Retirement

We are often asked by people if or when they can retire based on their savings.  Bay Street always says we need to have liquid assets totalling over $1m to survive in retirement.  This is nonsense.  The key is to own a paid off home and be debt free. If one achieves this, all the average person needs is around $250,000 ($450,000 for a couple) to maintain a middle-class lifestyle in retirement.  At the same time there will be the monthly Old Age Pension and CPP which can add an additional few thousand a month. 

How does one prepare for retirement? In addition to savings, there are other things to plan for that are just as important such as a proper will drawn up.  If you do not have one, do so immediately and then pick an executor.  I always recommend you must be careful picking one for your estate.  You want someone who will obey your wishes fully.  Lawyers and accountants will do the job, but both are very expensive and most likely have no emotional commitment to you as a client.  Plus, they never have enough time to do an estate all at once.  Because of this we suggest a reliable family member or a close friend who you trust.  

We then ask the client what they plan on doing when retired.  Most never give it much serious thought. One client told me what she planned, and I then mentioned that is great for first few weeks, but what are you going to do with the rest of your life? She ended up working two more years. 

When it comes to saving for retirement always start early. We are groomed to save for a downpayment before anything else.  We disagree.  If the average home price is reasonable, it can make sense, but today it is better to focus on retirement savings and favor the significant compound returns that financial assets can offer over time. Based on Canada’s average home price in June the bare minimum downpayment should be $70,000, although $138,000 (20%) is better because it will qualify for a CMHC loan. If you can save the latter by 35, you are better off building a retirement portfolio first rather than save for a downpayment.

Time is the most important variable to growing money, and the more you have the better off you will be.  The average return for most stock indices is roughly 7% annually which means your money will double every 10 years, if reinvested.  However, if done properly, one should be able to double the average return. This is why we suggest start by building up as much savings as possible at a young age.  

We always recommend saving $10,000 ($20,000 for a couple) and invest in GIC’s first. This money is strictly for emergencies.  After that, begin a retirement fund of $100,000 in safe blue-chip companies that have a history of increasing dividends.  These dividends can be used to help build a downpayment fund. Once the downpayment is saved, the income from the portfolio can then be reinvested.  

When buying a home, always try and pay it off ASAP because the tens of thousands of dollars in interest you will save can be directed to retirement savings. These savings are easily achieved by choosing a weekly mortgage payment or by adding extra cash each month. On a 20-year mortgage each dollar of principal paid early can result in savings of up to $3 in future interest charges and will shorten the life of the mortgage by a few months at least. The faster a mortgage is paid down the closer one becomes to a comfortable retirement. 

Make sure your equity portfolio is filled with top-quality Canadian firms that have a history of raising their dividends annually, like all our recommendations. As well, get rid of all mutual funds, options and ETFs. These are designed solely to make the banking industry rich. 

As you age, increase holdings in insured GICs until they become roughly 70% of your portfolio at retirement, in today’s economy.  Once you enter this chapter of your life you cannot afford to take any major losses.  If one does it is almost impossible to recover from them because time is now running against you.  Plus, we never know when fate will deal us a bad hand, like poor health. 

Never gamble. Commonsense is always your best guide to saving for retirement. Stick to blue chip securities like banks, utilities, energy and the major retailers because these investments will always grow with the economy. The main key to investing is, if possible, always re-invest all income and capital gains.  Even more important than having a large nest egg, always settle in a life that keeps your mind and body active. Neglecting both will result in a shortened retirement making the money you worked so hard to save irrelevant.

After the recent cut to interest rates, people are out in full force predicting a Bank rate as low as 3-percent. These same people are thinking it is going to be an economic saviour.  We doubt it, because if we do see rates that low, it will cut consumer spending and exacerbate our housing problems by pushing prices up because one will be able to borrow more.  Let’s hope this does not occur since affordability is one of the main issues in our economy.   

If interest rates do fall to 3% it will mean our economy has entered a recession and unless interest rates drop south of the border, our dollar will probably fall to 70 cents U.S., thereby creating inflation which makes Canadians worse off. Ottawa and most current Western governments do not understand that it is savings that build the economy. Without it our financial system would collapse. If anyone questions this, provide a country that has prospered without household savings.  One cannot because it does not exist.

Yesterday’s economy was based on record consumer debt that is now restricting today’s GDP growth. This is why rates today should be used to reward savings and protect the dollar, nothing else. It makes more sense to allow those with savings a minimum $5000 in low-risk passive income annually per $100k than to save those on the edge of insolvency a few hundred per month.  These savings in interest will do little for the economy because it will most likely be forced towards paying off debt rather than being productive and work its way through the local economy like higher passive income will do. No matter what, those who are being squeezed by higher rates today will still be in trouble with a bank rate two-points lower. They are pooched and will only be valuable to our economy with a clean financial slate.  

We predict that sometime during the fall deflation will become more obvious.  Led by a continued housing correction, prices for most goods and many financial assets will fall. Housing demand is there but few can afford today’s interest rates and prices.  The latest numbers show the average family income has fallen slightly to $112,000, which means people can qualify for a CHMC loan of $340,000.  This is enough for maybe a condo in small town Maritimes or the Prairies but nothing in the main centres across Canada where prices range between six-and-eight hundred thousand dollars, with Toronto and Vancouver costing over seven digits.

There is an acute shortage of tradespeople, and these positions are not being filled even with excessive immigration. This is just adding more flames to the housing market.  For 2024 it is now estimated there will be only 200,000 new housing starts, down from 230,000 last year because of a shortage of skilled labour and newly enacted laws that deter speculation. Here in B.C., it seems like the government is the largest developer. This is not a surprise since it can take up to three years to get the needed building permits.  It is the speculators that will fulfill the demand for housing but only if they can make money in a timely manner.

If you want to see what low rates do to an economy, look across the Pacific to Japan. Their economy is finally starting to recover from decades of contractions created by an exploding real-estate bubble that was followed by a period of excessively low interest rates.  As the chart above shows, accommodating the borrower by sheltering them from higher rates does not fix an economy.  It does more harm because those who are drowning in debt no longer contribute to economic growth no matter what rates are. This is why it is so important to reward the saver. 

Squeezing the indebted into bankruptcy speeds up a recovery since the process lasts only seven years at which time their credit record is wiped clean and a new one can be rebuilt. As harsh as it sounds, it is better to strangle the indebted and force a recession that may last a few years rather than decades as Japan’s economy has proven over the last 35 years. It was not until this last February that Japan’s major stock index, the Nikkei, broke the last high set in 1989 because of an irresponsible monetary policy that kept interest rates low and punished the saver.  

If a country wants to maintain a population, there needs to be 2.1 births per female.  Like most wealthy nations, we do not fall into this category and are thankful that foreigners choose Canada as their new home.  However, this policy is only productive when managed properly. An immigration policy that allows for a population growth above 1% annually creates chaos across the economy because there is not enough time for it to adapt, like what we are witnessing in Canada today. Ottawa is going to allow 488,000 people into Canada both this year and next even though the housing shortage was 500,000 units last year.  If we want to reach a balance between housing demand and population growth, we must limit immigration to 200,000 people for a few years.  

The only solution that will allow Canada to reach its potential is to have a government that puts the saver first, allows our businesses to develop, and let the labour market dictate our immigration policy for the time being. Without these three, the economy will continue to be lost. 

Chart from www.tradingeconomics.com

How much foreign investment has the Liberal and NDP coalition attracted since in power? None.  It scared it away. The above chart shows the amount of foreign investment that entered Canada (Foreign direct investment in Canada) and the amount of investment that left our borders (Canadian direct investment abroad). Deducting the first from the latter results in either a deficit or surplus.  Clearly a surplus is ideal because it acts as support for our currency. However, in Canada's case, since Trudeau came to power we have realized record investment deficits, as highlighted in the chart below.

Between 2015 (when Trudeau came to power) and 2023,  the investment deficit increased 211% and $4.583-trillion more investment left Canada than entered.  To put this amount into perspective, investment worth more than Canada's 2022 and 2023 GDP combined or the value of the TSX left country for greener pastures under the Liberals. 

One outcome of investment deficits is a declining currency.  Investment dollars leaving our borders must be exchanged for another currency which places price pressure on the Loonie.  This is highlighted above which shows that the Loonie lost 12% of its value since 2015 and means that Canadians lost the equivalent of their wealth on a global level. It should also be pointed out that our dollar traded between par and ninety-cents during the previous government only to begin a decline as soon as it looked like Trudeau was going to become Prime Minister. 

 

The above is just one of many factors why the OECD predicts Canada will be the worst performing economy out of all 38 members through to 2060.

With a change in government, Canada will reverse course. Nobody wants to invest in a country whose leaders turn down investment, raise taxes from all angles, and place mandates on products and services. Canada has all the necessities to reclaim our economic status which is why the TSX offers some exceptional long-term oppurtunities today. Maintain 40% of your investments in cash equivalents and the remaining funds in blue-chip companies with a history of dividend increases.

Data collected from https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610000801 unless stated otherwise

Markets are giving mixed signals.  The Baltic Dry Index which measures the cost of shipping dry goods has been in a two month decline but the CRB Index (dry goods) has gained 9%. The latter means inflation is in gear and the first says the global economy is moving less product.  Gold is at all time highs, Bitcoin is up 32%, and both experience abnormal swings each day. For example, one day Bitcoin soared 3% only to drop 4% the following one. We have witnessed gold jump $56 one day to over $2,400 and then close $28 lower.  These two are warning of wild speculation.  Generally, this style of investing often signals the peak of an economic cycle.

According to the Bank of Canada “…when you compare Canada’s recent productivity record with that of other countries, what really sticks out is how much we lag on investment in machinery, equipment and, importantly, intellectual property.” Between 2014 (when it first appeared Harper was on his way out) and 2022, Canada’s inflation-adjusted business investment per worker (excluding residential construction) declined 18.5 per cent, from $20,264 to $16,515. This is worrying considering the necessity of investment on economic output and standard of living.  To increase productivity, we need governments to accommodate investment, not scare it away.

Underinvestment will be exacerbated by the most recent budget. Specifically, Canadians desperately need tax relief.  Keeping the Capital Gains tax where it is at will keep more money in circulation and eliminating the Carbon tax will immediately put cash into our pockets, something that is desperately needed today to keep the economy growing. Higher taxes deter investment and, no matter if it is foreign or domestic funds, encourage an outflow of investment.

The budget forecasts Liberal deficits for at least the next five years which increases the likelihood of future tax hikes and creates even more uncertainty for investment. Such an unpredictable business environment will make it harder to attract business to Canada. Thankfully, this is changing the more it looks like the Liberals on their way out. Even Warren Buffett mentioned he is looking at Canadian investments again. Given he sold his sizeable stake in Suncor after Justin got into power, it would not be surprising if he is looking for similar assets knowing that the Justin is gone next year.

According to the Fraser Institute, the provinces and federal government are expected to spend $81.8 billion on interest payments in the next year, assuming every level of government balanced the budget today. It is also expected our nation will pay close to a trillion dollars in interest by 2035. That is money the future generations will never see but pay for the rest of their lives via higher taxes. What would this money do for our country if it was directed at education, policing, healthcare, and military? The path Trudeau is taking us down we will not have enough soldiers or hardware to defend our borders, let alone others, by the end of this decade.  Is this not a form of treason?  Sadly, similar government mismanagement is prevalent across the globe.

Preserve your cash.  Depending on your age and risk level, keep 40% of your portfolio in insured Guaranteed Investment Certificates (GIC’s) for now. Stick to one-year terms which today offers around 5%. Try and keep GIC’s in registered accounts so the interest is not taxed and favour dividend stocks in your regular account since the income is taxed less via the Dividend Tax credit.   Buy and hold only blue-chip shares that offer a dividend yield between 4-and-8.5%. When interest rates start to fall mutual funds will be big buyers of these shares due to their attractive yields. Plus, we believe when we get rid of the useless government in Ottawa, Canada will be the number once country to invest in. The future is Canada.

Greece came asking for our Natural Gas (NG) last month. Justin turned them down like he did to Germany and Japan. What he does not understand is Greece has all the needed pipelines in place that can deliver our NG to Eastern Europe.  This would have been a perfect opportunity to hurt Russia and China but Justin is scared to offend his totalitarian idols.  This is without a doubt his biggest mistake and shows contempt for all Canadians and our allies.  Furthermore, it provides further evidence of how out of touch he is with the real world. 

We will never know how much tax revenue, profits, and jobs this deal would have created, but we do know that shortly after Trudeau told Germany selling our NG lacked a business case, they signed a $50b deal with Qatar. Trudeau is delusional if he expects all governments around the world to follow his example and eliminate fossil fuels. Does he really expect Africa to keep their population in poverty by not developing their recent NG discoveries in the name of something that science dictates a natural phenomenon? Only horrible leaders like Trudeau prevent a population from moving forward.    

Justin tries to defend his climate policies on protecting future generations, but with history as our proof, humans only care about such issues when they have a roof over their head, when their bellies are full, have some savings in the bank, and disposable income left over. Surviving cold, heat, starvation, and everything else that comes with poverty are the enemies of environmental preservation because trying to survive consumes all your thoughts and energy. Only when people are comfortable and healthy will they begin worrying about climate change and be willing to make positive changes. 

Every developing country wants what we have, and natural gas will allow for this to happen. Both sides of the deal benefit. It creates jobs, provides energy to industry twenty-four hours per day, is ridiculously cheap, and contrary to MSM, it is a clean source of energy.  Unfortunately, just like he believes his twenty-thousand-dollar watch tells better time than what the common folk wear, Trudeau believes energy that costs more is the better option. 

By blocking the sale of our NG, Trudeau is hurting Canada’s future generations. He is like a CEO of a major retailer stopping the sale of their best-selling product in the name of virtue signalling. Like all companies, Canada cannot afford to lose revenue. Trudeau needs to go.