Entries Tagged 'Book Updates' ↓

The bomb

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“We’ve always lived below our means and have no children,” says Louise, “so it’s been easier for us to save than it is for many people.  Neither of us ever had well-paying work (my husband never hit $75,000) but we’ve never had big needs or wants – we spend about $50,000 per year.”

That seems to be enough when you’re in a small Ontario city like Guelph. At least for her and Paul. So on their combined incomes of $150,000 (but no pensions), they’ve saved up a storm despite paying off their home years ago.

Both are in the middle-fifties. They read the post here a few days ago about net worth, and seem a little shocked that the average Canadian (says StatsCan) clocks in at $243,800. As you may recall, a third of that number comes from pension benefits that may or may not be received in the future, and another 30% is in residential real estate, reflecting our bubblicious market and historic values.

“So our net worth number (including a conservative house value estimate) is: $2.45 million.  Of that, the house is worth about $350,000, and our after-tax accounts are more than half of the rest.

“Garth – since I like to feel secure, I feel I need to keep earning for a few more years (three perhaps? Do you think that’s long enough?) but my question is:  What the heck are “average” Canadians and Americans going to do to make it through their retirement years?  I don’t feel wealthy at all, given how many expenses will come our way during the next (possibly) 30-40+ years.  But when I see what the typical pre-retiree has saved, I just don’t understand how they’re going to make it.  What do you think?”

Indeed. The numbers are sad. At present 72% of Canadians do not have a corporate pension with any defined or pre-determined benefits. Most folks are lucky today if the employer matches them for contributions to a group RRSP, which is then managed by a company flogging mutual funds. Meanwhile real estate values are at record levels, suggesting this will change because nothing goes up forever. Those two items (pension, house) make up two-thirds of average family net worth, which would leave about $80,000 in actual liquid assets.

But as I mentioned, the wealth gap is growing, and the top 20% have net worth of $1.4 million or greater (like Louise, and a lot of people who come here), which suggests mucho middle-class people have far less liquidity and far more real estate equity than the median.

Now, what about retirement?

First, it’s long. Count on twenty years. That could take a lot of dough. Second, you’re largely on your own. The average Canada Pension Plan monthly payment is $611. Big deal. That’s $7,300 a year. Even if you worked your whole life and contributed the maximum (which relatively few do), the biggest monthly is $1,038. Once you hit 65, the Old Age Supplement adds $537 (but clawed back for many). So the average government pension package is a piteous $13,800 a year.

Worse, of course, you might not even get the OAS in the future until you’re well and truly wrinkled and dried up – like age 70. Already the qualifying age has been moved to 67 (for those born after 1963), and you can be sure it will move again.

By the way, the average American social security payment for retirees is $1,294 a month, or more than our CPP and OAS combined. Houses there cost 50% less and retirees have universal health care. Mortgages are fixed (no rate increases) for 30 years, plus people who retire with one can deduct both the loan interest and property taxes from their taxable income.

This may be why US stats look even worse than ours. The average Yank spends 18 years retired, and yet by age 50 has saved just $43,797. The number of people aged 30 to 54 who currently think they are screwed in terms of income after they stop working is 80%. Actually 36% save zero before retirement, and rely totally on government pogey.

So, in summary, Louise is right to worry. Yes, with her $2.45 million and the $150,000 a year in income it will throw off (forever, if invested nicely), she and her squeeze are okay. But society is unlikely to let millions of other middle class people – who foolishly saved too little, bought too much house and will be caught in the downturn – end up on KD and kibble. Given the wealth disparity and current demographics, it’s pretty much assured personal tax rates will rise and benefits like CPP and OAS disappear for all but the needy.

If you know that now, max out your TFSA and invest it aggressively. Think twice about loading up on RRSPs for retirement, which will be sitting ducks for any increase in general tax rate as all proceeds must be taken as taxable income. Stop putting money into assets which pay interest with no potential for capital gains, since rates will stay relatively low for years and the yield is 100% taxed. Focus on returns which come as capital gains and dividends, on which the tax hit is reduced by about 50%. Income split with vigour, most effectively through spousal RRSPs that can be collapsed during years of low income. Sell your house, invest and downsize at the most auspicious time. That could well be now. And understand, above all, that the greatest risk we face is running out of money. Not losing it.

As you know, the people who read this pathetic blog are not normal. Incomes and net worth are far above the herd. Meanwhile there are 85 million Boomers in the US and Canada. Their collective stagger into years of non-work and higher needs will sure be an economic bomb.

Have you heard what’s already being said about ‘eat the rich’? Yikes.

The correction

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If I’d known the people reading this pathetic blog were so damn well off, I’d have dressed better. At least changed my leather Harley-Davidson briefs. It’s one thing to make a lot of money (we already know you do that), but quite another to accumulate wealth. So after reading yesterday’s comments on net worth, new respect. What a rapacious horde of capitalist swine we are. I am so proud.

Of course, we also want to keep it that way. So let’s talk about markets, and risk.

On Tuesday the Globe asked its readers (a collection of druggie, infested homeless people compared to you) whether they were concerned or not about a stock market correction. Just 14% said they were very anxious. Half were somewhat worried. A third were confident.

Let’s compare that with a Bloomberg survey done a few days ago among institutional investors, analysts and traders. They see it this way: 47% say the market is close to unsustainable levels, while 14% concede it is already in a bubble.

In other words, 86% of retail investors (the little guys) are cool with things the way they are while 63% of financial pros (the insiders) are worried. So, should you fret?

Let’s recap. The S&P is up almost 17% from this week a year ago. In 2013 it increased 30%. In fact, the market is now fully a third higher than it was back in the pre-crash days of 2007. More than $15 trillion has been added to US equities, and the gain since the low point in March of 2009 is a staggering 193%. And while the TSX was relatively lackluster last year (up just under 10%), so far in 2014 it’s ahead 14%, with the 12-month gain now running over 26%.

This all means US markets (which set the tone for most others) have not had a correction of 10% for almost three full years – since the American debt ceiling crisis of 2011 (when gold peaked). This is abnormal, to say the least. On average, corrections have gripped markets every 18 months since way back in 1946. That would suggest we’re way overdue.

But these are not normal days. By any stretch. Interest rates have been at emergency levels now for almost five years. In fact, Europe is battling deflation and rates may go negative. The US Fed has been spending billions a month buying bonds with wealth it created, to keep money costs down and the system flush with cash. Corporations have amassed record levels of capital, and been using it for an orgy or mergers and acquisitions – $1 trillion in new deals this year alone.

US unemployment has plunged from over 10% to barely over 6%, with more than 200,000 new jobs every month for the last half-year. House prices, decimated 32% in the American crash, have risen on average 1% a month for more than a year. Inflation’s been tame, while markets soared. Investors have been able to borrow at 3% and earn 14% – which explains a record surge in margin debt. Demand for bonds, thanks to government stimulus, has pushed yields down and prices up. Suddenly everything looks expensive, but how can you walk away from gains like these? To invest in a 2% GIC? Pshaw.

But are markets overvalued?

Yup, stock indices are at record highs, however expressed as a multiple of corporate profits, things look a lot less scary (with one exception). The S&P is now at just over 18 times earnings, which is the highest in four years, but still miles below the 30 level reached during the height of the dot-com nonsense back in heady 2000. That was a prelude to the market losing half its value over the next couple of years.

It seems investors never learn some stuff – like speculating in companies which are cool, but don’t make money. Internet stocks as a group, for example, are at 72 times earnings on the Dow. (Facebook, Amazon and Netflix are all above 90 in price/earnings ratios. Yikes.). Besides social media companies, which are obviously in a hipster bubble, biotechnology stocks have been trading at more than 500 times earnings – which is why this part of the market (and the tech-heavy Nasdaq) have been whipsawing around most of the year, falling 20% in the spring before recovering.

So, let’s hope you haven’t built your entire portfolio on Twitter.

But apart from trendy, flaky companies, how much fear should you feel?

Probably not that much, if you stick to buying the indices and achieve lots of diversification with US and Canadian large cap ETFs, for example. The American economy holds out opportunity for lots more growth over the next few years, plus major corporations have paid down costly debt, become more efficient (that’s why unemployment shot up) and expanded their markets. In short, they learned what people buying houses in East Van did not.

Of course markets will correct, but when is unknown. By historic valuations, the S&P is about 12% too expensive. But then (as I said) these are not normal times. Inflation is tame. Rates are extreme. Companies are making money. Central banks are vigilant. Even events like MH17 and Gaza don’t seem to matter much. So expecting a badass move down may be unreasonable.

If you have a balanced (40% safe stuff, 60% growth assets) and diversified (ETFs in Canada, US and abroad, large and small cap) portfolio, a 10% or 15% dive for stocks will be a piffle. If you’ve been sitting on dead cash, then it’s a time to buy.

Of course, most people won’t. They’ll sell. But then, they read the Globe. Losers.