Saving for Retirement in Canada

First, a note for the Baby Boomers

I'm a younger guy, and this is directed at the near-retirement age people: you guys have been very lucky and many of you don't realize it. Your working years have coincided with the greatest bull market in human history driven by demographics and the rise of the American empire. The 1980-2000 period, or 1980-present when you include bonds, is historically unprecedented. The rise in stocks/bonds was incredible, and you were lucky to have your income earning years feed cashflow in the middle of the bull market.

I find that many older people fail to acknowledge the role of this well timed, historically unique bull market. And they draw some wrong conclusions, such as “I am a great investor” and “I will see similar returns if I stick to my methods”. Well if the bull market ends, no you won't. And if that historically unique bull market didn't happen during your working years, you would be in a very different position today.

It's all about expectations

Another consequence is the expectation that Baby Boomers have for investments as a whole, and for their children. Boomers think to themselves, everything will keep rising at 7% to 10% a year in perpetuity. So they make promises to others based on this. They think their children can live the grand retirement life they did, if they invest similarly (I personally doubt it).

And then there's pension fund managers and investment advisors. Younger people are lead to believe that government & corporate pensions will still exist because these amazing returns will continue forever. In reality, I think those returns are gone. Many corporate pensions will be exposed as bankrupt the moment someone is willing to revise the expectation of returns going forward... most forecasts are still done with these 7% to 10% figures! It's now a decade of poor returns, yet people stick to those outlandish projections!

I'm rambling a bit, but to sum up my thoughts on this:

1. In my generation, I think very few people will be able to save anything close to a $1 million (in today's dollars). The Boomers could do it only because they got the greatest bull market in history, and should be thankful for that timing.

2. If you have a pension, that's great. But realize that some pensions will vaporize because they are based on now-obsolete returns and wildly outlandish projections. Do not expect that your children will have any pension at all.

3. If you're near retirement, I caution you about expecting anything like 10% returns going forward. I think that's extremely optimistic, and even Buffett writes this in his 2007 Berkshire letter. GDP is growing at around 2% and there's a mountain of debt in both USA and Canada. Personally my projection for stock/bond returns going forward is more like 2% to 5%

4. Real estate has been a huge part of Canadian "wealth accumulation". There's no point to building equity in your home unless home prices are rising rapidly... it's just a leveraged investment. So just like in America, there has been a false expectation of wealth-growing based on a housing bubble. Many of us think Canadian RE is a bubble, and if this ends, it's going to take a lot of this supposed "wealth" away. So beware of that risk too.

- Perpetual Bull