Year: 2009

I always enjoy features in MoneySense or the Globe and Mail where they profile a family, highlight their current money issues, then consult with a panel of financial planners for suggestions on what the family should do moving forward.  Some time ago in MoneySense, they talked to a couple who worked, lived a frugal lifestyle, were paying down their mortgage on an accelerated schedule and fully funding their children’s RESPs, but at the end of the day had nothing left for retirement savings.  They asked what they were doing wrong.

Most of us remember at some point seeing the chart or hearing the idea that if you saved $200 / month from your 25th birthday until you retired, you’d have more than someone who saved $400 / month from their 35th birthday until they retired.  That’s the magic of compounding!  Many of us see this type of thing and it motivates us that start saving early and often.  HOWEVER, there’s another side to the issue.

It’s probably MUCH easier for the typical 35 year old to save $400 / month than it is for a typical 25 year old to save $200.  As you get older, usually your earning power goes up, and at a certain point your expenses go down (once your mortgage is gone and the kids have left home).  Even though you have less time for compounding to do its thing, you have the capacity to save more.

This was the response from the experts to the couple mentioned at the beginning of this post.  They were already taking care of a number of big expenses, and the experts said they needed to put retirements savings on hold.  With a paid off mortgage, and significant savings for the children’s education in place, at a later date they’ll be capable of directing far more of their income at retirement.

The other comment, which I also felt was worthwhile, is the experts warned that they shouldn’t live an impoverished life NOW to avoid living an impoverished retirement.  As Buffett might say “it’s like saving up sex for your old age“.

I was talking to a friend in a roughly analogous position recently.  She’s a mind-30s professional and opened an office in the last couple of years.  She’s paying all the bills and funding her modest lifestyle, but doesn’t have a lot left for retirement savings or investing.  When she was worrying about this, I told her that she should be patting herself on the back for having a successful business (that’s far beyond ramen profitable).  Her financial focus right now is growing her business, which is what it should be.  It will naturally compound and begin growing organically (word of mouth and all the marketing she has in place), at which point she can start directing more money toward retirement (and keep increasing this as her business grows).

This all certainly isn’t to say that saving (and especially retirement saving) is unimportant.  If someone says they aren’t at a stage in life to be saving for retirement then buys a plasma television or an expensive furniture set, I’m not going to be able to get behind their decision.  Instead, I’m saying that if you’re saving for your kid’s education, paying down your mortgage or investing in a business, you ARE preparing for retirement (just not using an RRSP).

Don’t beat yourself up.

I often see kite surfers zipping around Lake Ontario on windy days and I think it would be a great sport to pick up.  The only problem is – what do I do with the kids?  I can’t very well go flailing around in the water with my young kids patiently waiting on the shore for hours at a time.  You might be thinking that maybe my wife could look after the kids – but she is home with the kids all week so I’m not sure that “playing around in the water” qualifies as a bonafide excuse to leave her with the kids.

For those of you with young kids – how do you do activities that don’t involve the kids?  Do you just give up on them altogether?

Here are some pics I took last weekend of kiteboarders:

All photos taken with my trusty Canon 200sx.

I’ve travelled in developing countries such as Thailand, and one of the interesting things is that they won’t protect you from yourself.  You might be climbing up a mountain and where in the West there’d be a massive fence to prevent anyone from falling over the edge, in a developing country there’s a single chain around the outside.  Perhaps the message is “if you’re dumb enough to fall off a mountain, we’re not going to kill ourselves trying to prevent it”.  Another example is the ability to come into close contact with wild animals.  At a Thai zoo they were letting visitors bottle feed a tiger cub (which was VERY cool, but I suspect even a baby tiger could do some damage if it got its claws or teeth into you).  They also have elephant shows that involve things such as having the elephant step on an audience member.  Having a 10,000 lbs animal standing on you isn’t very bright, but if the audience member is willing to volunteer, the people running the show are happy to let it happen.

We all have our bone-head moments, and it’s no good if it leads to serious injury or death.  I remember one time at a camp fire I decided it was a good idea to move one of the rocks around the fire, reached out to grab it and gave myself a good burn.  The people with me were sympathetic but (rightfully) told me it was a pretty dumb thing to do.  And you know that elephant thing?  Yup, I did that too (it put one of its feet right on my chest, knocked the wind out of me).

Beyond physical danger, there’s also numerous people looking to take advantage of consumers by selling shoddy products (or outright fraud).  All levels of government try to protect their citizens from this but, as with many government endevors, they do a painfully bad job of it.  I’m certainly not blaming the victims, but I sometimes suspect there’s an unintended consequence happening where such attempts end up leading to MORE harm to consumers.

Because people living in a western country are protected so much, they start counting on it.  Some people ask, after seeing a commercial for the “$49.99 Path to Instant Wealth!”, if it isn’t true, how can they be advertising it?  Wouldn’t the TV station or someone in government quickly shut them down???  Others may not be so upfront about their feelings, but in their heart-of-hearts they can’t believe a scam artist would be advertising in the Globe & Mail’s classifieds or on network television.

I’m planning at some point to do a post on the anatomy of an infomercial, but basically there’s a group of people who’ve made an art of quickly gearing up some bogus product, advertising the heck out of it, then shutting down the company and draining all the cash as the regulators come knocking.  They re-brand themselves, and start pitching something similar, rinse and repeat.  The laws to prevent this type of thing (and people enforcing them) just can’t keep up.

As an aside, you sometime get a similar justification on the other end FROM the scam artist.  Apparently a number of people involved in running “Nigerian advance fee scam” truly believe that Western government reimburse citizens for money they’ve lost to the scam artists.  This is how they morally justify what they’re doing (“they’ll get all the money back from their government, so it’s ok if I steal from them”).

Once people become more trusting, because they’re used to this protection, it becomes easier for them to harm themselves, which leads to greater protection, and people making worse choices in a vicious spiral (every time you make it idiot proof, they invent a better idiot).

“Well Mr. Cheap,” you may ask, “do you want us to go back to a wild-wild west marketplace where scammers operate with impunity and there’s little protection for consumers?”  Yes, I suspect in many ways this would be better (or at least should be taken into account when considering expanding consumer protection).  We’d all get burned early and often, and learn that you have to factor the merchant’s trustworthiness into any transaction.  People such as Ellen Roseman would become even more important, as they’d propagate information about who is behaving well and who is behaving badly.  I think the door-to-door energy marketers are scum, but I also think they’ve made Ontario consumers far more cautious about doing business with strangers who come knocking at the door (which is good).  The obvious counter-argument would be that the barriers to commerce of having to evaluate the trustworthiness of everyone we want to do business with (and the varying ability of each of us to do so), would lose us more than any gains that would be made by encouraging more cautious consumers.  I don’t believe this, but I don’t have anything but a gut feeling for doubting it (and would be delighted if someone could provide compelling evidence that this is the case).

Canadian Capitalist wrote a very interesting post yesterday highlighting the fact that there are some disabled former Nortel employees that paid into the “self-insured” LTD (long term disability) plan offered by Nortel and now might lose their benefits.  As Thicken My Wallet pointed out in the comments – this basically a loophole in the law – the contributions made by the employees that were in the LTD plan did not belong to Nortel and shouldn’t be considered part of the assets available to creditors.

Ram correctly points out that the government should fix this – I find it ridiculous that they were able to change the RIF minimum payment rules last year thanks to CARP’s constant nagging which was a complete waste of time yet something important like this can’t get changed.  Even though I said differently in the comments (since I didn’t fully understand the situation prior to TMW comments) I agree that the government needs to help those people and fix the rules on this matter.,

That said – I still want to talk about government bailouts of company defined benefit pensions!

One of the big problems with government bailouts of company pensions is that is that those are private contracts or “deals” between the employee and the company – often via a union.  It has nothing to do with you or me or the government.

Technically it’s not anyone else’s responsibility to help someone who made a private deal with a company and it didn’t work out.  It’s the same thing as if someone had all their investments in their own company stock and it goes bankrupt.  Anytime you make a long term deal with someone else then you face the risk of the other party not fulfilling their end of the bargain.  Whether it’s your pension or a lawn care contract – it’s your responsibility.

Now I’m not so hard-hearted that I think these people shouldn’t be helped at all – I would have no problem with the government helping them out if necessary.  But what I would really like to see are some changes for the future to prevent it from continuing to happen.

Some suggestions

Outlaw employer-run defined benefit pensions.

This is a bit extreme but it does take care of the problem where employees base their financial planning on an expected pension and run into trouble if the pension is reduced (especially if it reduced to zero).  Most workers use some combination of rrsp, tfsa, CPP and OAS for their retirement so it’s not like there aren’t alternatives to defined benefit pensions.

Allow opting out of defined benefit plans.

One problem that exists now is that normally someone working for a company that provides a defined benefit plan has to participate in it.  This doesn’t give the worker any choice in their pension since the contributions made by the employer and employee count against any RRSP contribution room so the employee might not be able to save enough outside the company pension.  Allowing the employee some choice will give the employee more responsibility and will reduce the obligation for the government if things go bad.

Only have government run DB plans

In this case companies would not be allowed to run their own plans but could participate in a government run (the CPP would run it) pension plan.  The main difference is that the liability would be on the government so everyone who participates in these plans would be on equal footing.  These plans would also be fairly conservative so they might not be as overly generous (and risky) as some existing pension plans.

Employee education

I think this one is a complete pipe dream but if you could educate the employees that:
1)  Their pension plan is only as solid as the company and the pension management and things don’t always work out.  The pension might not be there for them in the amounts promised.
2)  Saving outside their pension might be a good idea.
3)  Buying company stock is very risky because they work there too.

Don’t allow employees to own company stock

This one has nothing to do with pensions but always seems to come up when public companies such as Enron go out of business.  This is too hard to regulate and really falls under the category of “education” but it would be one way to force employees to diversity – Bad Money Advice had an excellent article regarding the follies of owning company stock. Bottom line is that you shouldn’t own any – if you do have some because of special deals/payments etc then sell it as soon as you can.

Conclusion

While I do feel bad for employees and retired employees who have retirement plans go bad – bailing out each group when they run into problems isn’t the answer.  Leaders of public companies have shown that they manage for one reason and one reason only – for the mega-bonuses they can get if the company outperforms.  They generally do this by taking extra risks – worst case scenario is that they get let go with a big severance package.  Or sometimes they just cook the books to make more money for themselves.

If you favour more regulation then don’t let these companies be responsible for the future of their employees.  If you favour less regulation then give employees some education on the risks of having a company pension plan and allow them to opt out.