Don’t Let ‘Em Scare You
Posted by Gail | Filed under Retirement Planning
This comment came through from Kelly on my website:
Hi Gail! I am currently reading a dooms-day type book by an American author that deals with the potential for hyper-inflation in the near future given the ever-mounting US deficit and I would love to see a blog about your thoughts on short and long term inflation in Canada and what this means for retirement savings and emergency funds. I currently have about 75000 in RRSPs and save 600 per month, I am 33 and my financial planner says that if I continue at this rate, when I retire at 5577, my savings will only amount to about $350000 in real terms if we assume an inflation rate of 3%!!!! I don’t think this is something that people really think about, yet is so important in planning what to save. I am also extremely lucky to have an indexed public service pension plan…but if inflation rates of 10%, 20% or more are possible (as suggested by the dooms-dayer)…even that might not be enough! Anyhow, great blog and amazing website! Keep up your good work!
So here’s a chick who has an indexed pension plan AND is saving $600 a month AND is only 33, and her advisor has used the spectre of inflation to scare the crap out of her. It won’t be enough! Really?
At a return of just 5% on average, she’ll have over $900,000 plus a big fat pension plan that is indexed, and it still won’t be enough?
I am sick to death of the industry trying to scare people into saving more money by telling us that no matter what we do we must do more. More, more, more! Or we must take bigger risks with our money by investing in things we aren’t comfortable with, don’t understand, or would be fools to ignore.
Is it any wonder that people don’t save? With failure as the outcome, why would anyone bother? Is this why Canada’s debt continues to climb as our savings rate stagnates? Are we all so sure that we can never have enough that we’re content to live for today and damn the future?
Kelly, don’t let The Spurts scare you with predictions of a supersized inflation rate. There’s no doubt in my mind that we’re going to see a jump in inflation. But if you look at the historic records, taking the super-inflation of the 80’s into account, we still come in with an average of about 3%. And a short period of inflation isn’t anything to sweat. It’s life. Part of the economic cycle. Just know that when it comes it’ll bring higher interest rates (on your debt and on your savings) so if you’re very conservative you can lock up those higher rates for the very long term and benefit hugely when rates once again fall. Go read my blog on Interest Rates & Inflation if you want more info on this.
You also belong to a very sweet pension plan and can likely expect your payout to be 60 – 70% of your working income. Your savings, therefore, will only need to fill that gap.
You’re doing fine. Better than fine, actually. If I were you I’d make sure I was maximizing my TFSA and then maximizing my RRSP (in that order) so you’re growing as much of that money in a tax friendly was as possible. With your great pension plan, the last thing you want is to have is a whopping tax bill come retirement.
And for heaven’s sake, I hope you’re having some fun now too. Sometimes we get so scare about what the future holds that we completely forget that we are Living in The Present. Yes, you have to do the right thing so you’re not destitute later when you’re not working. But if you’re saving everything extra and having no fun right now, you’re not having any kind of life. You must find the balance between today and tomorrow.
People, we all have to save. Some of us, like Kelly, have the wherewithal to save a lot. Some of us, not as much. It doesn’t matter how much you can afford to save, start. Over time, make it one of your goals to grow your savings.
Never mind all the blah-blah-blah about it not being enough. It’s more than you’ll have if you don’t save. And never mind the yada-yada about earning higher returns. Choose investments with which you are comfortable and have some experience/knowledge.
Saving is #2 on Gail’s Golden Rules. To have some money later, we have to save now. And all the dire predictions for the economy or glowing reviews of the market don’t mean squat in light of the fact that as a country we aren’t saving diddly-squat. Perhaps if The Spurts would just shut up we could hear our little voices whispering to our common sense and we would be okay.
You can’t go wrong doing the right thing. And saving is the right thing to do. Do it!
March 1, 2010 at 7:56 am
You said just what I used to think. What was the point of saving? It’s never going to be enough. But then I heard the little voice and now don’t listen to 90% of what I hear from banks or “advisors”. Besides your blog, the only helpful thing I’ve ever seen on retirement saving was an article in the last issue of Money Sense, where they talked about three different scenarios for retirement – what you could expect to be able to do on a set amount. It was straightforward – although I didn’t really agree with their assumptiont that all government pensions will always be there – but it made me feel a lot better about saving. And with the rise of reverse discrimination – I’m not sure that I’d feel a whole lot safer with a government pension anymore…
March 1, 2010 at 8:00 am
Too many people get caught up in the issue of inflation. If you are saving and getting a reasonible rate of return then you will make it in this world.
I used to believe a lot fo the doom sayers. I bought into Y2K and Peak oil. Now I’ve learnt that I have better things to do with my time then worry if the sky is going to collapse. I’m much happier not worrying about that stuff. And if the world should end I’ll deal with it then.
regards,
Jason
March 1, 2010 at 8:16 am
Besides, if she retires at 55, like most who retire that young, she’ll likely do some part-time work or consulting. So she’ll continue to have some income coming in. And if she continues to be good with her money then she’ll likely have vastly reduced expenses – at 55 she’ll likely have her home paid off. She’ll be fine! I’m 46 and am paying for wasted years with a very small RRSP account (under 75k and until last year in some of the worst underperforming mutual funds you could imagine). However with CPP (and yes it will be around for a long time – don’t let the spurts scare you – the CPP has been valued to provide benefits for at least the next 75 years thanks to the changes made to premiums in the 1990s), and a pension plan, I’ll have about $30,000 in pension benefits a year. With those kinds of numbers, I am much better off putting money in TFSAs than RRSPs anyway – something the spurts don’t want to tell you.
March 1, 2010 at 9:48 am
I like the idea of maxing out the TFSAs before the RRSPs. It sounds like Kelly is going to have a pretty nice income in retirement. (What a great “problem” to have!)
As for inflation, I’d love a little right now. I’d like to start earning more than 2% on my savings! I agree with Gail. Just make sure you’re putting something aside for tomorrow, minimize your risk, and enjoy the present.
March 1, 2010 at 10:35 am
I read the blog daily but don’t often comment; I felt obligated this time since it’s a topic that bothers me a lot.
I don’t worry about inflation for my investments at all. The investing industry is making a truly horrible assumption when they try to scare people about inflation: that your wages won’t rise as well. There’s a second part to that assumption: that you won’t increase your investment contributions to match inflation. If you don’t do that, then they’re right that inflation will eat into your investments. But, if you increase your investment contributions each year to roughly match inflation, then you’ve neutralized the worry.
If you normally put 500/month away, then on 3% inflation you put 515/month away the next year, 530 the next, 546 the next, and so on: each year increasing your monthly contributions by the inflation rate.
It actually gets better. There are surprisingly few studies into whether our worries about inflation are even rational in the first place. Elizabeth Warren (I encourage everyone to find an watch her lecture “The Coming Collapse of the Middle Class) looked into a number of spending categories and compared spending for a typical family in the 70s and a typical family 30 years later. Categories such as housing, food, clothing, cars, appliances, health care, child care, etc. were considered. In nearly ALL of the categories that we use daily (food, clothing, appliances) prices have either stayed the same or gone DOWN! (All of this is adjusted for wage increases.) Housing costs have gone up but here’s the reason: people are living in bigger houses. The per bedroom cost of housing is basically the same: if your parents were fine in a 4 bedroom 2 bath house, then if you buy a similar home, then they’re approximately the same in cost. Again, there is an inflation difference but when you adjust for corresponding wage increases, then the picture isn’t even remotely bleak: it’s actually fairly bright. Technology improvements make things like appliances cheaper over time (provided that you don’t always buy the newest and best models).
The one area where costs have sky-rocketted is health care, but the study was an american one.
Don’t fear inflation. Wages tend to rise to correspond almost exactly with inflation. If you match your investment contributions to increase with inflation, then there’s no boogeyman to fear
March 1, 2010 at 10:51 am
great post gail! i feel really inspired by this one.
It’s hard to remember sometimes that saving is enough….grow it in time!
I’m 25 and often feel like I’m not saving enough for retirement…but in October of this year I’ll get to joing my pension plan and 10% of my gross will be auto direct to that (5% from me and 5% match from employer). I just hope this April my raise is big enough to cover the 5% that I have to kick in.
March 1, 2010 at 10:57 am
Thanks Gail!!! I really appreciate your time and consideration to my post and think your advice reflects what my gut was telling me anyways! I am very blessed and very grateful to be in the position I am in, and not to worry…I still have some left over for fun now with my 14 month old son! I just came back from my mat leave and I am choosing to work only 4 days a week to have more time for the fun stuff, and thanks to planning, many of the tips and advice on your website, I am able to do so with out compromising my savings or lifestyle! Thank you again! P.S. I can’t wait for the new show!!!!
March 1, 2010 at 11:03 am
Also, thank you for the suggestion of maximizing use of the TFSA! I currently don’t have this set up as a savings mechanism, but I will get that going sooner rather than later!
March 1, 2010 at 11:26 am
rmck nailed the fault with the advisor’s scare tactic. If you don’t increase your contributions by inflation over a 30 year period then your savings will not buy as much as they would today. You don’t even need to increase your contributions every year, if every 3 years or so you realise that your contributions haven’t kept up with your wage increases and you make an adjustment your savings should pretty much keep up with inflation.
When doing projections involving inflation you either need to ignore inflation on both sides of the equation (contributions and final value of savings) or you need to account for inflation on both sides of the equation. That advisor deserves to be fired by Kelly for trying to use that kind of scare tactic. What a slimy way to try to get higher contributions (and fees) out of clients.
March 1, 2010 at 12:06 pm
Great post, Gail! I felt encouraged to save…after all, having something for the future is better than being in the red.
March 1, 2010 at 12:22 pm
Funny enough my husband and I were sitting at the ski hill yesterday for our daughters ski lessons to complete and he pointed over to the chalet and showed an area of the chalet (bar and food cafe) that absorbed a great deal (if not all) of his pay cheque when he was much younger and working at the ski hill. I then mentioned that wouldn’t it have been great if you had just saved 10% of all those pay cheques and how much he would have saved by now (some 20+ years later). He sighed and said yes that if he could go back and have a redo based on what he knows now – it would be completely different. And with that we are teaching our 7 year old daughters the power of saving starting at a very young age. Meanwhile we are playing catch up with our savings (his mostly) and doing what we can based on what we have. Can’t do much more than that.
March 1, 2010 at 12:22 pm
Thanks for being the voice of sanity Gail-what would we do without you?
March 1, 2010 at 12:25 pm
We currently don’t save enough in RRSP’s but when we are debt free (34 months and counting) we will then be able to ramp up our effort.
I just opened up a TFSA and look forward to adding to that also.
I guess it’s how much of a cushion you want when you retire.
Gail – you’ve said that typically we don’t need as much money at retirement for a number of reasons including we are typically mortgage free. We need to go to a Financial Advisor that can give us some more info on #’s. But I guess they are just estimates!
March 1, 2010 at 1:21 pm
I had a similar experience as Kelly. When I was 30 yrs old I met with a financial advisor for the first time. I was single, no kids, working fulltime ($30,000/yr income) with a pension to look forward to. I had about $15,000 in RRSP’s. He told me that I needed to plan to have $2 million to survive in retirement – $4 million to be comfortable! Me alone! … no kids, no husband… OMGoodness. It was so demoralizing. In spite of that he talked me into “signing on the dotted line” for a $200 monthly contribution to a mutual fund plan…. all the while cautioning me that “it wasn’t enough – no, not nearly enough”. When I think back to that advice now, it really irritates me! He scared me silly, and that wasn’t fair or appropriate.
March 1, 2010 at 2:16 pm
Once again, the voice of reason! Thanks Gail, for reminding us once again that common sense goes a long way. It’s sad that Kelly bought into the scare tactics. Here she is working hard and saving aggressively and she is still feeling anxiety, worrying that it’s not enough when she could be out having a great life! Gail, I love that your message is always balanced – that you need to look after yourself. You need to look after yourself financially, but you also need to look after your own health and wellbeing and not fritter away a chance to experience joy and fulfillment with constant worry or stress. Happiness is important – that’s one of the important messages I’ve taken from your show. I hope that Kelly doesn’t wake up one day and realize that she’s got a great savings account but no joy, no friends, no partner, no life, that the best years of her life are gone.
Jason – I agree, it’s so easy to get caught up in the negative messages we hear in the media. The truth is, taking care of ourselves is very basic. if we ignore a lot of the alarmists and just go with what makes sense to us, most of us will probably do okay.
Mrs.T – that’s shocking. $4 million for a single person? Outrageous.
And thank you to rmck for the solid feedback. Everything you’re saying makes sense to me!
March 1, 2010 at 4:35 pm
…please don’t worry about me! I have a very balanced life, with a great husband, an amazing son, a fun job, a lovely home, plenty of social activities (golfing, camping, racket ball, dance, to name a few) and travel, many friends, and over abundance of scrap booking supplies and a full 8 hours of sleep every night!
I am not stressing about inflation, but I like to be ahead of the curve and be prepared and well informed! Planning for the future and enjoying life now are not mutually exclusive, and I find it interesting that people assume that because I am saving now and planning ahead that must mean I am not having any fun in life now, because that couldn’t be farther from the truth. I think Gail’s message encourages people to do both, which is exactly what I am doing…but I just want to make sure I have all the information possible so I can make the best choices with my limited resources.
Just because I am doing my best to save for my families future doesn’t mean that I am a lonely hermit counting my pennies…quite the opposite!
March 1, 2010 at 5:08 pm
Kelly, you sound like you’re doing awesome, both personally and financially. I’m 11 years older than you and wish I was in your place financially… however, with Gail’s help, we’re on our way now and next month we’ll be debt free! I’m sure it will feel GREAT!
March 1, 2010 at 6:25 pm
People saying that a 4 bedroom, 2 bath house costs essentially the same now as they did in our parent’s day (relative to wages) clearly don’t live in most Canadian cities. The average Canadian house is more than 4 times average income. In the past, they were 2 or 3 times average income.
And don’t even touch on the huge non-affordability of cities like Victoria (8x), Vancouver (9x), Kelowna, Calgary, Toronto (5x), Montreal, etc.
March 1, 2010 at 6:38 pm
My parents purchased a 4 bedroom 2 bath 1 yr old home in 1978 for $63,000. My parents had a combined income of approx $40,000 at the time… which means their home cost 1.6 times their annual income.
27 years later, in 2005, my hubby and I purchased a 1 yr old 4 bedroom 3 bath home for 3.4 times what that same annual income would be today, so I agree with Deanna… price of housing has gone up significantly, relative to how much wages have gone up!
March 1, 2010 at 7:50 pm
Thanks Kelly for writing in. I am in the same boat but single and 38 years old. It is easy to focus on the threat of hyper-inflation and forget about the benefit of a fully indexed defined benefit pension plan. The financial industry is set up to freak us out. My new wealth advisor gave the same advice as Gail, TFSA first then RRSP and reminded me to live in the now. It is comforting to know that he is on the same page as Gail.
March 1, 2010 at 8:01 pm
My grandparents have lived through two wars, about three changes of governmental system, one hyperinflation, and two changes of currency, and have done quite well by not putting all of their eggs in one basket. They lost all they had put in government bonds and had the family business reduced to rubble, but they made enough on land for 30 years of retirement, got a modest but stable profit out of industrial stocks, and left the emergency gold to their children. My grandmother’s advice: 1. Diversify; 2. Keep your cool; 3. Invest, don’t speculate.
So, even if you go through “your retirement savings are going to be the least of your problems” phases of history, it doesn’t mean you cannot win.
March 1, 2010 at 8:46 pm
I agree — and it goes all ways —- usually there’s someone out there screaming that house prices are going to drop 40% tommorow, and someone else out there screaming that house prices are going to go up 10% so buy now. Follow the money and see how they get paid. Ten bucks says the first guy is selling a book telling you how to avoid this apocalypse, and the second person is looking to sell you a house
Make your own decisions, live comfortably, have a reserve fund, do the best you can.
Personally, for those of us with kids and a mortgage and in our 30s, my personal goal is to escape into my late 40s / early 50s with my job and no consumer debt. Anything else (ANYTHING) else is a bonus.
March 2, 2010 at 2:03 am
Deanna:
That comment obviously doesn’t apply to all housing markets. It should be rather undeniable, though, that houses are being built bigger than they used to be and this should be taken into account when comparing average housing costs now to then.
March 2, 2010 at 10:01 am
@ rmck – one thing that has driven prices up is low mortgage rates. In the 80s, a mortgage of 18% wasn’t unheard of. As for your argument that houses are bigger now, in the cities where they exceed average income the most (Vancouver, 9x, Toronto, 5x) trust me, as someone who lives in a 1300 sq. ft home and paid 4x as much as my sister’s much larger house in Stouffville, bigger costs does NOT equal bigger house.
March 2, 2010 at 11:44 am
That’s where I’m from so I know…”That comment obviously doesn’t apply in all housing markets.”
March 2, 2010 at 12:16 pm
Hi Gail, I hope in telling my story I help another person of my generation or in a similar situation.
I have been reading your blog religiously for the last couple of weeks and I have purchased your book and am working threw reading it. My husband and I are not doing to poorly with our finances…. Our depts. are Mortgage, 2 car payments of which only 1 has interest charges. We have no credit card or LOC dept (I like to keep it that way). My husband and I are both 41 with 2 children ages (11 and 7) and 2 dogs. I am the voice of reason at home when it comes to spending and I try to only buy if we have the $. I enjoy working with money. But I am sure I am going to get the Gail kick in the %*% & pretty soon as I re-tell my story. I have enjoyed watching TDDUP for many years and always thought wow how “they” could not realize what was happening to “their” money. Last summer I was part of the economic down turn. I lost my Management position and found myself unemployed in an industry that no longer recognizes an employment candidate unless they have some kind of designation (remember I am a child of the 80’s only the “privileged few could afford degrees). I struggled to find a position any position that would keep the roof over our heads. I have found a position, making considerably less then before and at a job I hate. But that is life and as it settles into a normal pace, my recent experience has become the catalyst that now makes me wonder what the &%&% am I going to do when I get old? We (yes we) have no RRSP’s (I don’t even know what a TFSA is. I am only now starting an RESP for the kids. I grew up in a household that as a new family to Canada in the 1970’s, life was a financial struggle, never having much but never going without the necessities. There was never talk about retirement or saving for old age. I am starting from scratch and paying the price of “oh I don’t need an RRSP I have a home” or “I don’t have the $ to put towards and RRSP right now”. Maybe when I retire I can survive on eating those words.
I am diligently working threw Gail’s spreadsheets and crunching the numbers and quickly realizing the consequences of financial Inaction. I enjoy working with numbers and kick myself for all those wasted years….. I am determined to teach my children all that I am learning. Thank you Gail for being the financial little voice inside my head waking me up from my financial slumber…… I look forward to viewing your new show.
March 2, 2010 at 1:06 pm
@80’s
RE: RESP — I have heard from many different financial experts that it is important to “save yourself” first — you mentioned not having an RSP, but not whether you might be eligible for any pensions.
If you are not eligible for pensions, before you save for your child’s education, you should first save to ensure that you and your husband have enough to get through the “golden” years.
People can survive without education, and they can also do student loans for the education they want….
At your age, you may not be able to afford to wait to begin saving for retirement.
March 2, 2010 at 2:09 pm
@ Kat +1 — there’s no scholarship for turning 65.
I know you’re not asking for help but I’ll throw in my two cents – one, do open up a TFSA. Particularly if your income is down.
Second, and I know it’s hard to think about it and really hard to pay for it, but if you need a certification|diploma|degree to get your job back, is there really no way to get it? 4 years sounds like a long time but in the grand scheme of things, it’s not. I know your debt averse but student loan debt isn’t so bad if you have a good job waiting for you on the other side.
Lastly, you should be commended for not having any consumer debt, other than your car loans. I’m a child of the late 70s, and do not think I’m any more privileged than a child of the 80s though
March 2, 2010 at 4:22 pm
Thank you both for your feed back, it is greatly appreciated.
I have just research what a TFSA is and by golly I will be opening one up…..ASAP. not sure what I will be putting in it yet, but my Gail homework will eventually tell me.
I think I may have been unclear, I do have a College Diploma but as my career path had diverted me away from my origin of study and sadly without a BA, BS, BAA, ABCD, EFTH or any other acronym attached to my name I am having a hard time competing with it the young. Even with 20 years Professional Experience many of the job posting for which my experience would qualify me all ask for a BA, BS etc… etc… and I normally get, “we were much impressed with your resume, but have decided to go with a candidate that better matched our requirements” or “we were hoping for someone with a degree in Business – BA” these are actually quotes.
I refer to being a child of the 80’s within the context of my own experience and others that I had the pleasure of growing up with. Born in 68 and immigrating to Canada with 3 other siblings we struggled to make a life. My mom was my strength and I to this day do not know how she did it. It is threw her that I learned the value of appreciating what you have and if you want something you have to work hard for it. For myself and many of our neighbors in the big TO going to College and University was a dream. I paid myself threw College (I couldn’t afford University) and took a course I could afford (administration). When I came out I did find a job in my chosen field but no acronym. 20 Years later and surviving the school of hard Knox I worked by butt off to make it into Management but sadly find myself battling against the young (rightly so). But enough of that…. ?
I will say that, no, I don’t have a company pension (another reason why I’m still in career transition) my husband does, but has just started to contribute to it (he is new with his company as well). I struggle with the Idea that I get myself an RRSP and not worry about my children’s education. I don’t want them struggling to get that Education and starting of their life with this big dept that so many carry even years after they have finished school. I will try some kind of balance, even if I can only give a small amount. At least I tried to give them some help. College and University costs are sky high and so is the price of housing and I feel as a parent I owe my children at least to try. All I can do is what I can and teach them how to respect themselves and their finances……… For weddings (they are both girls) my dear they will be on their own…. ?
My only hope is that I am doing the right thing……
March 2, 2010 at 5:05 pm
You’ll be teaching them the right thing by taking care of your retirement first and letting them also partially work their way through college – the way you did.
March 2, 2010 at 5:11 pm
@80’s It’s very nice to have parents that support and love you, it’s really nice to have parents that support and love you and can give you a little help financially with school, but I assure you — it is AWESOME to have parents that love you enough to make sure that they don’t end up living in your basement with you and your spouse.
There is nothing wrong with working for what you want in life…. frankly, a lot of people that just get it handed to them don’t appreciate it.
And spending all that money on 1 day? *shudder* yes, they should be on their own.
btw, the beauty of a TFSA is that you can have savings that you can touch, so if you think you have enough money, then when the time comes, use some of your TFSA for their education.
March 2, 2010 at 7:44 pm
Wow! Financial advisers like that scare the you know what out of me! I still believe in the motto “a penny saved is a penny earned”. We’ve seen in the last year or so how fragile the economy can be. As a result I’ve changed my investments from aggressive to minimal? Why? Because no matter how low the interest rates get, at least I’ll know that my principal amount will remain relatively intact. I’ve lost enough by being aggressive, now it’s time to hunker down.
March 3, 2010 at 1:36 am
Thanks you for this post. Feeling like nothing I save will ever be enough is a MAJOR reason why I have no savings to this point and have not made a serious commitment to eliminating my line of credit or student loan debts.
However, I am moving in a new direction and I am trying to make small, steady steps towards being more fiscally responsible. Knowing that its not hopeless makes it much less scary and depressing of a project. Your blog postings, show, general good humour and sensible attitude is also helping keep the “I am 32 and I have debt, no savings and am planning a return to school” despair at bay and allowing me to slowly plod toward a new approach to my money!