Colleen Wallace is frugal, and proud of it.
The 70-year-old resident of Chelsea, Que., a rustic enclave north of Ottawa, managed to make ends meet while raising a daughter on her own, and despite being laid off from her federal government job 17 years ago. She doesn't have a computer, and she uses a rotary dial phone with a party line – a relic of a bygone era in telecom. She collects a pension, has a modest investment portfolio and her house is paid off.
“I’m not hurting but there’s no room for any exotic spending,” Ms. Wallace says. “I’m very good with my income. I’ve never gone into debt and never spent more than I can afford.”
But like millions of Canadians who are either approaching the end of their working lives or living on fixed incomes in retirement, Ms. Wallace faces an array of economic forces that appear to be stacked against her, and she is worried about her financial well-being.
It’s the saver’s dilemma. Life for these Canadians has become an uncomfortable squeeze between weak returns on their investments, stagnant incomes and the steadily rising cost of everything from food to fuel to housing.
“Savers are screwed,” says Nick Rowe, an economist and monetary policy expert with Carleton University in Ottawa. “There are good times to be a saver and there are bad times to be a saver. And the bad time to save is when everyone around you wants to save and not many want to invest.”
Bank of Canada Governor Mark Carney, among other central bankers, has kept interest rates near historic lows since the onset of the global economic crisis in an attempt to stimulate the flagging economy, and there’s no sign of a rate hike any time soon. But some critics say the playing field is now tipped too far in favour of borrowers rather than savers. Canadians in droves have piled on debt to buy new homes and make other purchases, prompting warnings from Mr. Carney of the dangers of carrying too much debt – even as his policies encourage borrowing and provide little ability for savers to generate substantial low-risk income.
“It’s one thing for Carney to say this is a problem and warn people,” says William Robson, president of the C.D. Howe Institute in Toronto. But “actions speak a lot louder than words.”
Inflation, while low at an annual rate of 2.3 per cent, compares with one-year guaranteed investment certificates (GICs) paying roughly 1 per cent a year. Simply put: A dollar saved today will be worth less a year from now.
For Ms. Wallace, the cost of food, gas, and her municipal taxes is going up, at a faster rate than her pension. Lately she has been wondering whether she should take her investments out of the market, given the turmoil of the past few years. The challenge is “wondering where I would put” the money, she says. “With interest rates where they are, I’d be going backward” by investing the money in bonds or GICs whose returns lag the rate of inflation.
“I used to think of [my savings]as a tremendous amount of money. There’s a wake-up call – it isn’t. Ten years in a nursing home would wipe it out.”
Many from Ms. Wallace’s generation did what they were told they should do to prepare for retirement: They secured a stream of pension income, build investment portfolios in the six, or if lucky, seven figures, and paid off their homes.
Those investments were supposed to see aging Canadians through the last chapters of their lives. Instead, many wonder whether their nest eggs will be sufficient or are built to weather the uncertain economic environment. Even their homes may not be worth as much as they thought, as economists warn Canada’s long housing boom may be over.
Add to that a slew of other factors: The Harper government is talking about scaling back one of the cornerstones of the pension system, Old Age Security.
Baby boomers are just starting to retire, downsizing their lifestyles and generally spending less. As a result, companies are more reluctant to invest in future growth prospects. Many investors have been stung by the meltdown of Nortel Networks Corp. and other Canadian technology stocks in the early 2000s, and made more cautious by the impact of the credit crisis on the rest of their portfolios in 2008.
Private and public sector employers are cutting back generous workplace pensions and continuing to shed costly defined-benefit pension plans – which offer predictable and secure incomes to retirees – for more uncertain defined-contribution plans. It’s still better than the situation for 60 per cent of Canadians who don’t have workplace pensions at all.
It’s a stark equation that is punishing a wide swath of the country’s population either approaching, or recently into, their so-called golden years.
“I think you have to be sick not to be unsettled by what you see going on,” says Jim Topolniski, a 62-year-old Montrealer who is starting a third career with a startup interior design firm, just a year or two before the age at which he once thought he would retire.
“With only a few years left, I can’t withstand the hits we’ve taken in the past. We have to be more conservative. I hope one day we can live half the retirement my parents did.”
Carolyn Arnold is excited about a new course she’s teaching to students of St. Martin Secondary School in Mississauga. The fiftysomething Oakville mother of two used to be a commercial bank lending officer. After her husband passed away from Lou Gehrig’s disease 10 years ago, she became a teacher, specializing in business and finance.
In the wake of the 2008 financial crisis, she wants students “to look at themselves and their attitude to money and what emphasis they place on it, where it fits in their life.” Students taking her course will learn about budgeting, savings and debt, and to become financially literate against the backdrop of an uncertain global economy.
Not surprisingly, Ms. Arnold is conservative when it comes to investing her own money. Close to two-thirds of her portfolio is in fixed income, “a reflection of who I am,” she says. “I can live with that. I’m not willing to accept the risk inherent in [chasing high]returns.”
And yet, for someone who teaches financial prudence to her students, Ms. Arnold is actually making investing choices that could shrink the size of her nest egg, in real terms. The GICs she is buying now are paying much less than the 5 per cent to 6 per cent she was earning before, and less than the rate of inflation. “There’s a hit on that,” she acknowledges.
Others in a similar position are more agitated by the prospect of seeing the “safe” portion of their savings deteriorate as inflation outpaces interest rates. “My purchasing power has gone down dramatically, and I’m one of the fortunate ones,” says 76-year-old Bill Langford, a British-born metallurgist and father of two. He took early retirement from the federal government 20 years ago and lives with his wife in North Saanich, B.C.
His indexed pension payments have not kept pace with total inflation, and he’s now drawing down his RRIFs, resulting in a heavy tax bill. A long-term market dabbler who took a hit from holding Dome Petroleum in the 1980s and Nortel in the 2000s, Mr. Langford’s six-figure portfolio is now almost 60-per-cent cash, the result of a well-timed exit from equities in 2007 when he sensed – correctly – that something bad was about to happen.
“I know I’m losing money” by holding cash with declining purchasing power, he says. “It’s frustrating, and very difficult to know where to put the cash.
GICs? “A waste of time,” he says. He’s wary of mutual funds and doesn’t want to commit to a 20-year bond that earns 3.5 per cent. “I had Ontario Hydro bonds that paid 9 per cent,” he says wistfully. “They were wonderful. These days there’s just nothing in the bond market and corporate bonds are quite risky.”
He may reconsider stocks, but not for the foreseeable future. “Europe is a bomb waiting to explode,” he says. Royal Bank of Canada, the country’s “go-to safe stock,” in his opinion, “has become wildly varying in its price. I feel it’s going to take a year or two or three before we see any kind of co-ordinated improvement – if then. If I have cash, I know it will buy me less next year – but if I have stocks, I could lose 50 per cent.
“I am displeased that I can’t follow a more traditional investment process with asset allocation and some prospect of growth,” he says. “I’d like to be able to leave something to my kids.
Slow growth, low yields
The new normal, warns Eric Lascelles, chief economist at RBC Global Asset Management, is characterized by slow growth, low yields and a lot of uncertainty. “It’s not a happy place for investors right now,” he says.
Some, like Mr. Topolniski, worry for the next generation of retirees and his own children, who will have a heavier burden to bear.
“Our kids will be saddled with so much to try to fund those of us who have been a little flamboyant in our lifestyles,” he says.
Canadians are also living longer, which means they need their savings to stretch longer than previous generations. The Ontario Teachers’ Pension Plan, for example, now estimates that the typical teacher will draw on their pension an average of six more years than they work and contribute to it.
That has some late-career or recently retired Canadians playing amateur actuaries, morbidly estimating whether they can outlive their savings. The Who’s rallying cry “Hope I die before I get old,” which many of these people heard for the first time in their teens, seems to have been replaced with “Hope I die before I get too old.”
“I don’t know how long the situation [of escalating external financial pressures]will remain,” Ms. Wallace says. I’ve decided I’ll live until 80, but God, if I hang in until 90, what then? Then it could be a problem.”
Others are more sanguine. Dutch-born Peter Smit is enjoying his third career as owner of a hip wine bar in Saint John, N.B., and living comfortably but frugally in an 18th-century farmhouse and with a retirement portfolio that is worth about the same as it was five years ago.
Is he worried about the future? Not at all. “My parents both died when they were 75. I may get lucky and live to 80, but that’s it. My philosophy is to spend money in the next 10 to 15 years, then probably not have much left.”
With files from reporter Jeff Gray in TorontoReport Typo/Error
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