying in the weeds for them.

Here’s the problem:

First, real estate lust has had terrible consequences. Sure, some people in some places bought low and have made a pile of dough. Most have not. Instead they’ve saved little and borrowed much. Theirs is a one-asset strategy and, sadly, houses don’t pay you a pension.

Second, interest rates are so low nobody can retire on GIC income. This won’t change. Those who fear investing, or don’t know how, may suffer as a result. See below.

Third, our culture of savings has been shot. It’s astonishing how we’ve changed. A generation ago people routinely saved 10-15% of what they earned. The average over the previous decade was 7%. Now it’s collapsed. It’s dead. After inflation our national savings rate is negative. Hard to overstate this – we have the worst rate in 60 years at just 0.7% of income (inflation is 2%). That’s 63% below the level of just a year ago. In other words, in the first quarter of this year we saved (on average) just twenty bucks per person per month. Ouch.

Fourth, people grossly underestimate the pile they’ll need. Life is long. People retiring at 65 require enough to last a quarter century. Those FIRE weirdos who seek to stop working at age 40 (to do what?) need a pile so big it’ll last 50 years. Good luck with that.

Fifth, public pogey won’t save you. At least if you dislike poverty. And corporate pensions are disappearing, or being turned into crappy insurance-company, mutual-fund puddles. CPP and OAS? The average collected is $679 a month. The old age thing is $607. Combined that’s only $15,400 a year. For a couple, it would equal less than $31,000 – and yet StatsCan says the average amount spent by retired households is $61,000.

Where will that extra thirty grand come from? If you’re a GIC ‘investor’ making 2%, you need a million bucks sitting there. But we know only 0.85% of the population has a seven-figure portfolio of liquid assets, whether that’s Bitcoin or GICs. So the only way an army of boomers will be able to pull this off is by selling their houses or (yuck) taking out costly reverse-mortgages and eating up their kids’ inheritances. Neither is good for the housing market, regardless of where interest rates sit.

In fact, a long and costly retirement for most simply cannot be met by a house sale alone. Savings and investing is critical. A mill is the starting point. Given the 4% withdrawal rule that would kick out about $30,000 annually over thirty years. Some people will be happy living on that plus CPP/OAS. Many will not – especially if you made a six-figure income during your working life. After all, you spend more retired at age 70 than you do working at 50. Don’t believe me? Wait and see.

Okay, so how do you get two million by retirement?

Given record household debt levels, a negative savings rate and a 70% homeownership level plus nine million wheezy Boomers, there’s no way the housing bonanza of the last two decades will be repeated. If you need and can afford a property, buy it. But don’t mistake it for a retirement plan. Those days are kaput. It doesn’t matter if mortgage rates drop to 2% or below, since the stress test remains in place and the pool of potential buyers relative to inevitable sellers is inadequate.

Better to concentrate on saving and investing. The benchmark has to be 10% of your income. More is better. Like 18% – which is the maximum allowable annual contribution to an RRSP. Look at the Notice of Assessment you received a few weeks ago from the CRA. It tells you exactly how much money you can put into an RRSP this year, plus the unused contribution from years past. If you are not filling up this sucker, you’re falling behind.

Best of all, there’s the TFSA. Six grand a year for you, your spouse and your adult kids. A couple investing the max in two plans (a grand a month) reaping 6% returns in ETFs over 30 years ends up with a million. Given that all withdrawals are tax-free, that would kick out $60,000 a year. Add in the CPP/OAS for both, and the household income is over $90,000 – with no clawback.

But, wow. Canadians save only $20 a month. Thanks to monumental house debt, and unprecedented servicing costs – despite some of the lowest borrowing levels ever.

So just imagine what happens if there’s a recession, erasing home equity, causing more unemployment and reducing household incomes. Or when, inevitably, interest rates rise again (and they will, unless the business cycle has finally ended. Not.).

Yes, most people are pooched. They may live in nice houses. They may have new cars. And they might take two vacays a year. But there’s a cliff ahead.

Fortunately you know how to bolt the herd. So do it.

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August 29th, 2019

Posted In: The Greater Fool

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