I read Andrew Allentuck’s new book “When Can I Retire?” My first reaction was that this book was not really written for farmers, but after some thinking I decided some parts could be useful for you. The book talks a lot about defined benefit and defined contribution pension plans, which most full time farmers don’t have. However, if you or your spouse has a off-farm job, then there could well be a pension plan in your future.
Plus, unless you really manage your affairs well, you likely are paying into what some call a black hole: That is the Canada Pension Plan (CPP). And if you live to middle age, you can collect Old Age Pension (OAS). But Andrew’s book throws a big wet blanket over most of these plans.
Most farmers are going to retire or hope to retire with a million bucks of equity alone. That’s more money than many people will have when they retire so why worry? Andrew outlines a few problems. I’ll go over some and then offer a solution that you might want to start now.
Here in Canada we have a decent health care system compared to most other parts of the world. I’ve heard many people complain about it, but two fairly young guys I know recently had expensive operations. One had a big part of his gut removed, the other had culverts put in a couple blood veins. And both said: “And we did not get a bill for the operations.”
Still, Andrew points out that inflation likely will continue to raise health care costs. Andrew suggests that if you’re 75 years old and in poor health, you likely don’t need to plan for inflation. But if you’re 55 and healthy or 45 and healthy, then you better plan for inflation. Just two or three per cent inflation per year means that in 30 years the things that are cheap now won’t be and the things that are expensive now will either be too expensive for most, or cost so much that they will reduce money we have for other stuff. If we want to more or less protect our lifestyle, odds are it will cost a lot more later than it does now.
CPP AND OAS UNDER PRESSURE
About 20 per cent of Canada’s population is over 65, so current pension plans will work for most of us. But by around 2050, around 44 per cent of Canada’s population will be over 65. If you’re under 40 and not independently wealthy, this should concern you. When 44 per cent of a country’s population is 65, the pension plans as we know them will not work. To collect benefits people likely will need to pay in more, take pensions later, and get smaller payouts or some combination of these.
I would think that in the next 15 to 20 years the cost of building these plans will rise. Nothing says that the government can’t start by clawing back more of the pensions that current pensioners collect.
The OAS is getting clawed back now and if it gets into danger, several things could happen. The eligible age could go up, you may need to take a means test to qualify, or it may no longer be indexed.
Right now, the CPP contribution is around $4,400 per year per worker (worker plus employer), while most retired people take out much more per year. The premiums rise every year as CPP raises the maximum pay CPP is paid on. This can become a burden for both employee and employer and the self-employed person. Over a typical working age of 35 years, a young person could contribute close to $150,000. These rising premiums will encourage people to find ways not to contribute.
CPP also relies on its assets to earn income and grow in value. If the stock market runs into problems and interest rates stay low, CPP’s assets may not be able to add to the overall value of the portfolio.
Government debt will further reduce its ability to “help.” By the time this economic set back is over, governments will be carrying a lot more debt than they did a couple years ago. So governments won’t be as willing or able to help and might even want to dig into our pockets a little more often.
WHAT TO DO?
At the risk of sounding like a broken record, my five-legged stool strategy will be more important as the years go by. If you’re new to Grainews, the five-legged stool is an overall financial plan I invented around 1993. The legs are: your job or farm or business, learn how to make money with money and especially with stocks, use proper life insurance for your time in life, have a second skill, and build some wealth away from your farm or business or job.
This could include an RRSP, an RESP if you have young children, and the Tax Free Savings Account (TFSA) that started this year. Many readers of Grainews and StocksTalk have set up this account. In a nutshell, we can put $5,000 into the TFSA in 2009, and 2010 and so on and any profits are tax free.
The problem is that many investors will only earn two to six per cent per year and tax free or not, that rate of return doesn’t grow money very quickly. But I have merged the TFSA strategy with a second strategy called selling covered calls. I’ve written about this strategy before and will again, so I won’t go over it for this column. I’ll just say that there are no guarantees, but it sure looks like we can make 20 per cent per year with the two merged strategies. Imagine if you could retire in five or 10 years with a nice lump sum earning you as much as your CPP and OAS would — and tax free to boot.
Andy lives in Winnipeg. He publishes a newsletter called StocksTalk where he discusses in detail how he manages his investments. If you want to read it free for a month send an email to [email protected]or go to StocksTalk.net,click on free month, click on go to form and fill out name, email address and phone number and click submit. You will be signed up automatically and receive several recent articles.