Monthly Archives: March 2014

Investing doesn’t stop at 65

older couple looking at investmentsOnce upon a time, employees devoted all their working life to one company. At age 65 they would get a gold watch (or a pen) and a pension that would last for the rest of their life. During those times, the life expectancy was 70 years old, so employers were not saddled with the pension burden for a long time.

In Canada, the government extorted 9.9% of people’s paycheck for 42 years and then when people turned 65, the government would pay pension benefits for about 5; remember, life expectancy was 70 years.

 During that golden era, employees didn’t need to have any financial knowledge. They didn’t need to know the difference between stocks and bonds and they could care less whether the stock market was going up or down.  They knew that their employer and the government would take care of them, and that is all they needed to know.

Mrs. S, a dear friend of mine, retired about 17 years ago. She spent most of her working years at the same company, Canadian National Railways. When she retired, she counted on the company’s pension and the government’s pension. She had some shares from her employer, some savings in her bank account and some investments in a private financial institution. Mrs. S never had to learn about the stock market to ensure that her savings would last. She doesn’t live in luxury but she is living a happy retirement life.

Times have changed since the retirement of Mrs. S. Nowadays corporations  are doing everything within their power not to have full time employees. They don’t want to pay corporate and government pensions, unemployment insurance, health insurance and many other expenses that corporations are forced to pay when they hire a full time employee. Instead, corporations hire independent workers or part time employees, they outsource jobs overseas or they invest in machinery or software that replace employees all together.

When corporations hire full time employees, they  contribute to the employees’ retirement plan, but it is the responsibility of the employee to decide how to invest those funds. If an employee invests everything in Nortel and Nortel blows-up, the employee is totally screwed. But how are employees, with no financial knowledge supposed to make those decisions? How are they supposed to choose among a myriad of stocks, bonds or mutual funds?

At one time in history, employees with no financial knowledge would deposit their money in a bank account and they would get some interest revenue. But the government has been keeping interest rates at almost zero and people have been forced to purchase higher risk assets, like stocks, to earn some kind of return for their money. The government is screwing the savers so that big corporations and the government itself can borrow money at low interest rates.

At one time in history people’s life expectancy was 70 years. Now life expectancy is about 80 years. If retirees have not made adjustments in their savings to fund 10 extra years of living, they can easily find themselves without resources to live.

Retirees are now responsible to make sure that they don’t outlive their money. After they reach the age of 65, instead of relaxing and enjoying their retirement, they have to continue learning and make sure that they will have enough money to carry them through a longer life expectancy.

Winning the lottery is not a retirement plan

The lottery is a tax on idiots
The lottery is a tax on idiots

Did you know that the retirement plan of 30% of Canadians is to win the lottery? My car mechanic had been buying $20 worth of lottery tickets every day long before I met him 15 years ago. In my opinion, his retirement could have been assured by putting that money in a retirement account and withdrawing it at age 65. This is crazy. The odds of winning the lottery are about one in 14 million. The lottery is a tax on idiots.

Almost 90% of Canadians count on the Canadian Pension Plan (CPP) to add to their retirement income and about 30% rely heavily on CPP as their sole source of retirement money. The average CPP payment is only about $600 per month and the maximum that someone can collect is a little over $1000. A person has to become very creative to be able to live with less than $1000. After 65, just keeping up with medical bills will be a challenge. I don’t even know if you can rent an apartment for less than $600.

What happens if at age 65 you have no savings?

If you have no money, the sad truth is that you will not be able to retire, you will have to continue working for as long as you are physically able to, and then, I don’t know…

If you continue working after age 65 and continue contributing to your Canada Pension Plan, the government will increase your pension payment by 8.4% for every additional year. You can continue contributing to the pension plan until age 70. This is in fact a good deal. Now days to earn an 8% gain in the stock market is very difficult. The life expectancy of Canadians is 80 years. That means that you contribute to your pension 52 years (from age 18 to age 70) and you only benefit from it for 10 years.

I take this opportunity to encourage Canadians to put away $50 per week from age 18 to age 70. At a 5% rate of return, you will have accumulated $916,000. Almost one million dollars. This will be a more generous retirement than any pension plan that the government could ever give you.


Is there an alignment between you and your money?

Money don't bring you happiness. I am semi retired. I work just enough hours to pay for my living expenses and then I don’t want to work any more. Currently I am working about 15 hours per week and I find this to be plenty for my survival.

I could work many more hours if I wanted to but for me, the most precious commodity is time. Time to complain about the snow, time to walk in the park, time to do nothing, time to read, time to write, time to get bored.

I believe that people’s relationship with money is all screwed up. Money is just a tool to get things that are important to you. Money is not the end. People embark into careers that they don’t like and stay in jobs that don’t enrich them, just for the money. They are putting a price tag on their happiness and self-worth. Those super ambitious people who work 10-12 hour days in a job that they don’t find satisfying, just for the money, wouldn’t they be better off by doing something that they like, even if they earned less?

I believe that we all should be earning a living in a way that is congruent with our values. To do this, we have to stop and reflect. We have to try to figure out what is really important in our life.

Many of the things that we consider important are not important at all. Physical objects have no real value. The most important things in our life are experiences, not objects. The real reason that we want money is to spend more time with the people that we love and to do the things we like to do. It is not to possess more stuff. Take a moment to think what the real value of money is in your life.

Are you in a position where you are trading time for money? How many hours are you selling? Shouldn’t you leave some of that time for your own enjoyment to share with the people who love you. How about buying experiences instead of objects?

Having a healthy relationship with your money is not complicated. You will need to follow this financial plan.

  1. Figure out your revenue
  2. Make sure that your expenses are lower than your revenues.
  3. Make sure that you are putting away money for retirement.

The problem that most people have is in point 2, keeping your expenses lower that your revenues. If you manage to master this rule then everything should work out.

If you would like to brainstorm about your personal situation let’s have a cup of coffee and we can explore your options. I am not a financial planner nor an investment adviser but talking about money is my passion.


Most Canadians have an opportunity to become millionaires through RRSPs

RRSP options Ever since I was a little kid, I have heard people saying that the rich have all the advantages and that the middle class always gets screwed. That the rich hide their money in Switzerland or in the Caribbean, and the rest of us, middle class, are stuck with paying most of the taxes. Then the government throws us a life ring, the Registered Retirement Savings Plan (RRSP), and we refuse to take advantage of it.

What are RRSPs? RRSPs are a gift from the government. They are savings accounts that allow us to benefit from significant tax savings.

This is how they work: Imagine that you are making $50,000 per year. With this income, your marginal income tax would be 46% (Ouch). If you decide to invest $20,000 in RRSPs, your taxable income will only be $30,000 (50000 – 20000) and all of a sudden your marginal tax rate will be 31% (still hurts, but not as much). That is a 15% tax reduction. That’s because Canada’s income taxes are progressive, the more that you earn the higher your taxes are. That’s the way the government punishes you for having a higher income.

Now you have $20,000 in a Registered Retirement Savings Plan. This money could be invested in many ways such as savings accounts, bonds, mutual funds, stocks, etc. Imagine that your money earns 5% per year ($1,000), you would not have to pay taxes on that 5% until many years later, when you start withdrawing money from your savings.

Assume that you deposit $20,000 for 30 years in your RRSP and that you are earning on average 5%. At the end of 30 years you will have a nest egg of $1,330,000 ( you see, anyone can become a millionaire). After 30 years you decide to start making withdrawals, let’s say at $30,000 per year. This nest egg will last you for about 24 years. You can play with the variables to suit your personal situation, but here, in a nutshell, you have a realistic plan that is suitable for many Canadians. Please note that RRSPs are not a tax avoidance tool, they are a tax deferral tool. The real advantage is to lower your tax bracket and to defer your taxes many years into the future. Eventually you have to pay taxes when you withdraw your money.

Instead of using this wonderful tool, we Canadians go for instant gratification. We buy new tvs, new designer clothes, a car or a house that we cannot afford and we end up with no money at retirement time. We cry that the odds are stacked against us and that the the rich become richer, while the poor become poorer.

There is hope and opportunity for the average Canadian, we just have to see it and take advantage of it. RRSPs is one of those opportunities, don’t let it slip through your fingers.

If you would like to brainstorm about your personal situation buy me a cup of coffee and we can explore your options. I am not a financial planner nor an investment adviser but talking about money is my passion.


Retirement Alert. Your Pension Plan May Fail You

In Canada, employee and employer pay 9.9% of each paycheck for over 40 years and then, when you retire the maximum that you can get back is $1,012.50. What a horrible business deal
In Canada, employee and employer pay 9.9% of each paycheck for over 40 years and then, when you retire the maximum that you can get back is $1,012.50. What a rip-off.

Question: What is the difference between a government pension plan and a Ponzi scheme?
Answer: If the government does it, it’s legal.

Every time you get a paycheck, you will see a deduction for the Canada Pension Plan or the Quebec Pension Plan. This money is taken away from you (and from your employer), not for your own pension, but to pay for the pension of someone else who is retired right now. When you turn 65, some younger person (and some other employer) will be working to pay for your retirement.

Here is the definition of a Ponzi Scheme according Wikipedia: an investment operation that pays returns to its investors from existing capital or new capital paid by new investors, rather than from profit earned by the individual or organization running the operation. Contemporary examples of Ponzi Schemes are Bernard Madoff in New York and Earl Jones in Montreal.

The only difference between a Ponzi scheme and a government pension plan is that if the government does it, it’s legal. Other examples in which there is one set of laws for the government and another set of laws for the rest of us are the lottery and selling alcohol in Quebec.

Here are some reasons to create your own retirement plan

  1. The government pension plan is about to collapse. Canada’s fertility rate is 1.63 and in the U.S. is 1.89. That means that population is decreasing. Falling birth rates mean there will be less workers to support more retirees.
  2. In the 50s people started working at age 18 and retired at age 65, government extorted money from them for 47 years. At that time life expectancy was 70 years, so the government only paid pension for 5 years. That was a sweet business deal for the government. Nowadays, with people getting late into the job market and with an increased life expectancy, governments are extorting money for a shorter amount of time and have to pay pension for 10 extra years (from 70 to 80).
  3. The national debt is increasingly putting the country at risk of not meeting all of its financial obligations.
  4. Companies are eliminating pension plans and are doing everything in their power to reduce the amount of full time employees. They don’t want to bear the cost of guaranteeing employees’ pensions.
  5. Old man greeting people at Walmart.
    If we don’t prepare for retirement, we may end up working at Walmart greeting people

    Individuals are spending freely and saving almost nothing. Canadians are saving only four per cent of their disposable income. That is a pitiful amount.

This is a wake up call. If you don’t want to spend retirement greeting people at Walmart, flipping burgers at McDonalds or begging on the streets, you should set in place a retirement plan and start saving now.