Happily ever after

KIDS modified

Donna’s husband died fifteen years ago. Smoker. “Too early,” she says. “He never listened.”

Sam left the house and fifty thousand in RRSPs, so Donna – with only her government pension – invested the rest for a monthly income stream. Grand total: $425,000. “Don’t take any risks,” she told the advisor (whom I know). “I can’t afford to lose a cent.” But it seemed like a big pile of money to her, so she rented a nice place and drew off $2,500 a month – from a portfolio making just 4%.

For seven years he told her to lighten up. For seven years she would not. “No way,” Donna said, “will I ever outlive it.” Then 2008 happened. Her portfolio dipped by a third (while the stock market sagged 55%). Against the advice of her guy, she cashed in, crystallized the losses and put the remainder – now less than $200,000 – into a savings account at the bank. “Good move,” TNL@TB told her. Her plan was to keep it safe, and dip as required

Last year Donna, now in her early eighties and quite healthy, ran out of money. The savings account is empty. Credit cards are maxed. She has to move into the kind of place she thought only downscale people lived. “I guess I am one,” she said this week when she called for help (her son reads this pathetic blog). It was wrenching when she cried.

Her mistakes were simple and common. Donna thought losing money was the greatest risk to guard against. It wasn’t. She allowed her emotions to overrule logic, selling at the worst moment. And she didn’t trust anyone with her money as much as herself. Now she’s old and poor.

You can be young, impoverished and happy. But never so at the end of your life.

This is sad, but destined to be common. There are over nine million Baby Boomers in Canada, and more of us turning 65 every year than at any other time in our history. Some are rich – about 5% of the cohort has a million in addition to their real estate. Most aren’t, with seven in ten devoid of corporate pension plans, the bulk of their net worth in real estate, and scant financial literacy.

This might not be a serious problem if we weren’t at a dangerous point in the economic cycle. But, alas, the perfect storm is gathering. Peak house means more and more net worth has been sucked into a single asset, even as the economy slags. Interest rates will be rising in the years ahead, impacting the market, reducing equity and scaring off buyers. Commodity prices have slumped, with oil back at the mid-$50 mark and a 79-cent dollar. The savings rate has tanked and 93% of people have not maxed their TFSAs.

So what are they thinking? That houses are safe, and the only thing they need own? Oh dear.

Well, as I pondered Donna’s situation a new poll on this subject popped up from Angus Reid. And it’s a shocker. We’re a little more screwed than we all thought, even without the Canadian economy now trying to slide into recession. The pollsters found 48% of retired people say they were forced to stop working by circumstances – usually job loss. Of that group almost a third said they “are struggling” to make ends meet. Another 46% report they get by, but can afford only essentials. In other words, about three-quarters are living meagre or deficient lives. Some retirement.

Half of these folks fear they’ll end up like Donna, outliving their money. They’re probably correct. But there’s more. The pollsters included working people, too, finding 74% of them are also worried they’ll deplete money before they exit life.

And this: among the retired, 57% say government pensions are their main source of income. That’s an average monthly payment of $618 for CPP and $564 for OAS, or $14,200 per year. Yikes.

So, here’s a concrete example of what happens when a government engineers low interest rates, and the central bank boss says he wants to encourage more citizens into real estate. People stop saving. They increase borrowing. They flock to houses, inflating prices and increasing debt. Everybody’s risk rises, especially in a society where the number of retired people will go from 6.4 million today to 15 million over the next two decades.

The politicians can ignore a few hundred thousand Donnas. They can’t look away from millions of them.

If I were, say, 30, this would scare me a lot.

On guard for thee

BEAR modified

In my home town yesterday people lined the street in droves, wearing every tacky thing in their wardrobe – so long as it was crimson or had a maple leaf. Dogs sported red bandanas. The tourist horses sprouted little flags from their halters and harnesses. Down the main street a few old cars carried old politicians, the MP included. Then a band. And the cake. This year it was about ten feet square, hauled by a Jeep and covered in chocolate hockey players. The proud baker walked behind, her pony tail flipping. A thousand people marched with her to the park, where it met its Waterloo.

While we celebrated Canada Day, the world spun. The people in Greece has a crappy time. The prime minister there flip-flopped. First he sent a letter to the Euro gods says his country would accept a deal like the one he’d walked away from. Then he gave a speech condemning it and asking people to vote it down on Sunday. Meanwhile the economy disintegrated hourly.

American stock markets shot higher, now that it seems more certain Greece will blink. More importantly, the numbers just keep improving for the US economy. A private jobs report showed companies boosted their payrolls in June by 237,000 workers, the most in six months. This comes after 280,000 more positions were created in May. And when the official government report comes out Thursday it’s expected to show 233,000 new hires.

This is the longest, strongest run for job creation in decades. It also came with news Wednesday that manufacturing expanded again in June, which demonstrates the internal strength of the American economy. Global demand may still be weak and the high US dollar is a barrier to exports, but it doesn’t matter. Consumers are happy with more jobs and higher incomes. They’re buying cars, houses, iPhones and dishwashers. Only the fruitloop doomers still insist the government’s lying and America’s in trouble. Americans disagree.

All this is remarkable for two reasons. Oil prices have collapsed (there was a huge drop on Wednesday), decimating the US shale fracking industry. And the Fed is about to raise interest rates for the first time in a decade. Both of those are negatives for the market, and corporate profits. But certainly not enough to dent a market that added almost 50% in just three years.

Yesterday I moaned a little about the situation here. US household debt is falling steadily, and here it bloats a little more each month. Our economy shrank for the last four months, and theirs expanded. The Fed will raise rates at least once this year, maybe twice, while the Bank of Canada head says our economy would have croaked without his recent cut. Canadians love houses. Americans own more stocks. Home ownership here is at a record high. There it’s at a 30-year low.

None of this I say to dis Canada. I adored the parade. The cake. The patriotism. I was beyond proud to sit in the House of Commons for nine years. I love my country.

But we’re probably going in the wrong direction, and the reward for that will be years of a subpar economy. This week’s oil tanking, plus raging wild fires in the western provinces, the mounting drought in BC, recessionary GDP stats and a 79-cent dollars are all sapping strength. The contrast with the US is stark. A few years ago our currency was worth more than the greenback, our arrogance was on display in Vancouver and you could buy a nice, distressed house in Phoenix for 70% off. My, how the tables have turned.

Well, this pathetic blog doesn’t run the country, so we have to deal with the hand dealt. Soon we’ll be swallowed up in a federal election campaign, the consequences of which could be dire. If you think the world looks askance at us now, just wait.

So, what to do?

For starters, the growth portion of your balanced and globally-diversified portfolio should be twice as weighted outside of Canada as within. These days about 17% Canadian, 21% US and 18% international is about right. And while having roughly a fifth of the assets in US$ is always a good idea, you can buy exchange-traded funds that give you American exposure but are purchased in loonies.

As for the fixed-income part – the safe stuff – put half in rate reset preferreds (paying 5% these days, with a big tax credit), and the other half in bonds. If you don’t understand why you should have bonds, revisit what took place Monday. When equities swoon (it happens), bonds usually go in the other direction. They stabilize and anchor a portfolio, tamping down volatility as well as your emotions. Just make sure you have the right kind.

Of course, given what may lie ahead politically, you should also flesh out your tax shelters. Today, for example, a couple can have more than $80,000 contributed to their TFSAs, but only a small fraction of people do. Make sure you’re among them. If you can’t afford higher mortgage payments, lock in now. But if you have money to invest, and the confidence to do so, then grow it until the mortgage renews, then make a big payment. If you don’t own real estate, wait. If you do, and all of your net worth’s in there, get out. If you work in the oil patch, find new work. But not as a realtor.

Despite the above, I say again, it’s a hell of a country.

My Canada Day was great. Far better than the MP’s.