It Could Be Worse

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When my pollster buddy Nik Nanos asked people if they’d be okay if their paycheque came a week late, it was a shocker. Specifically, the question was whether or not they would have difficulties paying their bills if the next paycheque was delayed for a week.

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Results: 56% of Canadian women said yes. 46% of men agreed. Only 18% said it wouldn’t be a problem.

This tells us lots. Like (a) half the people you know are insolvent, with more debts than assets. A disruption in cash flow is a disaster. (b) In a country where 70% own real estate you can see what mortgage debt has done. Seven in ten have houses. Five in ten have no money. They live paycheque-to-paycheque (c) There’s a mother of a retirement crisis looming, especially with real estate swooning.

I thought about that when I saw Scott’s email from Vancouver Island.

First off, a thank you for the blog, all of your efforts and insights.  It is both an enjoyable and informative read.  I have been enjoying your brief departures of late from real estate views (as you say, if folks haven’t got it yet, only so much flogging of the dead horse you can do) to broader financial topics.  In that vein, a retirement question for you.

My wife and I are both 40.  Overall we are in good financial shape:  no consumer debt, house we can easily afford and will be paid off in about 10 years, cash in the kid’s RESP, decent sized emergency fund.  The one area we are potentially behind on is retirement savings…together we’ve got about $70,000 in RRSPs.  This is probably low for the kind of retirement we want but it is mitigated by the fact my wife is a teacher and is on pace to collect a pension of about $4,000/month when she is 60 (which alone would be enough for us to live comfortably…add in the CPP/OAS we are likely to get and we’ll have more than we need).  My question to you is this:  how much confidence would you have that these public sector pensions will still be around in 20 years and that those who, at this point are entitled to them, will actually see some/all of that money?  In other words, are we putting too many of our retirement eggs in this basket?

Scott thinks he and his squeeze are in ‘good financial shape.’ Compared to the half of Canadians who can’t afford groceries if they get paid seven days later than expected, he’s right. But that’s too low a bar to measure by. I actually think Scott could be hooped.

Fact is they’ll be 50 before the house is paid off, and it could be worth less then than now. It also seems, based on their meager investments, that day-to-day living expenses preclude much cash flow for liquid assets. An emergency fund (likely in a HISA) is a total waste of money, since that’s why God made lines of credit which cost nothing to have in place.

Seventy grand at age 40 just ain’t enough. Especially when it’s all in registered investments – which means it’s worth only $45,000 after tax. No mention of TFSAs, which are superior vehicles and should be the first thing anyone sticks money into. So obviously these guys are putting a huge amount of faith in a public pension which is going to take another 20 years to materialize.

Four grand a month may sound like a lot, but it’s actually $3,000, after tax. Add in CPP for both (at the max) and this equals $4,600 a month, net. I have a hard time understanding how that gives a good life, starting in 2032, especially with a child or two to raise and educate along the way.

But Scott asked about public pensions. Are they safe? In a word, dubious.

Only 28% of all Canadians now have pensions, corporate or public. Most of those are defined-contribution plans which have no set payout attached to them, and will be dependent on financial markets and economic growth. The bulk of people have no pension plan, or participate in an RSP-matching scheme with their employers, with the funds managed by outfits like Sun Life or Manulife, offering a slate of generic mutual funds. Performance for most has been abysmal.

Only one in ten has a defined-benefit pension plan like Scott’s teacher wife, where the final allowance is known years in advance. Or is it? In Ontario, for example, the teachers’ pension plan has a shortfall between projected income and future obligations of about $10 billion – even after contributions have been raised and benefits trimmed. In the US, retired cops, teachers, civil servants and firefighters have seen their pension payments rolled back arbitrarily by politicians running governments that simply cannot pay. Unfunded pension liabilities are estimated to be $2 trillion.

In Canada the Canadian Federation of Independent Business says the unfunded liability for civil servants alone is $300 billion, and would take a $9,000 contribution from every taxpayer to rectify. Like that will ever happen. The conclusion is simple. In a low-rate, low-growth, low-return world teetering on the edge of deflation with 50% of people living paycheque-to-paycheque, defined pension plans are too good to last. There is no government that will step in and rescue teachers who make $80,000 a year, then expect to retire on $60,000.

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This, Scott, is why you’re at risk. Cut the spending and goose the investing. Open two TFSAs, get them fully funded (that’s $50,000 by next January) and properly invested in diversified growth assets. If your mortgage rate is 3% or less, stop accelerating payments and concentrate on a liquid portfolio. Mostly, stop feeling secure. You’re not.

Could it be worse? Yup. Look around you.

Garth Live in T.O. on Tuesday

A reminder for those sad people who have nothing else to do next Tuesday evening, and have reserved a seat to hear me whine and bleat: the event starts at 7 pm sharp, and you might wish to come a tad early to take in at least some of the Amazonian mud-wrestling. The location is the Toronto DoubleTree Hilton Hotel, on the airport strip at 655 Dixon Road. Admission is free, but don’t let that stop you.

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avatarGarth Turner - The Greater Fool posted Friday, October 19th, 2012.

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