Bonds have lost their lustre, says pension expert Keith Ambachtsheer

Bonds have long been considered a key component of our retirement savings strategies. After all, equities are more volatile, right?

Pension expert Keith Ambachtsheer, commenting in the Globe and Mail, says bonds are losing their lustre, and are being crushed by today’s low-interest rate environment.

“Twenty years ago, inflation-indexed bonds offered a real yield of 4 per cent,” Ambachtsheer states in the Globe article. “Today their yield is not just zero, but actually negative.”

He calls them “dead weight investments” that “currently have no role” for institutional investors, such as pension plans.

The article presents a graph showing the yields on 10-year Canadian government bonds since 1960. They ranged from just under six per cent yields in the early ‘60s to an eye-popping 17 per cent in the early 1980s, and have slowly dropped ever since. Yields fell below four per cent in 2004 and are approaching zero today, the article’s graph shows.

So if bonds aren’t getting it done in your investment portfolio, what’s a solution for the average guy or gal?

Ambachtsheer tells the Globe that “solid dividend-paying stocks” provide the answer. A heavier percentage of dividend-paying equities is better than the traditional 60-40 stock/bond mix, he suggests.

The Globe article comments on that idea, saying “there are, to be sure, some objections to this viewpoint. One is whether pension funds and individuals are prepared to deal with the occasional but devastating paper losses that go along with holding an all-equity portfolio.”

It seems that many Canadians who normally would invest are sitting on the fence about it.

As we reported in an earlier blog post, Canadians – again according to the Globe and Mail – are sitting on $127 billion, now lying in chequing, savings and Guaranteed Investment Certificates (GIC) accounts and not being invested in either the stock or bond markets.

Rather than picking a day and putting all the money in, portfolio manager Mary Hagerman tells the Globe that a better approach is to invest some of your money at multiple different times.

She recommends “investing excess cash either in regular intervals, such as a set amount each month (known as dollar-cost averaging), or when there are major stock market drops or corrections,” the article states.

“I’m not suggesting people try to time the market, but sometimes the market talks to you and you have to listen,” Hagerman tells the Globe.

So we’re living through a period when the safe harbour of bonds is a dubious choice due to very low interest rates, and when stock markets are very volatile.

For members of the Saskatchewan Pension Plan, it’s good to know that professional investment managers are on the case – they are the ones guiding your savings through these choppy waters. And if you’re interested in a dollar-cost averaging approach, the SPP can help you set up a regular monthly direct deposit, so that you aren’t having to time the market. Check them out today.

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New NIA study says we may need to work longer before retiring

New research from the National Institute on Ageing (NIA) entitled Improving Canada’s Retirement Income System sheds some new light on the age-old question of when to retire.

Writing about the research for the Advisor, James Langton sums up the study, by noted retirement experts Keith Ambachtsheer and Michael Nicin, this way – “greater pension coverage, higher savings and longer working lives will all be needed to ensure an adequate retirement for Canada’s aging population.”

The paper, reports the Advisor, warns that “retirement is getting more expensive and harder to achieve.”  The research found that the cost of long-term care in Canada will “triple to $71 billion in the next 30 years.”

So the costs of looking after older folks are going through the roof at a time when “pension coverage has steadily declined, and private saving is proving harder to achieve amid rising costs for housing, education and childcare,” the Advisor notes, again quoting the NIA paper.

The authors of the study also note that even those who do save are doing so in less favourable conditions, the Advisor tells us. “Today, we face historically low bond yields and uncertain equity returns in the face of climate change and political turbulence across the world. This means retirement savers may not get as much help from favourable financial markets as they did in the post-World War II decades,” the Advisor states, quoting from the paper.

The paper reaches the conclusion, the Advisor reports, that three important public policy considerations need to be met. Pension coverage must be increased, savings rates need to be boosted, and there needs to be thought given to ways to incent people to work longer.

Commenting on the same report in a Globe and Mail opinion column, the NIA’s Dr. Bonnie-Jeanne MacDonald elaborates further on these ideas.

“Canada can better keep up with the retirement income systems of other countries by improving the labour-force participation of older workers,” she writes.

“Having more older Canadians working will also increase tax revenue. With Canada’s aging population, it will help ease shortages in labour and skills supply as baby boomers contemplate their exodus from the work force over the coming decade.”

Working later also has an impact on saving, she notes. “If you work longer, you’ll need to save less for retirement. Every year you delay your retirement is one fewer year you’ll need to draw on your savings, and one more year for those savings to grow,” she explains in the Globe article.

The takeaway here is this – you may live for a long time. If you don’t have a workplace pension, you will have to save on your own for retirement. If you haven’t saved enough, you will have to work longer than you planned.

A step you can take on your own to address this problem is joining the Saskatchewan Pension Plan. This is a great resource if you don’t have a workplace plan or are not sure how to invest. SPP does the heavy lifting for you, growing your savings at a very low cost (and with a great track record) and then turning those savings into an income stream at the time you leave the workforce. It’s never too late to get cracking on saving, so check them out today.

Written by Martin Biefer
	Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing, classic rock, and darts. You can follow him on Twitter – his handle is @AveryKerr22