Lifestyle

Coast with the Most

watermark 2122 small

Forty kilometres from Vancouver “North by west in the sunlight”, to quote the former Union Steamship line, basks the Sunshine Coast.

Cast adrift from the Lower Mainland by Howe Sound and the Coast Mountains, this verdant peninusula is accessible only by a 40 minute ferry ride or 20 minute floatplane ride. It feels just like an island.

On the Sunshine Coast you’ll find relaxation and advernture in equal measure, from safe beaches and idyllic inlets to rugged slopes and snowy peaks with a wide arroy of parks and trils, hikers, bikers and dog lovers will never run out of places to explore.

The vibrant communities of Gibson’s, Roberts Creek, Sechelt and Pender Harbour offer big-city amenities in a small town atmosphere. A newly expanded hospital, great schools and quality recreation appeal to young and old alike. Up and down Highway 101 there are great pubs, restaurants, and eclectic coffee houses to suit every budget and taste.

chart

Retirement Means Poverty for Many

retirement-transitionplanning

Regular readers know where I stand on retirement: it’s a man-made myth. See the below chapter from my book “Confessions of a Wall Street Whiz Kid” for my views on the subject.

I have also been pounding the drum that health care costs will bankrupt older Americans. In this article from US News & World Report (which you can also read on Yahoo Finance) says, “One of the biggest drivers of poverty in old age is failing health and the associated medical costs.”

I urge all readers to read both the US News article and my chapter.

6-1-12-grandich-usnews

Poverty Increasing Among Retirees 

By Emily Brandon | U.S.News & World Report LP 

Growing numbers of older Americans are spending their retirement years in poverty, according to a recent Employee Benefit Research Institute study. The proportion of older people living below the poverty line has been growing steadily since 2005, and many of those people are falling into poverty as they age and spend down their savings.

Click here to read the article in its entirety.

Growing numbers of older Americans are spending their retirement years in poverty, according to a recent Employee Benefit Research Institute study. The proportion of older people living below the poverty line has been growing steadily since 2005, and many of those people are falling into poverty as they age and spend down their savings.

Click here to read the article in its entirety.

~~~~~~~~~~

Chapter 13:

Retirement: A Man-Made Myth

“Retirement at 65 is ridiculous. When I was 65, I still had pimples.” ~ George Burns

There are a lot of things I can point to as being wrong with our society today, but one glaringly obvious shortfall is our entitlement mentality. In general, we feel we “deserve” a whole lot of stuff that we really have no right to claim. First and foremost, in my opinion, is the concept of retirement.

Make no mistake about it: this whole notion of retirement is a man-made creation. There’s nothing Biblical about us supposedly killing ourselves for 75% of our years to store up enough assets to live off for the last 25%, yet that’s the system our society has built. The system is hopelessly broken and our government can do little more than try once again to kick the can down to the next generation. Somebody is going to pay an awful price.

Let me give you a little background on the phenomenon we call “retirement.”

In her New York Times article entitled “The History of Retirement, From Early Man to A.A.R.P.”, author Mary-Lou Weisman briefly and humorously outlines the history of retirement from Cave Man to modern day, and gives supporting facts about why retirement is not just man-made, but a 20th-century creation.

During the Stone Age, says Weisman, we worked until age 20 then died, usually from unnatural causes. During Biblical times, when people lived to be really old – the Bible says Methuselah died at the ripe old age of 969, thus the adage “older than Methuselah” – people worked until they dropped.

This working-until-your-last-breath mentality prevailed through the centuries even after Chancellor Otto Von Bismarck, nicknamed The Iron Chancellor, introduced the concept of retirement. In 1889, Germany’s Old Age Disability Insurance Bill was enacted to provide a pension for all workers at age 65. Sounds generous? Not really. It was proposed by Bismarck as a way of gaining favor among his countrymen, but it wasn’t as sweet a deal as you might think. The average life expectancy at the time was 45, so there weren’t many around at 65 to collect, and those who did usually didn’t live a whole lot longer.

What Bismarck’s bill did, however, was put in motion the idea that at some point in life we deserve to plop down in our rocking chair and grow mold. Did I say mold? I meant old. As Weisman describes, that single move “set the arbitrary world standard for the exact year at which old age begins and established the precedent that government should pay people for growing old.”

Fast forward to 1905 when world-renowned physician William Osler, in his valedictory address at the Johns Hopkins Hospital, where he had been physician-in-chief, said that workers aged 40 to 60 were less productive than their younger counterparts and those over age 60 were “’useless” on average. That must have been popular. At the time, around 60% of men aged 65 and older were still in the workforce.

But it wasn’t until President Franklin D. Roosevelt signed the Social Security Act of 1935, also known as the federal old-age program, that retirement and entitlements, which were mostly available only to white men, became a part of American culture. The average life expectancy in America was just under 62 years. Roosevelt’s old-age program was funded by a 1% tax on employers and employees on the first $3,000 of a worker’s earnings. Today, the Social Security tax rate is more than 6%.

….read page 2 & 3 HERE

The problem
In 1976, the Alberta government told an Edmonton farmer his private land was to be turned into a park and offered him a pittance for compensation; it was only in court years later that the province was forced to admit it actually wanted his land for a highway—which would have triggered much higher compensation. In Vancouver in 2000, the City told the Canadian Pacific Railway that CPR land was henceforth to be a public space—and that no compensation would ever be paid; six years later, the Supreme Court of Canada endorsed the de facto confiscation.

What do these two cases — one from a private landowner with limited resources and one from a corporation with much deeper pockets — have in common? Both are examples of how government regulation can and does restrict the use of property to such an extent that such restrictions are akin to expropriation. Except that when governments use regulation to seize property, compensation is often small or in most cases, non-existent.

In some cases, that is precisely why governments use regulation: it allows them to avoid paying compensation that would otherwise be due if expropriation statutes were in play. Here’s how it works: the regulation is imposed; the freeze or partial freeze occurs; the devaluation results; little or no compensation is offered.

The remedy from Europe
This book points the way out of such undesirable policies while also recognizing the reality and desirability of some regulation. The book includes international examples of compensation for what’s known as “regulatory takings” and outlines how countries such as Sweden, Finland, Germany, Holland, Israel, and others treat private property owners much more fairly, providing compensation for regulations that “freeze” one’s property. Stealth Confiscation offers examples of such sensible policy, explains Canada’s historic attachment to property rights, and analyzes recent initiatives for both legislative and constitutional reform.

….read the entire 72 page report HERE

Picture 2

Debt Serfdom in One Chart

The essence of debt serfdom is debt rises to compensate for stagnant wages.

I often speak of debt serfdom; here it is, captured in a single chart. The basic dynamics are all here, if you read between the lines:

1. Financialization of the U.S. and global economies diverts income to capital and those benefitting from globalization/ “financial innovation;” income for the top 5% rises spectacularly in real terms even as wages stagnate or decline for the bottom 80%.

2. Previously middle class households (or those who perceive themselves as middle class) compensate for stagnating incomes and rising costs by borrowing money: credit cards, auto loans, student loans, etc. In effect, debt is substituted for income.

3. The dot-com/Internet boom boosted incomes across the board, enabling the bottom 95% to deleverage some of the debt.

4. When the investment/speculation bubble popped, incomes again declined, and households borrowed heavily against their primary asset, the home, via home equity lines of credit (HELOCs), second mortgages, etc.

5. The incomes of the top 5% rose enough that these households could actually reduce their debt (deleverage) even before the housing bubble popped.

To Read More CLICK HERE

debt-divide2

Should the Rich Pay More Taxes?

It’s a multi-dimensional question.

The left says yes — income inequality has soared in recent years, and the way to address it (supposedly) is to tax the rich and capital gains at a higher rate. The right says no — that the rich already create more jobs and wealth, because they spend more money, and why (supposedly) should they pay more tax when they already pay far higher figures than lower-income workers?

Paul Krugman made the point yesterday that the tax rate on the top earners during the post-war boom was 91%, seeming to infer that a return to such rates would be good for the economy.

Yet if we want to raise more revenue, historically it doesn’t really seem to matter what the top tax rate is:

tax

Federal revenues have hovered close to 20% of GDP whatever the tax rate on the richest few.

This seems to be because of what is known as the Laffer-Khaldun effect: the higher rates go, the more incentive for tax avoidance and tax evasion.

And while income inequality has risen in recent years, the top-earners share of tax revenue has risen in step:

To Read More CLICK HERE

How Much Do You Need to Retire Today

At current rates, in excess of 2.5 million dollars invested in a balanced portfolio is required to generate 60K income for life.

Last week, the Canadian government announced a reduction in eligibility for the Old Age Security Benefit from age 65 to 67 starting in 2023. This means all Canadians age 54 and younger today will receive less retirement income from the federal government. We should expect more of this to come as pensions worldwide struggle with mounting deficits, thanks to poor investment management and insufficient contribution levels over the past 15 years. Now deficits are compounding thanks to zero-bound interest rates courtesy of central bankers everywhere.

This week one of the largest Canadian pension plans, the Ontario Teachers’ Pension plan, announced a 9.6 billion shortfall in capital needed to fund pension obligations. In response Ontario’s Finance Minister advised that the cash-strapped government is not prepared to increase employer contributions to the teacher’s plan: “We are saying benefits have to be cut”, was his official statement.

This is the inevitable outcome of more than a decade of can-kicking in the pension management area. The demographic cost of the aging boomers was easy to predict and calculate. But the numbers were simply not attractive to those looking to spend their way to prosperity.

The solution of choice was for employees and employers not to increase contributions, but to hire investment managers who promised to make a mountain out of a mole hill. I am reminded of some pension presentations I was asked to give over the past 10 years, where my recommendation was to discard static allocation models, lower equity exposure to control risk and lower return targets to a more realistic level in the 5% range. No pension boards hired our firm after these presentations. All the managers who were happy to promise higher returns got these jobs.

Assumed annual returns of 8%+ were plugged in and everyone hoped for the best. Except 12 years into this secular bear in stocks, investment returns have been under-performing target for more than a decade. The deficits are finally getting too large to overlook. Benefits are likely to be reduced for future recipients, as well as pushing out eligibility triggers.

Yesterday I met with some long-term clients who are members of OMER’s another large Ontario pension plan.  After more than 30 years, they are now eligible to retire on full pensions of 60K a year, indexed. I pointed out that these were incredibly valuable assets: at current rates, one would need to have in excess of 2.5 million dollars invested in a balanced portfolio to generate that kind of income for life.

They were surprised as few people understand the math of how much capital it takes to generate livable income today. I assured them that they and their co-workers were very fortunate to have this rare asset in a world where few defined benefits plans still exist. “But I am the only one in my department to still have a pension” she replied. “Remember 5 or 6 years ago when our employer offered us the option of cashing out a lump sum commuted value? Everyone in my office took that option and gave the funds to financial advisors. They all told me I was crazy for not doing it.  But they have all lost money and now most have just thousands in their retirement accounts.”

“Even $500,000 today may sound like a lot, but at current yields, 500K will give you a maximum of about 15,000 a year of income”  I said. “Thank God you were smart enough not to cash out. “Well”, she smiled, “don’t you remember–you told us not to–we have always taken your advice.”

Sorry for the self-indulgence here, I need it to make this point.  This was a highlight of my day.  But I also felt sad and frustrated for my clients’ co-workers who had taken the advice of the financial sales force and cashed out their life savings into the peak of yet another stock market bubble in 2006-2008.  I had seen many teachers harmed by the same bait in the late 90′s.

Over more than 20 years of advising, I have been a party to many financial decisions that make a huge difference to personal fortunes in the end.  Many of these recommendations add value not captured in the annual performance reports of our investment accounts.

Sound financial advice over time is incredibly useful to those who are willing to hear the truth and execute accordingly.  But it takes wise, unbiased counsel (those not paid to sell products) and disciplined clients to win this race. It is not always easy to do the right risk management things, but over time I have seen that it is incredibly rewarding for real life families. Once again, I am heartened and grateful for the gift of valuable work.

Unknown