Weekend Reading – Young people shouldn’t save for retirement edition
Welcome to a new Weekend Reading edition, citing an older economic model from a Nobel Prize winner that suggests young people shouldn’t save for retirement – at all.
More on that in a bit!
First up, a few recent articles in case you missed them!
These are some of the top Canadian stocks that I hope to buy and hold for pretty much forever!
Thanks to a reader question, I was inspired to write about how to split money with your partner.
What? Young people shouldn’t save for retirement?
According to an economic model from the 1950s, reaffirmed by a recent 2022 study in The Journal of Retirement, yes.
That study points to a life-cycle model (below) in this MarketWatch article whereby essentially younger workers are better served to allocate their human capital resources over their lifetimes with the aim of avoiding sharp changes in their standard of living.
The life-cycle model and research plays out this way:
- High income younger workers will need to save but only as they approach middle-age, as wage growth occurs.
- Middle-income younger workers will also need to save, simply not that much and nothing before their 30s.
- Lower-income younger workers don’t need to save for retirement at all, assuming their standard of living doesn’t change much over time and/or they will take advantage of maximum government benefits as a senior anyhow.
The research points to a fundamental concept that one needs to save for retirement (in the first place) because you want to have the same standard of living when you’re not working (as you did while you were working).
From the article:
“The economic model would suggest ‘Hey, it’s not smart to live really high in the years when you’re working and really low when you’re retired,’” he said. “And so, you try to smooth that out. You want to save when you have relatively high income to support yourself when you have relatively low income. That’s really the core of the life-cycle model.”
But there are some big assumptions the researchers seemed to make, or, the MarketWatch article simply didn’t bother covering in more detail:
- The power of compounding is in fact an eighth wonder of the world and certainly savings for investment purposes in stocks/equities – sooner than later, versus just an after-inflation interest rate close to 0% – is a far better way to invest for retirement that most 20-somethings should absolutely wrap their brains around.
- Nobody knows how long you may live and/or what your health needs may be as you age. When it comes to living in the United States especially, about healthcare, best be wealthy to afford health insurance or cover minor health needs or otherwise potentially face financial ruin at some point.
- While government benefits are fine and good, in any developed country including Canada, I would be worried about changes to government policies that update or manipulate the majority of your retirement income if you didn’t save early nor often.
Should young people save for retirement?
Absolutely.
But I’m biased.
I’ve been saving and investing since I was 21 and I continue to save and invest decades later.
I’ve seen the power of compounding work right in front of me, in our bank account.
I prefer to have multiple income streams, including income from my portfolio, as I approach semi-retirement. My financial plan has always included the desire to work on my own terms.
Canadian government benefits such as our Canada Pension Plan (CPP) and Old Age Security (OAS) should not be disregarded in any retirement income planning exercise, however, at the same time, I would not want to rely on our government for making my retirement dreams come true.
What’s your take on when to start saving for retirement? Is your 20s too soon? What about playing catch-up in your 30s and 40s? Would love to hear your thoughts!
More Weekend Reading – Young people shouldn’t save for retirement edition…
Congrats to 20-something Financial Mechanic, who as an engineer, worked hard, saved a bunch and actually semi-retired beyond some recent pet sitting duties. Incredible.
The Dividend Guy released his August dividend income report, including his list of favourite stocks he holds.
PWL Capital wrote about not giving up on global diversification.
Another reader recently asked me: what would you do with a lump sum of money?
I answered that question in this past post here:
Kyle Prevost on Million Dollar Journey wondered how much you are likely to spend in retirement in Canada?
Come see me speak at this year’s Canadian Financial Summit with Kyle!
Back for 2022 – I’ll be one of the speakers again this year at the Canadian Financial Summit, sharing my thoughts alongside established personal finance experts such as Rob Carrick from the Globe and Mail, the Warren Buffett of Canada (Peter Hodson), and many others!!
Some more info about the talks, including mine on the Canadian dividend tax credit and how that factors into my semi-retirement drawdown plan!
- The Summit is once again, 100% online so you can stream all the talks right from your computer/tablet/phone.
- You don’t need to go anywhere or buy anything.
- Once again – this event is completely FREE to attend. However, if you can’t make it for the scheduled date/time, you will be given the option to purchase a special any-time, anywhere, Premium All Access Pass that will allow you stream the entire conference whenever fits you best.
I encourage you to get that All Access Pass to watch all speakers, all topics, whenever you wish!!
That’s it. No paperwork. Just watch the Summit wherever, whenever!!
Just head on over to the Canadian Financial Summit, sign up for free, AND be automatically entered to win one of the free Premium All Access Passes the team will be giving away when the event goes LIVE on October 12th.
Definitely forward this email to any friends, family, and co-workers that may be interested so that they can get the free tickets too!!
(In the near future, they’ll be turning the free tickets into a pass that you’ll need to pay to access, so even if you’re just considering streaming some of the talks, at least sign up to it now so that you can secure your free access!)
More Weekend Reading…
Loved the “Stable Dividend” portfolio by Norm Rothery (subscribers only).
That “Stable Dividend” portfolio includes a mix of Canadian telco stocks, utility stocks (including Fortis that raised their dividend by 6% this week!), and some financial stocks. From Norm:
“While the Stable Dividend portfolio does not offer perfect protection against downturns, it has fared better than the index on most occasions. It also tends to hold utilities, telecoms and other seasoned firms with generous dividend yields that are likely to survive all but the worst of calamities. That said, disappointments from individual stocks should be expected to occur from time to time.”
The Humble Dollar wrote about retiring right.
With the stock market in a major downward mess, Dale Roberts asked his readers in his Sunday Reads: what stocks and ETFs are you buying?
For the most part, I just keep buying!
Last but not least, thanks to Accidentally Retired for including yours truly in this latest FIRE-insights study Q&A with many bloggers. Very interesting answers about investors’ sentiment!
Have a great weekend!
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
High Mark: The market can be very cyclical and what is down 10% today may be up 30% in three years. Yes, I have been burnt by high yield stocks in the past as IVR-N immediately jumps to mind. I bought it at $20.00 and it is nowhere near that now. But over 51 years in the market I have seen many dips and rises. In 2008 I was at my brothers, and we were talking about it and suddenly I said that isn’t it great. My nephew gave me a strange look and I noticed it, so I said that now there were more opportunities to buy stocks. As noted before BGI.UN is a fund backed by Brookfield and so I think the dividend is safe. And speaking of Brookfield it has 750 BL. of assets under management and now they are breaking the company in two. What was BAM.A will now be Brookfield Corp. and the manager will be called Brookfield Asset Management. Brookfield Corp. will still control 75% of the Manager. The Manager will look after the platform companies and pay the dividends and distributions. I got the prospectus today and did the math and figure I will receive 3046 shares of the Manager. When it comes to buying shares, people argue that it is only the yield that counts but if a $100 share has the same yield as a $20.00 share than I will buy the $20.00 share every day as you can buy more of them. That is why I don’t buy good shares like WCN, CNR, CPR, CSU, BMO, RY, etc. as they are just too expensive to buy at the present. When I first bought TD, it was in the $20.00 range and NA looked like it was going to drop off the board as I I bought it for an aggerate of $10.875. Now both have split and are now in the $80- $90 range.
Very thoughtful reply, Ronald and you have a lot of wisdom to share with your nephews!
I absolutely believe buying more stocks, now, is smart. I’m doing it every month and also saving for 2023 TFSA contribution room now too 🙂 Want to have my $13k ready to roll. I’m trying!
Mark
Hi Mark; I was just wondering if after buying many growth dividend stocks would think of purchasing high yield stock that may not raise the dividend or distribution. My nephew said he was buying Brookfield but I didn’t recognize the symbol he wrote beside it so I looked it up. It was BGI-UN-T and is a fund of Brookfield’s. It pays a $.60 or $.15 quarterly and the price at the time was $6.03. With the market down it is now about $5.05 which yields 11.8%. Another is NWH-UN-T and pays $.06667/ month which yields about 7.82%. These are low cost high yield companies. It takes very special times to receive almost 12% on your money and I think it is pretty safe if backed by Brookfield.
Interesting.
Here is a short profile, I had heard of this until you mentioned it really.
https://www.5iresearch.ca/company/tsx/BGI.UN
I’ve been burned by higher-yield stocks in the past, one example is TA (TransAlta). I got out of it in 2014 I recall and moved $$ elsewhere.
I don’t think the yields on these stocks can be sustainable and therefore offer nothing in the form of growth IMO for the coming years.
For example, there has been a heavy downward trend for NWH.UN this year, like most stuff (!), and over the last 5-years, the company is down 10%. I feel total returns matter so I like a blend of dividends and growth in my portfolio but growth might be hard in the coming 5-10 years.
Thoughts?
I see in today’s Globe where an economist thinks that young people should spend their money instead of saving it. When I was young I did a rather old fashioned idea as I paid for anything I wanted with cash and if I didn’t have the cash then I didn’t buy it. This led to much cash at home and you might say forced budgeting. Since my wants were few I would bank 2/3 of my paycheck and keep a third.
Ya, I don’t get the not saving at all thingy for young people. I guess I’m getting too old. 🙂
Mark
I think young people should always invest in the stock market. The word is INVEST not speculate. Also on the opposite end I read were people when they retire should stop investing and relax and live off their savings. I say if it worked all those years and you gradually amassed a large sum then why stop now. I find investing in the stock market educating.
Thanks for your insights and well put, Ronald. Investing is far different than speculation.
“When it comes to living in the United States especially, about healthcare, best be wealthy to afford health insurance or cover minor health needs or otherwise potentially face financial ruin at some point.” Sadly, over the past 50 years, politicians have endlessly dreamed up ways to spend our money for programs that they hoped to be remembered by instead of properly funding our health care system. The end result is that a huge %age of the population has no doctor. Wait times at clinics and hospitals is ever growing and pray that you do not need an operation (unless you are a politician).
As one gets older (I am now 78), the greater chance that you will outlive your doctor. At that point, you do not have the luxury of waiting endlessly to finally get a doctor. Therefore, how long before we end up with a 2 tier system where those of us who planed for the future just to wind up having to fork out?
Very good point. I suspect we’re going to mitigrate to more of a two-tier system in Canada for sure.
When our kids turned 18 I took them to the bank and we opened TFSA and RRSP accounts. It was expected they deposit $25 to $50/ month in each account through automated withdraw.. This was to instill a savings habit and learn to live on the rest. It’s easy to develop spending habits especially with access to credit. Over time, adjustments have been made by either increasing the amount deposited or using different investment products. (mutual funds to ETF).
During their working life the idea is to possess a variety of assets (Real estate, RRSP, TFSA, pensions etc…) so that they have options come retirement.
Start the saving habit early – time is your greatest ally.
Outstanding life lesson shared with your kids, Gruff 🙂
Mark
Hi Mark,
The good news for September is that we received a few dividend increase announcements for our portfolio. PPL, EMA, and FTS. Even got notified of dividend increases coming soon for a couple of companies we don’t own yet, but may potentially buy sometime in the future. NWC and SIS.
Other than that, all is well.
Yes, I did too. I hold a good portion of EMA and FTS here and have done so for >10 years.
That’s excellent with NWC and SIS in the dividend pipeline 🙂
Kudos!
Mark
The reality is that most young people today simply can’t save for retirement – those starting out have lower incomes, and as today’s Globe shows in a detailed article, the cost of rent is becoming highly unaffordable, even for those who are educated and earn entry-level professional salaries. If they are able to save a bit, they often need to pay down exorbitant student debt and/or start saving to buy a home.
The guilt factor of not being able to save for retirement is something I hear from my younger staff all the time – they want to, but the cost of living in the GTA, for example, is so prohibitive. I don’t think housing affordability will change much over the next 10-20 years. I suggest they do what they can but plan to put any increases in earnings into savings, rather than lifestyle creep, and they will be able to catch up.
The GTA is nuts. I used to live there 20 years ago and housing was expensive for me, as a young 20-something then.
A big issue is supply, just simply not enough of it. It will take years if not decades to address that.
Mark