I found the article titled “Boomers shaken by 2008 rout” published on June 21, 2011 on Advisor.ca to be quite disturbing.
The current economic pressures, which are making it more challenging to save, when combined with risk-averse investing, could be a recipe for future retirement savings deficits. In this regard, I recently read an article that I thought did a great job of articulating something that I have been having a hard time putting into words. In summary, the writer said that there are basically 3 ways to fund retirement:
- Save more;
- Retire later; and
- Earn a higher rate of return.
Current economic pressures (unemployment, sandwich generation, etc.) make it harder to save more. Retiring later is far from certain as it depends on health and continued employability. Therefore, it is imperative that people manage the returns they earn on their savings.
Earning 2-3% so as to avoid risk very often means one of two things:
Earning 2-3% so as to avoid risk very often means one of two things:
- Accepting the certainty of a lower standard of living in the future; or
- Betting that one will remain healthy and sufficiently employable to work longer and retire later.
That doesn’t sound like risk reduction to me.
The writer goes on to observe that it is no wonder that older people fall prey to investment scams – when confronted with the realities associated with years of safe 2-3% returns, they become more vulnerable and are more likely to chase “too good to be true” scams.
The writer goes on to observe that it is no wonder that older people fall prey to investment scams – when confronted with the realities associated with years of safe 2-3% returns, they become more vulnerable and are more likely to chase “too good to be true” scams.
While, in the short-run, investing in good quality equities may entail more volatility than investing in GIC’s, in the long-run there is an argument that it is actually a lower risk strategy. I have a difficulty classifying a strategy as “low risk” if the consequence of it is very risky – and yet, that is exactly what is happening all too often. Consider the following illustration: A person needs $50,000 per year to live. In scenario A, they invest in the “low risk” portfolio which will ensure that they run out of money in 20 years. In scenario B, they invest in a portfolio which is expected to never run out but which may run out in 15 years. Which is more risky?
It is easy to advise people to “save more” and “play it safe” – but I wouldn’t want to pay for that advice. A financial advisor who can design a portfolio that helps a client prepare sufficiently for a quality retirement without overly sacrificing enjoyment today – that I would pay for.
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