There are a few things that tick me off. One of them is how Governments act in general. The worst part is that most seem to run the same way regardless if they are American or Canadian. Unfortunately, one thing that bugs me the most is how they handle money. They seem to be pretty good at creating committees and spend money on research but they far from knowing what they do.
My suspicions are that they are more interested in making a good political announcement than looking at the real numbers. Yeah I know… this is an understatement! But still, it freaks me out!
Here’s a Shocking Example:
Recently, the Government of Quebec issued their latest budget. In this document, they introduced a new “pension program” that employers have to offer to their employees. For this initiative, I just have compliments. It’s awesome to force both employers and employees to think about retirement. The cost of supporting retirees is too big to have them supported by the Government or the future tax payers (especially considering the demographics).
However, I have a problem with the calculations they used. And I guess this is why they put us in the hole year after year! They calculate that an employee would only have to save 4% of their gross income in order to live with 60% of their income at retirement.
When you read the latest statement, there is nothing shocking about it. I mean, living with 60% of your income is pretty good. Considering the fact that you should have paid off all your debts (or almost), 60% seems like a reasonable number.
You would think that if they say that you need to save 4% of your gross income, they have done their calculations. You would assume that this number is not created by a few dreamers. You would bet that your Government hired a whole team of experts to come up with this new solution. Oh boy… I am so naïve sometimes!
My Son Can Do Better Math than That!
My 6 yr old, William, can probably teach the Government a few things about calculations! Here are the assumptions they made in order to get the magical 4% of savings to generate 60% of your income at retirement:
You will die at 82.
You will generate a 5.75% annual return AFTER FEES.
This is exactly when I started to freak out.
All right, let’s start with the first assumption. You will pass away at the age of 82. Really? A recent study showed that my young daughter, Amy, life expectancy was 100. The current life expectancy for a woman in North America is 83. And you can bet that this number will increase greatly in the next 10 years. What happens if you live until the age of 90? 95? You will be living on social benefits for 10 years or so! This will definitely be the 10 worst years of your life!
But there is something more dramatic than living past 82. It’s making a 5.75% investment return over 30 years or so. The 5.75% is not too bad, but when you consider that most people do not invest more than 50% of their investments in the stock market (they prefer low interest bonds instead!) and that most people will pay between 1% and 2% in fees, you are looking at a serious problem!
The interesting part about all this is that we do have a professional association of financial planners in Quebec that publishes the investment return norms for retirement planning. But this association is rather conservative. So instead of presenting great charts to their clients, financial planners use investment returns between 4% and 6% depending on the client’s risk tolerance (as you can’t expect to make 6% annuallly if you invest 75% of your portfolio in bonds!). At no point in time was this association consulted to build this amazing retirement plan at 5.75% (net of fees). I guess the Gov was too afraid to have its bubble burst. After all, when the retirees realize that 4% wasn’t enough, the Gov guys will be far away retired on a beach enjoying their generous pension plan!
What Scares me the Most
What scares me the most is not what just happened with the retirement fund but rather what else will happen that I’m not aware of. I’m privileged to work in the financial industry and know a little bit more about investing and retirement planning than the average citizen. This is how I caught this nonsense. Unfortunately, I’m convinced that Govs are making similar case studies to take other decisions. If they run their environmental decisions based on the same model, I guess they will underestimate the impact of our society on the planet. That again, is an understatement.
Have you ever run into any Government absurdity? I’m curious to hear your story, I’m sure they are worth sharing!Google+
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