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Larry Berman: Saving for retirement in a low-return, high-debt world

ANALYSIS: There is a new book coming out co-authored by Jonathan Chevreau called The Victory Lap Retirement. Think of it like the great Seinfeld episode about the show about nothing, except it’s a retirement book about not retiring. Better put: Doing what you love to do and not doing what you have to do and make a few bucks while you’re at it…is it time for a victory lap retirement?

The main challenge looking at the median Canadian family is that we probably have not saved enough. We are likely going to face a few decades of low interest rates and below average returns for equities (this is open for debate over a beer or ten), which suggests the traditional buy and hold 60:40, 70:30, and target date portfolios may likely fall short of delivering for investors primarily due to the low interest rate backdrop and the unsustainable debt fueled economy we live in.

I’ve suggested many times over the past few years that the global economy needs low rates for the next few decades to offset the economic headwinds of the aging demographic and the mountains of debt that is accumulating. Poorly calculated policies like cutting the TFSA limit back and rolling back OAS deferment simply do not recognize the great thing that we are all living longer and healthier lives. Make no mistake, creating a supplementary retirement plan provincially is not likely the solution. One challenge for Canadians is that we collectively have too much debt and have not saved enough for retirement. The burden on governments for social benefits could be staggering and the Americans are far worse off than we are in Canada because the social security trust fund in the U.S. holds about $2 trillion in treasury bonds. The unfunded liability of U.S. entitlements until 2050 is estimated to be about $80 trillion. Bottom line is benefits need to be cut and/or taxes need to go up...or we just need to pay in longer and work a little longer.

The math is simple, you cannot expect to pay in to a retirement plan for 40 years and have it last for 30 years. When social security plans were developed during the great depression years, the math worked. You could retire at 65 and life expectancy was 69. It’s now about 84 in Canada and if you make it to 65 it is closer to 92 according to actuarial tables. One good thing the government did last year was change the math for RRIF withdrawals so that it lasts longer and can compound tax free. Let’s just say we need more of that kind of thing and realization that society have a growing unfunded pension crisis.

According to 2015 RRSP guide a family making about $100,000 per year, which is about 25% above the median Canadian family income, should save about $500,000 in their RRSP by the time they are 65 so that their standard of living is not changed in retirement. This assumes a 5% rate of return and annual increases of 2% per year for inflation contributing $10,500 per year starting at 35.

One challenge with retirement is what to do and based on what we are learning about dementia related diseases is that if you don’t use it you lose it. Actually continuing to work and keep busy in retirement may have significant benefits in deferring and possibly eradicating age related dementias. One of my favourite charities is the Baycrest Brain Health Science Researchers in Toronto that are leading the world in learning about how to reduce the onset of dementias. As it turns out, keeping busy in your retirement goes a long way to living healthier and happier in your later years. Volunteerism is a great way to start, but why not find a passion and work part time in retirement or what Chevreau calls an encore career. The difference in your standard of living and final estate can be meaningful if we are right about a low interest rate world and well below average earnings growth.

The chart I reference in the video above shows the target of $500,000 and an expected gross return of 4% with the average Canadian mutual fund management fee of 2.2%. For the exercise, we are using Statscan median consumer expenditures and a 2% inflation rate. Of course, small changes in inflation expectations, market returns, your standard of living and where you live, and fees all play a part, but I wanted to show why having a good financial plan done is a very important exercise to help you reach the finish line. This plan forecast was prepared by Fabien Ouellette , who is a financial planner and a portfolio manager at my company ETF Capital Management using expected rates of return for a buy and hold 60:40 global portfolio. Because expected returns are likely to be lower than desired given low dividend rates, low interest rates, and debt fueled economic growth there is a strong case to be made for encore careers. You can model for an historic 7-8% return in a balanced portfolio, but you’re kidding yourself and you are open for a bad outcome later in life. Plan conservatively and be pleasantly surprised.

If you want to learn more about how you can plan for a better retirement, hear more about encore careers, and navigate through the New Normal come out to my current speaking tour: AN INVESTOR’S GUIDE TO THRIVING How to Navigate in a High-Debt, Low Growth, Bubble-Prone world where we will look at way to navigate current markets, the impact of interest rates, energy, the dollar, politics, and for the first time the series will feature a debate panel discussing real estate investing in Canada (in Vancouver, Calgary and Toronto).


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Larry Berman is the host of Berman’s Call on BNN and the CEO of ETF Capital Management

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