Why Retirees Are Looking For Alternative Investments
I read an interesting article in Canadian Money Saver magazine that quoted some disturbing statistics. The article stated that Canadian investors have had mediocre returns and suffered large losses in their retirement portfolios over the last few years and are now at a loss about what to do.
Investors are questioning all the advice they’ve received over the years. Being diversified between equities and bonds is just not working for them with the volatility of the stock market and low interest rates.
In consequence there are now:
- Over 31 Billion dollars in Canadian money market funds earning a measly 0.05% to 0.88%.
- Tens of Billions of dollars sitting in chequing accounts, savings accounts and GICs.
- Tens of Billions of dollars more idling away in under-performing RRSPs and RRIFs.
The media are shrieking about boomers not being prepared for retirement, and popular books, such as “What’s Your Number?”, are leading people to believe a life of extreme poverty is what’s awaiting them if they don’t get serious about their retirement savings RIGHT NOW!
Related: How My Retirement Plans Got Derailed – Big Time!
Unfortunately this leads to either indecision about what to do – hence the prevalence of the above mentioned, low return vehicles – or taking unnecessary risks to generate higher returns.
Who do you trust?
When I was in my twenties, on the advice of a stockbroker acquaintance, I purchased some junior mining stock. This was my first foray into the stock market and I knew nothing – I was eagerly expecting the big score that would make my financial worries disappear.
What happened was, after several months, the shares disappeared from the Alberta Stock Exchange and I lost my 200 bucks.
Fortunately for me, around the same time, I enrolled in my Employee Savings Plan and the matching contribution from my employer was in the form of bank stock.
Related: A Peek Into My Stock Portfolio
Apart from being a taxable benefit, the stock was free to me and I kept accumulating it and started to receive dividend cheques (about 80 cents at first).
I eventually got hooked on dividend investing, sold my mutual funds and purchased other dividend stocks. As a consequence I haven’t been worried about the occasional bear markets I’ve lived through.
In 2008 – 2009 my portfolio took a big hit – I am pretty over weighted in bank stock after all – but, because I started investing early I don’t believe I’ll ever be in danger of losing my initial investing amounts.
Author David Trahair in his book, “Enough Bull”, says people should refrain from investing – especially for retirement – until they’re in their later years.
His premise is that you should concentrate on paying off debt and accelerating your mortgage payments instead of spreading out your dollars.
Related: Can You Succeed With An All GIC Portfolio?
The general consensus is that once you reach your 50’s you can save a considerably higher percentage of your income because you’ll be in your peak earning years.
While being debt and mortgage free is an admirable goal, it would scare me to death to be middle-aged and have no savings.
Not everyone works for the same employer – or even in the same career – for forty years, working up to the highest pay scale wage or getting promoted up the ranks.
There are many who hit the proverbial glass ceiling earlier on, are downsized, early retired, or just leave to take on more satisfying – albeit lower paying – work.
Related: Why A Career Break Can Be A Great Investment
I still believe in starting an investment plan early. Even when I didn’t have the funds to contribute to savings, I reinvested my dividends and my portfolio still grew quite well.
What do we want?
Canadian investors want to preserve their capital, but they also need to earn an adequate return. Many investments can provide a consistent stream of income without putting their life savings at risk.
When US investment banks packaged up sub-prime mortgages that were given a triple A rating (not to be confused with Canada’s Mortgage Backed Securities which hold CMHC insured mortgages), investors were all over them, thinking they were “safe as houses.”
Unfortunately they were duped by the very institutions they put their trust in.
Related: Why Our Debt To Income Ratio Is Misleading
Canadian banks offer Monthly Income Funds as part of their mutual fund line-ups that pay a consistent monthly or quarterly distribution.
They hold a variety of income producing investments such as bonds, preferred shares and dividend paying stocks, with currently a higher percentage in stocks.
Insurance companies are starting to offer more flexible annuities with dependable income that’s guaranteed for life, and the residual amount is available to your heirs.
These are the types of professionally managed, income-producing investments retirees are looking for (even though they’re not risk free and the fees can be quite high).
New types of investments are needed that are secure and stable, and give solid returns and peace of mind.
People want to live a long and healthy life. We shouldn’t have to be afraid that we’ll outlive our money.
It is indeed a grave situation. Right after the 2008-2009 economic downturn, which significantly decreased their portfolios, retirees (or soon-to-be retirees) were faced with the current low interest rate environment.
It’s hard to find good income generating investments (other than bonds) that are low risk as well. Peer to peer lending can be an option, as are dividend stocks – but both carry much more risk than many retirees would like.
@Anton Ivanov: It seems that in the future people will have to become more and more responsible for their own financial needs in retirement.
That’s why I think it’s best to start early, buy good companies, when there’s a bear market “sale” buy more, and reinvest dividends until you need them for income. If you focus more on the income side and not let day to day market fluctuations affect you, risk will be minimized in the long run.
Great post and welcome to our boat Boomer, or perhaps it is us who jumped in your boat! We are in dividend paying stocks as well; and now we are going to convert our bank monthly income funds to a rifs. Gic’s etc. just don’t provide enough income — if that’s your route you might as well just divide your savings by the number of years you plan to live and that’s your income! This comment is not as organized as it is in my head but I think what i’m trying to say is that I agree with you 100%!
@Gary: As I mentioned to Anton above, I think buying good companies that continuously raise their dividends is the key and focus on that dividend income rather than getting hung up on the total value that fluctuates from day to day. Keeping a portion of your money in easily accessible products in case of unforeseen events will let you ride out any sudden drops. The stock market seems to recover a lot quicker now than previously.
do you think a bond eft would fit the bill just in case the market drops? in canada the choices for dividend stocks seems so limited so i’m heavy in the banks. do you think having 5 banks is in any way considered diversified?
@Gary: My problem with bond ETFs is that as soon as interest rates go up – as they are sure to do eventually – the prices will drop, and I have not found one that has a decent distribution.
Bank stocks pay good dividends, but they are expensive now (my average price was about $15 🙂 ) A lot of people hold all of them, but you should have other holdings to be better diversified. I have been buying more consumables and REITs – I recently bought Brookfield Office Properties and I’m looking at First Capital Realty. Natural gas might also be worth looking at if you think the pipelines will eventually be approved.
Thanks, always, for your continued support Gary.
i have coke and jnj but what would be a good place to park funds for periods when stocks tank and we need cash? i hate too put cash into gic’s. i realize we are just brain storming and you are just sharing ideas and experiences.
Good article – I am a huge fan of dividend producing investments, and equally a huge fan of starting early.
To me, my goal is not necessarily retiring as early as possible…it’s just trying to be able to retire as early as possible, should I choose to.
Thanks,
Michael
@Gary: Currently the money I may need in the near future (or waiting for an investment) is held in a high interest savings account paying approx. 1.4%. Not great, I know. You can often get better rates in a TFSA especially at credit unions or non-traditional banks. The best I’ve seen so far is 3% at People’s Trust (which is higher than their 5 yr GICs).
I know that’s not what you want to hear, but I’m also at a loss for something better. Perhaps our readers know of alternatives.
Cheers.