Zero

He’s an anaesthesiologist. She teaches yoga. Household income this year, “a little under five hundred,” says Trevor (85% of it is his). Savings and investments? “I’m a little embarrassed to tell you this,” he says, “but we don’t have any.”

How could this be?

Herewith are the excuses: (a) Trevor’s income comes through personal fees, not a professional corporation and he is now (thanks to T2) in a 54% tax bracket. (b) They bought a $2 million house in Oakville – “which is by far not the best house on the street, so gimme a break.” The mortgage is $1.5 million. Properties taxes this year will be almost $30,000. (c) The nanny’s paid $3,000 a month, in after-tax income. (d) Two car leases. Big insurance policies. Two vacations a year. It adds up. Once the kids head off to private school, tack on sixty grand.

So when a 1%er couple (in terms of income) has stuff and lifestyle but no cash (and no pensions), what does this say about society’s priorities? Too much, sadly. Over-spending and under-saving are twin reasons many people will face retirement shocks, unable to replace their incomes or support their habits.

That consumption has replaced saving is evident. In 1982 people saved (on average) 19% of what they earned, and socked it into high-paying cash assets (mortgages were 21% and term deposits paid 15%) . Over the last quarter-century we managed to save an average of 7.3% of income. And in the last few months, that has collapsed to 0.8%. In fact, in BC (home of the highest house prices and most new taxes) the savings rate is negative. The average family spends 8% more than is earned, using debt to fill in the rest.

As interest rates fell, borrowing and spending rose and savings plummeted. Without reward in the form of high interest rates, people seem to lose all discipline to put money aside. As rates hit historic lows, houses hit historic highs. So did debt. Now a massive amount of family income is diverted into servicing $2 trillion in accumulated borrowing, while the cost of living inches up. At the end of the month, nothing. No wonder every year a new survey finds 40% or more of people could not survive even one missed paycheque. No wonder there’s over $100 billion in HELOCs on which no debt repayment’s being made.

So a nation of house-rich, debt-pickled and savings-poor people every day edges closer to the end of working careers. As this pathetic blog has tried to show, there’s no pot of government money waiting to look after you. CPP is grocery money. OAS is gas money. Neither were ever intended to support people after they finished working, but are rather supplements to a corporate pension and/or personal savings – usually in the form of RRSPs or TFSAs.

How much do you need to save? Sure, 19% is excessive unless you enjoy feeding your kids bugs. But 0.8% is a complete joke. So something closer to the long term average of 7-8% may be about right for most people. Obviously the sooner you get into this habit, the better.

Trevor, of course, thinks he’s okay. Ten years from his desired retirement age he hasn’t really given a lot of thought to income replacement. We did the math. Unless he blackmails Tony Clement online, it’s statistically impossible for him, at age 46 to prevent an income drop of about 80% at age 55. Hell, he’ll have a tough time even affording his property tax and Lululemon Tight Stuff yoga pants on a gross take of a hundred grand. He has simply spent too much and saved too little. The only way out of a retirement jam is to dump the house, and hope the real estate market doesn’t fade between now and then.

How many other people are there with cars, a house, obligations, kids, overhead and expectations, but no actual money? For them, bank account deposits every month turn into debits, and success means they balanced. No surplus. At the end of the day, it doesn’t matter what you make, but what you keep.

If this is you, change things. At a minimum, find $500 a month to stuff your TFSA – then don’t bury it in a GIC. If your company has a pension plan, sign up for it, even if it’s a crappy group RSP. If you have a cheap mortgage, don’t be too anxious to pay it off. Invest instead and diversify your life rather than pumping all your net worth into a single asset. Do a budget, a plan, for your household. Get free government money with an RESP for your kids. Throttle back on holiday trips – your spawn will love you more for helping with university tuition when she’s 20 than a beach trip when she’s six. Consider leasing a car rather than throwing forty grand at a machine which will eventually be worth zero. Invest the money instead. Income-split. Use RRSPs. Get out of high-fee mutual funds. If you have to, lease your basement. Or move into one.

Seriously. Forget more stuff or more debt. Focus on financial assets. When work’s done, you need an income stream. One that can last two decades, and replace much of what they used to pay you. Most people will fail. So, start now.

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After that post, you may need a hug.