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Seniors and retirees - Declining interest rates that could have an impact to income for five years or more - Can the Feds help us?
September 3, 2020
6:23 am
Alexandre
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I made a deal with the Canadian government, in regard to declining interest payments on Savings accounts.

If they drop interest rates, in exchange they will be paying me higher GIS when time comes for me to collect.

If I had a million dollars I would be rich (scratch that) - I would be making about $10K in interest income at soon to be 1% top interest.

With $10K annual income I'll be treated as an extremely poor person: give me OAS, GIS, electricity discount, HST rebate, house property tax rebate, etc., etc.

Meanwhile, I do live in my mortgage free house, and own a car I paid cash for.

If I plan to live till 95, that's 30 years after 65 when I will qualify for all goodies. Taking $30K from $1M annually, plus about $15K-$20K in government assistance and interest income combined - in my retirement I'll be living on an after tax income of $40k-$50K in today's dollars.

Not bad.

Oh, yes, free medicine too.

September 3, 2020
7:30 am
AltaRed
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Loonie said
I chose to put money into interest-bearing instruments. Every investment has risks, however low. This does not mean that other Canadians should have to fill in the gap for my decisions. I could have decided otherwise.
I could, for example, have turned to gold like Winnie. I could have diversified further like AltaRed - and probably should still do so! I could have bought an annuity with a guaranteed predictable income for life. Annuities are not fashionable but they are recommended by many retirement experts as a way of filling the gap between pension income and living expenses, precisely to avoid the situation some people may now find themselves in with a loss of interest income which they are now using for living expenses. 

This part of Loonie's post bears some serious thought going forward. Those who chose to concentrate on interest income from GICs and HISAs, rather than a well diversified investment portfolio of global stocks and a range of fixed income, did so on the premise of protection (return) OF capital, rather than return ON capital. A portfolio concentrated in GICs and HISAs may protect one's principal BUT it is extremely risky with respect to investment income.

Central banks have been known to yank short term interest rates around rather violently in their mandate to hold inflation to 2% and that makes GIC and HISA income highly volatile AND thus risky. Yield curves have been all over the map in the past 15 years or so and one can expect them to continue to be that way going forward. That means retirees are going to have to dip into capital to sustain their cash flows in times like today.

There are some lessons to be learned here for those relying on interest income, and that is to ensure they lock in to a range of maturies upwards of 10 years to smooth out the volatility. Someone who locked in to a 10 year bond a year ago on part of that portfolio has 9 years left to ride that horse. Too many have concentrated on HISAs in which interest rates can change this afternoon, especially those 90-180 day promos which tease investors with rates almost as good as 5 year GICs. Except on day 181, that promo rate is gone. That 5 year GIC that one could have had as little as a year ago in the 2.5-3+% range would look awfully good right now.

Unfortunately, rate decreases on HISAs and GICs are not yet done. Central banks are shifting their mandates to grow GDP and sustain jobs more so, or as much as, control inflation to 2% on a tight leash. Low rates, even zero rates, are here to stay for longer than we might think. The GIC and HISA rate charts here are going to see further decreases, perhaps as low as 1%, in the not too distant future.

It is tough to consider extending maturities at this time of such low rates but some of you perhaps should consider grabbing some of those 2% 5 year GICs before they also disappear. Going longer right now is a very tough call, and diversifying into perpetual preferred shares and/or dividend paying stocks is also a tough call given the rapid recoveries both of these asset classes have experienced since March lows. But some portfolio diversification may be a necessary evil in the years to come.

September 3, 2020
8:26 am
canadian.100
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Some really excellent information in the above post by Alta Red.
I also believe interest rates will continue to decrease until the world gets out of this pandemic (perhaps in a year or two, maybe three) and recession (that might take several years) and the throne speech in the fall will not be "the miracle cure" for the economy.
- the stock market has proven again that it needs to be seriously considered for those who realize that one must diversify investments. HISAs and GICs in this period are simply not going to cut it as discussed by AltaRed.
- my so called crummy big bank and insurance company perpetual Preferred Shares are now golden - even the "rate reset" preferreds are providing dividends in excess of 5% with clear tax advantages over interest income. By simply holding them for years, has paid off big in 2020 vs HISAs and GICs and I think that will continue.

September 3, 2020
9:21 am
AltaRed
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To be fair, it is always a tradeoff between protection of capital and return on capital. Preferred share market prices can be quite volatile so they are not the holy grail. As Loonie also said, annuities can have a place in one's portfolio as well. IOW, diversification.

September 3, 2020
10:21 am
Vatox
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Simplest solution is to not live on all of your income, during working years. Do not have debts when you retire. And never rely on future gains to cover your living costs. Contributions to your savings is your future income and not magically appearing gains. Gains are a bonus and should be treated as extra protection.

Very simple, yet so hard for so many people to manage.

September 3, 2020
10:30 am
canadian.100
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AltaRed said
To be fair, it is always a tradeoff between protection of capital and return on capital. Preferred share market prices can be quite volatile so they are not the holy grail. As Loonie also said, annuities can have a place in one's portfolio as well. IOW, diversification.  

AltaRed - You are totally correct.
Fortunately my Perpetual Preferred Shares are back to cost and paying 5%-6% dividends so no problem there. If interest rates start to increase which is HIGHLY unlikely, the principal value will start to decrease same as bonds.) My Reset Preferred Shares are more volatile than the Perpetuals - I treat the Resets like an annuity - while the capital value did drop since I bought them 10 years ago, I have been receiving consistent steady dividends (4% and higher on cost) for 10 years. These dividends have more than covered the (unrealized loss) and I do not intend to sell them - I will just keep collecting the dividends as I said like an annuity. I have not realized any capital loss because I did not sell them and I do not intend to sell - I may sell them as interest rates keep dropping in the next year and the capital value of the Perpetuals has significantly exceeded my cost.
Some of my Perpetuals are already more than my cost. Of course this may not work for everyone but it is working for me because of these unusual times we are in particularly as HISA and GIC rates are heading down towards 1% and likely lower.

September 3, 2020
11:38 am
Bud
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my guess the Pfds back to par will be redeemed for lower rate junk

September 3, 2020
12:11 pm
canadian.100
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Bud said
my guess the Pfds back to par will be redeemed for lower rate junk  

Yes, Bud that is happening - one of my Royal Bank Perpetual Prefs is being redeemed at cost in October.
Not sure they will offer "junk" as you say, but if so, I will pass.

September 3, 2020
4:34 pm
Bill
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JenE and pwm, right on re boomers! They were handed an awesome society and look at what they're passing on. No need to make working people shell out even more for retired boomers, as Alexandre indicates there are sufficient social safety nets already.

No such thing as a "GICinvestor", GIC buyers are savers, not investors. And savers have freely chosen to live and die with interest rates.

September 3, 2020
5:10 pm
Loonie
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I think AltaRed has overstated the volatility factor with GICs. Once you buy a GIC, it's not at all volatile, and that's why people buy them, for predictability. When it matures, you have a choice. You can reinvest or you can invest in something else. At that time you have to assess the prospects of various strategies.

I should perhaps make clear that I am not really regretting the decisions I've made. I am not dependent on investment income. As Vatox suggested, it's a bonus. So my bonus will be less. GICs are still very low risk no matter how you slice it. The GIC itself is not volatile; only the GIC market is volatile. The major risk is still currency risk. If I knew which currency aw was likely to be more stable, I would invest in it, but I don't. The USD is no longer the benchmark in my view.
HISAs are indeed highly volatile except where one has a short term guaranteed promo rate. But we all need HISAs, so there is not really a choice.

I am always reconsidering whether I want to diversify more, and so far the answer has always been "no". Everything else has risks I don't want to take, aspects I don't fully understand, and/or requires a longer horizon than I reasonably have. Everyone should review their priorities and plans regularly, and I do. I might change my mind at some point, but probably not. It's far too much work for me as I would need to be hands-on about it because my personality requires this.
These are very personal decisions. We all have circumstances that are personal which can affect our decisions and priorities. I try to make the best decision I can for my situation.
The person who is at the greatest risk, in my view, is the one who is ill-informed or guided by ideology or firmly held confidence. I assume anything can happen and quite possibly will. This makes me quite conservative. We've had covid but we ain't seen nothin' yet. Just wait til the power grid goes out, for example, or the effects of climate change affect you very directly. These will make covid look like a small blip and both are extremely likely even in my lifetime.
And to those of you who think there is one person or political party to blame or one perfect strategy or one rating service that tells all, I think you are completely wrong. Any investor, particularly in these difficult times, must be nimble, aware of their own limitations and biases, alert to things they didn't foresee, and especially things that don't fit with their assumptions. Check your biases at the door before you enter the investment arena and you'lll be better off.

Good luck to all!

September 3, 2020
5:10 pm
pwm
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Thanks Bill, you are correct. Buying GICs is not investing, it's lending your money to a financial institution, so the very term "GIC Investor" is an oxymoron.

September 3, 2020
5:24 pm
Loonie
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Those who are interested may find this discussion of the meaning of "investor" useful. It gives a broad and thorough understanding which does not exclude GICs.
https://www.investopedia.com/terms/i/investor.asp

However, I don't think semantics are what's at issue here.

September 3, 2020
7:55 pm
AltaRed
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canadian.100 said

Yes, Bud that is happening - one of my Royal Bank Perpetual Prefs is being redeemed at cost in October.
Not sure they will offer "junk" as you say, but if so, I will pass.  

I believe those are the last of the pref issues that are not NVCC compliant and thus cannot be used in capital ratios. Hence the calling of those issues.

@Loonie: True the GIC is not volatile once purchased. It is the market that is volatile, including the secondary market if anyone actually tried to sell a GIC before its maturity.

September 3, 2020
10:39 pm
Norman1
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Loonie said
Those who are interested may find this discussion of the meaning of "investor" useful. It gives a broad and thorough understanding which does not exclude GICs.
https://www.investopedia.com/terms/i/investor.asp

I make a distinction between savers, investors, and traders and don't consider saving and investing to be the same.

WealthSimple's definitions in Investing 101: Investing Basics For Beginners are closer to how I view the three:

Investing is different from saving or trading. Generally investing is associated with putting money away for a long period of time rather than trading stocks on a more regular basis. Investing is riskier than saving money. Savings are sometimes guaranteed but investments are not. …

September 3, 2020
11:40 pm
Loonie
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People can use their own vocabulary however they want.

I wouldn't agree with wealthsimple because I regard saving as longterm.

It doesn't really matter, but I object to the downgrading of fixed income investing as a kind of non-investment. It has risk; it has returns; it is an investment.

September 4, 2020
6:36 am
savemoresaveoften
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In my mind, GIC is an investment as it will earn you something, you have a choice of short vs long term, different issuers. There is the element of reinvestment risk and also credit risk if the amount invest is above CDIC limit.
Either way, seems like most agree that a hit in investment income due to pandemic is NOT a valid argument why government should subdidize/help you out. Those that has their jobs cut or hours reduced are the ones that deserves help and should.

Never like the idea when someone just argue or propose something the clearly benefits one's own position, regardless whether its fair or reasonable. I certainly got hit as I have some GIC maturing over the next 12 months and surely the renewal rate will be no where close to what I am currently receiving.

September 4, 2020
11:27 am
Norman1
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Long term savings is still savings and not investing.

Reinvestment risk is really external to the savings account or GIC. That risk is that of not meeting a target amount in ten years, for example, with five year GIC's or a non-compounding ten year GIC.

Buying GIC's above deposit insurance limits is investing when the issuer is unrated or lowly-rated. However, it is a lousy investment when one is expected to receive the same return as the fully insured GIC.

September 4, 2020
11:36 am
Bill
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Agree, not usually much point considering suggestions that come from self-interest. Also I pay no heed to calls for more spending when unaccompanied by indication of where the money would come from, i.e. what taxes would be raised? new taxes? what other gov't expenditures would be cut? or is the money just to be additional gov't debt to be paid in the future by today's young?

I guess GICs could be considered investments in the sense that you pretty well always lose money after inflation (and CPI, etc indexing seems to be fake, never seems to really reflect full effect of true inflation we experience at street-level) if you pay even a moderate rate of tax. Plus GIC investments have been slaughtered by stock market returns for decades now, so there's more relative losing ground there too.

September 4, 2020
3:05 pm
Jon
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Seems like lots of animosity here against one single member. I think a better way to persuade people is play nice. After all, even if the other side didn't appreciate it, it is good for the soul.

In regarding to self - interest, isn't it something that we all are guilty of ?

Interest rate trending downward really are something that is not harmful to savers, and those on fix income. However, there really are two factors contributing to it, and I don't see them changing in the future.
1. Aging population:
As the society age, the growth in spending will decrease, which reduce the amount of investment in an economy. Both of these factors are deflationary as there are less money chasing after both consumer goods and capital goods (equipment).
2. Technological improvement:
As out society become more technological advance, we are able to use the factors of production more efficiently. This is also deflationary, as the productivity (aggregate supply) increase, while the total demand (aggregate demand) lags behind.

September 4, 2020
4:16 pm
Bill
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Jon, I agree, self-interest motivates all of us. But, as an example, the self-interest that promotes others giving me some of their money vs the self-interest that promotes a generally more productive society because that also benefits me are not the same. So to me there are some better ways than others to pursue self-interest.

You also say "Interest rate trending downward really are something that is not harmful to savers, and those on fix income" - can you elaborate? I agree with your thoughts re aging population and tech improvement, good points, so do you mean that lower rates indicate rising deflationary pressures and that deflation's good for savers and those on fixed income?

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