Retirement’s Harsh New Realities

“Do not give way to useless alarm; though it is right to be prepared for the worst, there is no occasion to look on it as certain.” – Pride & Prejudice, 1813

Mark Twain was right when he said that although history doesn’t necessarily repeat itself, it certainly rhymes. In today’s world, I believe Gordon Pape (Gordon) would agree with Twain, but disagree with the second half of the above quote from Jane Austen’s novel. Based on the recommendations in his newest self-help guide (or what I define as a handbook given it’s format), he proclaims that there is a great deal of certainty with regard to future retirement plans…and the news isn’t good !

The timing of the launch of this book could not be better.: people continue to live through the (hopefully) tail end of the worst financial crisis since the Great Depression; the press continues to flash large headlines about the European union crumbling into pieces; the US is in debt up to its eyeballs with some of the worst unemployment numbers in its history; personal retirement accounts are a fraction of their original value; defined benefit pension plans are becoming as rare as four-star movies, and; many people are now scheduling visits with credit counselors to manage the predictable Christmas over-spending. Oh, and don’t forget those new years’ resolutions that are already wearing off (gym?).

At the same time, we are exposed to new national financial surveys on a weekly basis. Many of the recent surveys are highlighted in Gordon’s book. Sadly, a lot of what we’re learning is nothing new: the RRSP is underutilized, after 3 years most people are still clueless about the TFSA program, and too many people are retiring with a debt load over their head. Followers of Gordon’s previous books (and articles –  many of which are freely available) will appreciate his message that “Despite years
of warnings, exhortations and incentives, far too many are still unwilling or unable to take the action necessary to protect themselves from years of financial distress in later life.” Was that Twain I just heard ?

Throughout the book, you can almost hear Gordon’s head banging against the wall as he tries to understand why people won’t embrace Retirement’s Harsh New Realities. He claims this will be his last book on retirement (he is 75 years old), but I am betting he’ll provide a revised edition or two – he has to! He also stated that critics have previously accused him of scaremongering. Well, believe me, there are things he could have done with this new book that would have provided a much scarier story.

Book Layout

This handbook is divided into 2 sections. The first deals with those 9 harsh new realities (incidentally, for those who maintain an interest in financial planning, some really are not that new!). A couple favorites, for me, are the chapters entitled ‘We Don’t Know What We’re Doing’, and, ‘We Don’t Know Who to Trust’. The second section is basically the process map of solutions to the addressed problems.

Gordon provides a golden nugget at end of the book, with a section of Questions & Answers. You can appreciate that the author is exposed to thousands of emails, with people asking about even the most basic financial issues. Just reading through the questions will demonstrate why he needed to produce his swan song.

To conclude section two, he adds appendices that include Retirement planning worksheets, expense estimation worksheets, inflation training and a listing of recommended web site links. I always recommend that authors provide web access to PDF versions of their worksheets, since most readers  won’t mark up their books. Hopefully Gordon will put this on his list of to do items (with our thanks) !

Section One: The Realities

It should not come as a surprise to anyone paying attention: most of us are living longer. That simply means we could experience retirement for a much longer period. And with long life comes a larger requirement for money to support that extended period. In the old days, many of us were fortunate to hold a job for life and retire into the sunset with a solid defined benefit pension to cover that longer time frame. Today, unless you’re in the public sector with a tax-payer funded pension plan, the odds are high that you either have NO pension, or, your company has shifted your plan to defined contribution.

Sprott Business School professor, Ian Lee, identifies 3 classes of Canadians based on pensions:
– first class Canadians who receive an MP’s pension (now there’s a surprise)
– government class Canadians who get the public service pensions (retiring at 50 or 55, no less), and
– cattle-class Canadians collecting OAS at age 65

A Richard Ivey School of Business analysis of the 47 Canadian companies with the largest pension liabilities showed 40 had fewer pension assets than liabilities as of the end of fiscal 2010. The 47 companies’ aggregate pension liabilities of more than $150 billion exceeded total pension assets of about $136 billion.

Scared yet? It gets worse: another stat from Gordon’s book – “The number of Canadians with incomes below Statistics Canada’s poverty line grew from 204,000 to 250,000 between 2007 and 2008 (almost 25% in 1 year!)”. Add to this the fact that tens of thousands of Canadian seniors eligible for CPP and OAS have not even applied for their benefits, and you can understand why Gordon feels Were on Our Own, and. We Don’t Know What We’re Doing. To add insult to injury, another incentive for starting to get interested as early as possible is the latest finding as it relates to the early onset of dementia.

When the author reviews the nest eggs of many of the people who seek his guidance, it’s no small wonder that he highlights a chapter heading: Our Savings Are Pitiful. How often have you read articles promoting the benefits of compounding? The issue is that compounding requires time and money to be effective. Sadly, too much of that money is tied up in ‘stuff’ rather than in retirement accounts.

Gordon also utilizes a fair amount of space to deal with the issue of financial literacy. Many of those who are at least aware that they are illiterate don’t know exactly what to do about it. The fact is, regardless of income levels, education, profession or disciplines, financial ignorance is universal. Too often, we assume that certain individuals should be financially astute because they possess higher IQ’s. That is about as silly as thinking “owners of expensive vehicles are automatically skilled drivers”. The author offers some opinions as they relate to the Task Force on Financial Literacy. Needless to say, there is a bit of skepticism voiced about the financial industry’s involvement and it’s potential conflicts of interest (oh, and if only it were as easy as hopping on a yellow scooter). As for the government’s involvement?  Well, after reading the recent McLean’s cover “99 stupid things the government spent your money on”, you would wonder why the government should be involved with anything to do with financial literacy.

Yet another chapter focuses on the concept of risk and highlights the harsh reality that there is no such thing as a ‘safe’ investment. I won’t spoil the impact of this chapter with details, but suffice it to say, there are a lot of investments (sorry, I meant financial marketing ideas) to avoid. His comments about ‘Couch Potato Investing’ have already stirred up conversations on the web and in the national newspapers. Hopefully, people are reading those exchanges. Detailed arguments are highly educational.

And no financial self-help guide would be complete without a chapter addressing Canada’s needlessly complicated income tax system. Gordon takes the reader on a tour of the income tax form to demonstrate how the system is stacked against the retiree. If you don’t understand the phrase ‘income-tested benefits’, you are in for an eye opening presentation. It’s a great way to learn that success comes to those who finally embrace the need for completion of one’s financial homework. The government benefits from taxpayer ignorance…and they know it.

Harsh reality #8, We Don’t Know Who To Trust,  is a favorite. This morning, I opened the financial section of a national newspaper and the headline read: “Ex-RBC advisor gets prison term”.  Another couple of headlines, this time from web sites: “Is Your Investment Advisor Capitalizing On Your Fear ?”; “IIROC levies $5 million fine against ex-broker (Henry Cole)”. And, Rolling Stone Magazine columnist, Matt Taibbi has recently exposed yet another chapter in the ongoing saga of Wall Street fraud. At some point, you wonder if stuffing your savings in the spare bedroom mattress isn’t such a bad idea after all. The return isn’t very good, and inflation coverage is zero, but at least it’s better than what the financial parasites are offering. And you can (hopefully) trust yourself. At least you can trust yourself better than the Alberta-based funeral director who was recently caught substituting cheaper caskets and cremation trays.

When composing book reviews, I typically don’t like to inject detailed comments from other authors, but please look below to see the quote from author Ellen Schultz. Frankly, her comment defines this chapter of Gordon’s book to a ‘T’. The #8 reality, to me, is the harshest. You have to be on the top of your game if you wish to avoid the next Bernie Madoff. Where there are sheep, there will be shepherds.

As I have opined before, the world is a corrupt place. And until the human race is universally recalled and put through a badly needed re-design, this will always be the case. Live (and invest) accordingly. Want some proof ? Check out these links:
 ScamWarners.com and Top Business Scandals of 2011.

Section One of Gordon’s guide, ends with a chapter focusing on the harsh reality of personal sacrifice. In his own blunt language, the author lets off a bit of steam with a general observation of the Canadian situation: “There is no escaping the fact that, collectively, we are financial dolts”. Somehow, we seem to put a top priority in acquiring the trophy home and a driveway full of depreciating assets, rather than  balancing the greed with our future needs. If you are the type of person who needs a symbolic kick in the fanny to help you prioritize, this chapter will provide it. I must warn you, though: Gordon wears a rather pointed shoe.

Section Two: The Solutions

Now that the reader has had a chance to understand those 9 harsh realities, it is time to discuss exactly what can be done to overcome the hurdles. Advancing to the “In Conclusion” chapter, I think Gordon’s summary quote sets the stage for getting people to respond to his solution recommendations: “Retirement Planning is not something you can kick down the road. If you wait until you’re fifty, it’s too late.”

If you’re not sure where you are on the road to recovery, you can spend some time with Gordon’s Retirement Worry Index within the Make A Plan chapter. Don’t be surprised if you’re already in the desperation scenario (could that be why reverse mortgages are now selling like hotcakes ?).

His solutions list covers topics he has covered before in many of his previous books: using the RSP; using the relatively new TFSA (a small, but important government gift); minimizing taxes; eliminating debt; using an advisor, and; understanding your private pension (if you have one) and the government’s CPP and OAS plans.

My favorite chapter in this section is entitled, Educate Yourself. It’s quite a jolt when you read the statistics surrounding the math competencies of the average Canadian. On top of that, 42% of our adult population have problems reading! Is it any wonder why so many people own overly complex (and expensive) financial products. The true test of any change in general financial literacy will be reflected in the future behavior of the financial product engineers and the proliferation of even more complex products.

Every book I have ever read, has a key line or two that I underline, because those lines perfectly define the key message of the book. The Solutions section of this book serves as the ‘to do’ list for the reader, and I want to use a couple of Gordon’s quotes to emphasize how important it is to begin these chapters with the right mindset.

From page 140:
“This book and others like it can provide significant help, as long as people are motivated enough to read them.”

From page 234:
“All the courses and books in the world won’t help if people aren’t willing to allocate time to learn.”

As I mentioned at the outset, this book serves as an educational guide, with actionable steps to get both your brain and body in motion towards a rewarding retirement plan. Gordon has provided a boatload of information and recommendations in one convenient location: he has described the major issues, told you what to do about them, told you what to buy and what not to buy and, provided some real world examples to illustrate the recommendations.

But as he has said, content and process are meaningless without commitment. For too many people, this really is the last chance to prepare for a happy retirement. I highly recommend that you read and, more importantly, act on the blunt and honest advice in this handbook. Now!

Well done, Gordon.

COMMENTS SECTION

Reality #8 and Ellen Schultz:
“Financial industry companies treat customers as sources of revenue to be inveigled into paying as much as possible, through shrewd half-truths, complicated language and methods, and bold face promises accompanied by exculpating fine print”.

Case Studies: the gift that keeps on giving
As Warren Buffet would remind us, it’s a lot cheaper to let other people make mistakes, and then learn from them. And  some of the best online gifts to help you with this process, are the case studies of real people that are provided in the national newspapers each Saturday. These highly educational stories are available for free and can be found as follows:

Financial Post:
Globe & Mail:

Here is a test for you: go to those respective web sites and read at least the last 5 case studies.
If after starting through the first study, you find your eyes glazing over, with an urge to hit the tv remote, that’s the perfect indication that you should be making an appointment with a fee-only financial planner – and soon.

On a serious note, if you do decide to read those studies, pay particular attention to the process that those financial planners go through as they evaluate the client’s financial situation and develop income projections for the future (including government benefits). This will help you to understand how a financial professional is trained to KNOW how to establish the amount of resources you will require to survive retirement. We really do live in an ‘it depends’ world and there is no ‘right number’ unless specific personal goals are established first (my thanks to the newspapers for that free information).

Nothing New:
You may recall that I made a comment about some of the book’s content not being new to those who follow financial planning closely. Yes, a lot of information may be available elsewhere. And, yes, it may have been covered a hundred times – but for many people, a lot of the content is new.

I always treasure this comment from Wall Street Journal columnist Jason Zweig:
“In my columns, I write the exact same thing between 10-60 times a year, making sure none of my readers can tell that I’m repeating myself. That’s because there are only a handful of enduring truths about investing…sooner or later you must either lie, or repeat yourself”.

When it comes to financial planning and investing, you can’t say it enough times !