Monthly Archives: April 2016

Case study: Surviving with the Canadian Pension Plan

Dancing with friends

I will work until I die, maybe

My friend Carlos (fictitious name) always refused to save money for retirement. He always said that things will turn out fine, that he loves his job and that he would work until the day he dies.

Well, my friend Carlos is in his early 60s. He still loves his job, but things are no longer the same. It takes him so much more effort to do the job than it used to. He loses his patience easily when talking with his clients, and he finds that he gets tired easily.

What is the Canadian Pension Plan
Judgement day. Retirement at 65
Judgement day; Retirement at 65.

At this stage of his life, he has started wondering about the Canada Pension Plan. What is it? How can he benefit?

Because he wants to work less, he has decided to start collecting benefits before the age of 65. What are the consequences of that?

There are millions of people like my friend Carlos. People who earn just enough to live and who have the capacity to save for retirement but don’t. If by any fortuitous event they earn more, they take longer vacations, or they simply work less. They live life for today and they will deal with the future tomorrow.

What if I save for nothing?

Last year, I was speaking about personal finance in front of a group of college students. One girl asked me: “I could die tomorrow. Why would I save all that money for nothing?” My answer was: “What if you don’t die tomorrow? What are you going to tell your older self when you are struggling to pay the rent?”

There are two big problems with financial planning:

  1. We don’t know when we are going to die, and
  2. We don’t know what rate of return we will get for our money.

So, it is very difficult to plan for the future. Will I save enough? Will it be too much?

Why we are forced to contribute to the Canadian Pension Plan

At one time in history, I used to resent the government for forcing us to contribute to a Canadian Pension Plan. How dare they take such a paternalistic stance and force us to save for our retirement? We can make our own decisions. Now I understand. The government has taken such actions because there are millions of people who think like that college student. There are millions of people who think like my friend Carlos. The future will take care of itself, and I will spend my money now, in the present, because we don’t know if there will be a tomorrow.

Unfortunately, in spite of the government’s good intentions, the Canadian Pension Plan sucks. It takes money from us all throughout our working lives and when we need it, at age 60, 65, or 70, it is never enough.

The average pension pay that Canadians are receiving today is about $664/month. Can you imagine living on $664? The rent for one person is about $650 in Montreal in a mediocre neighborhood. If they pay the rent, how are they going to eat?

My friend Carlos, who decided to start collecting now, before turning 65, will be getting about $350. This amount is nice, now he can afford to work even less. But what is he going to do when his ability to work will decrease even more? How is he going to live on $350 per month?

Generally, when someone retires at age 65, they might collect full benefits ( about $664). If someone decides to retire at age 60 their payment will be about 30% less. In the case of my friend Carlos, he is collecting about $350. If someone delays retirement until age 70, their payments will be 30% higher (about $865 ).

It’s hard to live on so little

We have to wake up to the reality that it is difficult to live out of our pension benefit. Assuming that we retire at age 65 and we live until 81, we have to have a significant amount of savings to carry us for 16 years.

My solution is simple: my solution is not to depend on the government, not to depend on the Canada Pension Plan. My solution is to take your fate into your own hands, to think that you will live at least until your life expectancy. My solution is to save money, at least 10% of your income. The earlier you start, the better off you will be.

Living a long life should be a gift from the universe, not one more thing to endure.

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Using debt to increase your wealth

Having a beer with friends
Having a beer with friends

I owe a lot

I owe more than $500,000. This debt is composed of mortgage debt and personal debt. I use this debt to invest in real estate and in the stock market. In other words, I borrow money to make money.

I am aware that excessive debt could be dangerous, but what constitutes “excessive debt.” In my case, I have bought two condominiums with down payments of over 20% each. This means that 80% of the property was financed with money from the bank. In the real estate world, this is not excessive. Every month I am making my mortgage payments which in turn reduces my debt and my risk.

As far as the stock market, I am leveraged to about 50%. This means that for every dollar I have in stocks, I have borrowed an additional dollar. I have borrowed money from friends and family at  an interest rate of 4%. However, my gains in the stock market are bigger than my expenses.

Toxic debt

Debt is one of the most misused tools in our financial toolbox. Many individuals use debt for consumer items which have no return on capital; vacations, automobiles and clothes come to mind. Sure you feel pleasure as you spend that money, but you should know that immediate gratification, in the long run, brings more pain than pleasure.

The only reason to get into debt is to invest in assets which can produce returns in excess of your cost of capital. For example, if I borrow money at 4%, I have to make sure that my return will be enough to cover my interest expenses.

A future of deleveraging

I have reached my short term goals as far as owning real estate and stocks. My next goal is to pay down my debt. If I can, I will pay my debt to the tune of $1,000 per month.

What about you, how does this apply to you?

If you have a plan, if people and banks trust you, and if you can produce returns which are higher than your interest expenses, then borrow money and put it to work. Just be careful, always expect that something will go wrong and be ready for it. There is always something more precious than money at risk: your reputation.

Book Review: How to Work a Room by Susan Roane

book cover. How to work a room

How to create and build relationships

The most valuable assets anyone can have in business and in life are their relationships. In order to build strong relationships, we have to step out of our comfort zone and meet people.

Susan Roane tells us how to use any occasion to meet people and to build relationships. She teaches us how to work a room, from social events, to business events, to many of the different social media.

I found great value in every chapter and I felt that I learned a lot. Most of the information is common sense, but in this changing world, with technology transforming everything around us, sometimes we lose track of what is common sense and what is a new trend. Susan reminds us and assures us that many of the rules of engagement and socializing are still the same.

Dinner with friends after a Toastmasters competition
Dinner with friends after a Toastmasters competition

However, I found the book difficult to read for many reasons:

It is difficult to find a flow from one chapter to the other. It feels like a chain of disjointed little chapters that jump from one section to another. She mentions that in her day-to-day life she has accumulated a file of stories which she had jotted down. It almost seems that she just copy and pasted all those different stories to put together this book.

Susan gives us a lot of her personality.  She uses so much Yiddish slangs that she had to add a Yiddish glossary at the end. This is great if you are part of that community, but not so great if you are not Jewish, it makes you feel isolated. I am from South America. Her Jewish background and slang say nothing to me and I don’t feel like flipping back and forth between the text and the glossary. Make it easy for the reader, easy to understand, easy to read.

Susan uses hip catchy titles for each of her chapters. At the beginning, I thought that it was cute and original, but halfway through the book I got tired of it and began to see it as corny and outdated.

The author uses a lot of quotes and testimonials from other sources. I wish she would put these sources in the footnotes. It seems that every other paragraph starts with Mr/Mrs  ——– says, “Blah, blah, blah.” She goes on for about half a page and then gives credit to someone else. It is good to give credit to others and to acknowledge them, but when you overuse that technique, it stops adding value to the reader and it becomes one more hurdle to get through before getting to the real message.

Overall, I give the book three stars out of five. The book is full of useful information, but her writing style gets in the way.

Thank you Susan, for sharing all your knowledge.