Many Unhappy Returns
via Finacial Post | February 15, 2012
Playing it safe won’t help investors net enough savings to retire.
As Canadians enter the home stretch of the annual RRSP season, a CIBC poll has uncovered a disconnect between the rate of return investors think they need to retire and their actual behaviour. A whopping 45% of 1,000 adults polled by Harris/ Decima did not even know what annual rate of return they need to meet their retirement goals. And 57% of those who did know nevertheless chose low-risk guaranteed investments that CIBC Asset Management president Steve Geist says are unlikely even to keep pace with inflation. Geist worries this ignorance of likely rates of return is being used as an excuse to bail on making substantive investment decisions. “They think that by taking no risks they are playing it safe, when in reality they are falling further behind.” Just adding a percentage point or two to returns can have more impact than the annual contribution. Few have a concrete “magic number” to project their retirement income. “It’s a moving target as time passes,” Geist said in an interview, “I thought more people would have a handle on what sort of range they expected.” While 7% think they could attain their objectives with a return under 3%, they’d be lucky to get even that from money market funds, 5-year GICs or savings bonds. Government of Canada bonds currently yield only 1.2%, GICs 1 to 2% depending on the term and money market funds a paltry 0.75%. Those are all negative real returns after inflation. The problem with a 3% return is you need a ton of capital to generate a liveable income. If you wanted $90,000 a year from an instrument paying 3% a year, you’d need a $3-million portfolio to generate it. Those hoping for $60,000 a year would need $2-million at 3%. I’d venture to say only a tiny minority of Canadians have that much capital. Worse, if it’s interest income outside registered portfolios, the income may be highly taxed at the top marginal tax rate (on the order of 46%).