Financial Update For March 23, 2010

• TSX +19.19 .
• DOW +43.91
• Dollar -.24c to 98.15cUS The Canadian dollar touched a one-week low against the U.S. dollar, weakened by mixed commodity prices and uncertainty about Europe's handling of Greece's debt
• Oil +$.63 to $81.60US per barrel.
• Gold -$8.10 to $1,099.50 USD per ounce

Fight over real estate fees not over
Michael Babad Globe and Mail
The fight over the Multiple Listing Service run by Canada's realtors isn't over yet. The Canadian Real Estate Association said today it approved changes that would give home buyers and sellers more power over their transactions on MLS. Under the change, a consumer will now be able to pay an agent a flat fee to list on the service, where about nine out of 10 of all deals are done. Agents must now pass along a seller's home phone number, if that's what the seller wants, to a potential buyer if asked. The association said in a statement that it believes it has now addressed the issues raised by the Competition Bureau, which has taken the issue to the Competition Tribunal.
But the Competition Bureau immediately responded that it plans to continue to challenge the “anti-competitive rules that deny consumer choice and stifle competition” despite the CREA changes.
“There is nothing in these proposals that we haven't seen before and they do not solve the problem,” Melanie Aitken, the Commissioner of Competition, said in a statement. “They are a step in the wrong direction. These amendments amount to a blank cheque allowing CREA and its members to create rules that could have even greater anti-competitive consequences.”
The bureau said CREA's amendments do not remove “existing roadblocks to real estate agents who list properties on the MLS from offering innovative services and pricing options to consumers.”

Financial Update For March 22, 2010

• TSX -92.03 after uncertainty over the Greek financial crisis pushed the U.S. dollar higher, which in turn helped drive down prices for oil and metals.
• DOW -37.19 Investors were taken aback after India's central bank unexpectedly raised interest rates for the first time since July, 2008 after inflation ran ahead to a 16-month high. The Reserve Bank of India increased the benchmark reverse repurchase rate by a quarter point to 3.5 per cent. That move rekindled concerns about central banks removing stimulus too early
• Dollar -.46c to 98.61cUS The greenback continued to gain strength after Greece's prime minister said the country might turn to the International Monetary Fund for support if European leaders can't agree on a bailout plan that would reduce high borrowing costs. However the loonie had run up strongly to above the 99-cent level earlier Friday after Statistics Canada said consumer prices rose 1.6 per cent last month, following a 1.9 per cent increase the previous month. Economists had been expecting prices to rise at an annualized rate of 1.4 per cent.
• Oil -$1.52 to $80.68US per barrel.
• Gold +$19.90 to $1,107.60 USD per ounce

When you start to earn, you should start to save
BY LUISA D’AMATO
CAMBRIDGE — Young people who are just starting their careers have a lot to think about in terms of finances, says Irene Vassalo, a financial consultant with Investors Group in Cambridge.
Anyone who is self-employed, or doesn’t get benefits, should be thinking about covering themselves with a benefits plan that includes financial protection if they’re hit with a disease like cancer, a stroke, a heart attack or disability from a car accident.
It may be hard for someone in his or her 20s to imagine being disabled, but it can happen to anyone. “They definitely need to look at protection,” said Vassalo.
People in their 20s are often getting married, buying their first home and having their first child — although not necessarily in that order
Vassalo believes in putting money away for a registered retirement savings plan — even if it’s only $25 a month — as soon as you start earning.
Maybe you can’t imagine yourself retiring, but you can keep that money away from government taxes. You can use it as a down payment on your first home, and you can use it as a long-term savings plan.
Also, you need a special fund — of at least two to three months’ income — for “emergencies and opportunities,” she says.
An emergency would be losing your job, becoming ill, your car breaking down, or your roof or furnace needing replacement. An opportunity is the happier prospect of buying a new car or piece of furniture, or going on a trip.
If you’re getting married, “watch the wedding expenses,” she says. “It doesn’t have to be a $50,000 wedding.”
In an ideal world, you should save 10 per cent of your income by putting it into registered retirement savings, put another 20 per cent into the emergency fund, and spend the remaining 70 per cent on your bills and daily needs.
When you get to buying your first home, you can lend yourself the money you put away into retirement savings plans for that down payment. You’ll have to pay yourself back over time.
It’s best to get your mortgage pre-approved before you find your dream home. Banks will look at how much income you have and how much debt.
Should you go for a larger mortgage because interest rates are low? What if they start to go up?
For that question, Vassalo recommends this strategy: Assume interest rates are double what they now are, then see if you can still afford the home.
Also, consider other costs: The biggest expenses in a home apart from the mortgage are property taxes, heat and utilities.
If you are considering renting out the home, or part of it, check the situation and be realistic. How is the vacancy rate in your community? How handy are you? How will you feel about being called in the middle of the night to fix the toilet or get rid of a mouse? What will happen if your tenant is badly behaved and doesn’t pay the rent?
“You have to be prepared for all circumstances,” says Vassalo.
If you’re starting a family, start a registered education savings plan immediately. The government matches 20 per cent of your contribution to a maximum of $400 a year. And you can use it to pay for all sorts of educational institutions, even a performing arts conservatory or correspondence courses.
Help your children become financially smart by training them to save part of their allowance or birthday money. Some should be saved for their education, and some should be saved for a short-term goal like buying a bicycle or video game system. http://news.therecord.com/article/686919

Financial Update For March 19, 2010

• TSX -60.65 A continuing Greek debt crisis helped push the TSX lower, with commodity stocks dampened by worries an already shaky global economic recovery could have the wind knocked out of it should EU bailout efforts fail.
• DOW +45.50
• Dollar -.46c to 98.61cUS
• Oil -$.92 to $82.01US per barrel.
• Gold +$1.00 to $1,125.00 USD per ounce
Generating 70% replacement ratio to retire at 65, requires 35 years of saving 10-20% of income Jonathon Chevreau, Financial Post
Canadians hoping to "replace" 70% of their working income when retiring at 65 will need to save a "very high" portion of their annual pre-retirement earnings, says a C.D. Howe Institute study released today. Depending on their earned income while working, they will need to save between 10 and 21% of their pre-tax earnings every year: for 35 consecutive years between age 30 and 65, says the report, titled The Piggy Bank Index: Matching Canadians' Savings Rates to Their Retirement Dreams. The full 10-page e-brief can be found by clicking here. [If you have trouble with the link, as I did, copy it and paste it directly into your browser.]
Limits on tax-assisted savings prevent most high-earners from replacing 70% of working incomes
The authors -- David A. Dodge, Alexandre Laurin and Colin Busby -- say Canadians face obstacles in saving more. "The problem is that although private savings allow choice about retirement age and income, the Income Tax Act limits on tax-recognized savings may prevent many higher income earners from accumulating sufficient RRSP savings to securely replace 70% of their final earnings."
In a press release, former Governor of the Bank of Canada David Dodge [pictured above] said the findings provide "a ‘reality check' about the saving rates required to meet [Canadians'] retirement goals and inform the choices they could have to make between working longer or consuming less and saving more."
The authors assume a 3% real return on investments, despite the fact 4% is the historical norm. They assume inflation will average 2% a year and that public pensions like the CPP/QPP and Old Age Security will continue in their present form.
While a 70% replacement ratio is considered the "gold standard" an appendix provides calculations for more modest income replacement ratios of 60% and 50%.
Only "working poor" can get by saving less than 10% of gross earnings
It finds that with the exception of what it calls "the working poor," most Canadians must save 10 to 21% of gross earnings every year to get to the 70% replacement ratio in retirement. "This fraction is likely higher than many Canadians believe and higher than is set aside in most employer-based group RSPs or defined-contribution plans," the authors write, "It is also higher than the effective contribution over time to many employer-sponsored defined-benefits plans, and for high-income earners exceeds the annual limits placed on RRSP contributions."
Note that last point, given an earlier CD Howe recommendation that RRSP contribution limits be almost doubled from the current 18% of earned income and $22,000 maximum to 34% and $42,000 respectively, as reported in this blog here early in February. The recent federal budget ignored the recommendation but indicated further consultation will occur in the spring. In today's e-brief, the institute adds that "Income Tax Act limits would prevent many earners from accumulating enough RRSP savings over 33 years (by age 63) to replace 70% or more of their working income."
Delaying retirement to age 67 so you save for 37 years reduces the fraction that must be saved somewhat, "but the required saving rate still remains high," the brief says, "People wishing to retire even earlier at 63 face even higher costs."
Delaying saving past 30 means saving more than 20% of income
And as all the nation's banks tell us during RRSP season, delaying the commencement of saving past age 30 means eventually having to save what the institute calls "extraordinarily large fractions of income -- more than 20%" for many above-average earners during the last decade of one's working years.
The paper concludes on a public policy note, saying the debate on how to improve our pension system is "well founded." Policy changes can improve incentives to save for retirement and to more efficiently manage retirement savings. But CD Howe's final line in the brief could have been written by virtually any financial planner or advisor: "In the end, if Canadians want high incomes and consumption in their retirement years, they will have to save more of their incomes and forgo more consumption during their earning years."
Malcolm Hamilton: dreams "shattered" only if you accept 70% replacement target
Asked for his reaction to the paper, Mercer's actuary Malcolm Hamilton -- pictured left from a Wealthy Boomer video interview last year -- said he had read an earlier draft but little appears to have changed. Here, unfiltered by me and only lightly edited, is his input sent by email. I've italicized it to make it clear the authorship is his, not mine. I've added the subheads in bold:
The paper shows that:
* If you want to replace 70% of your gross income when you retire at 65, and
* If you earn an above average wage,
then you need to save quite a bit from a rather young age (30). If you want to retire early with that same standard of living, you need to save even more. The conclusions are very sensitive to assumptions about future returns, but that's the way it is.

The big question is whether you need to replace 70% of your gross income to preserve your standard of living when you retire. Most Canadians retire with closer to 50% replacement. Most say that their quality of life is as good or better after retirement than before. As you know, I always felt that 50% would preserve the standard of living of the average family of 4 because a large percentage of their pre retirement income (often 40% to 50%) is consumed by kids, mortgages and taxes.
50% replacement ratio may suffice to preserve low standard of living while working
All of these burdens are hopefully gone by the time they retire. Their pre retirement standard of living is low. The good news is that they don't need to save much to preserve this low standard of living. One of the tables in the report concludes that those with average earnings can retire with 50% replacement at age 65 by saving only 5% of their incomes ... as compared to 11% if they want 70% replacement.

I do worry about the message accompanying the paper ... in essence that Canadians are saving too little and that their dreams will be shattered when they retire. This is true if we accept the 70% target. But it is not true if the target is wrong, and no evidence is offered in support of the 70% target. In essence, if you assume that everyone needs more than they really need when they retire, you conclude that everyone's dream will be shattered ... but so what?
Obsessive retirement saving shouldn't come at cost of raising families
We need to strive for a more balanced perspective. Yes, we want people to have adequate incomes when they retire. But we also want them to have adequate incomes when they are carrying a mortgage and raising their children. Telling them to save obsessively solves the first problem but exacerbates the second. And from my perspective, the second problem may
be the bigger one.