Reynolds - The skeptical investor: how to grow and protect your retirement savings

THE

S KEPTICAL

INVESTOR

A LSO BY J OHN L AWRENCE R EYNOLDS

NON-FICTION

One Hell of a Ride

Laying It on the Line (with Buzz Hargrove)

Bubbles, Bankers & Bailouts

Prognosis: The Current State and Shaky Future of Canadas
Health System

When All You Have Is Hope (with Frank ODea)

Shadow People: Inside Historys Most Notorious Secret Societies

The Naked Investor: Why Almost Everybody But You Gets Rich on Your RRSP

Straight from the Top (with Robert Milton)

All in Good Time (with Brian Tobin)

Money Management for Canadians (contributor)

Free Rider: How a Bay Street Whiz Kid Stole and Spent $20 Million

Mad Notions

RRSPs and RRIFs for Dummies

Ballroom Dancing: The Romance, Rhythm and Style

FICTION

Haunted Hearts

Solitary Dancer

Gypsy Sins

Whisper Death

And Leave Her Lay Dying

The Man Who Murdered God

VIKING CANADA

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First published 2010

1 2 3 4 5 6 7 8 9 10 (RRD)

Copyright John Lawrence Reynolds, 2010

Author representation: Westwood Creative Artists
94 Harbord Street, Toronto, Ontario M5S 1G6

All rights reserved. Without limiting the rights under copyright reserved above,
no part of this publication may be reproduced, stored in or introduced into a retrieval
system, or transmitted in any form or by any means (electronic, mechanical, photocopying,
recording or otherwise), without the prior written permission of both the copyright owner
and the above publisher of this book.

This publication contains the opinions and ideas of its author and is designed to provide useful advice in regard to the subject matter covered. The author and publisher are not engaged in rendering legal, accounting, or other professional services in this publication. This publicationis not intended to provide a basis for action in particular circumstances without consideration by a competent professional. The author and publisher expressly disclaim any responsibility forany liability, loss, or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this book.

Manufactured in the U.S.A.

LIBRARY AND ARCHIVES CANADA CATALOGUING IN PUBLICATION
Reynolds, John Lawrence
The skeptical investor : how to grow and protect your retirement savings / John Lawrence
Reynolds.
Includes bibliographical references and index.
ISBN 978-0-670-06405-2
1. Retirement incomePlanning.2. Portfolio management. 3. Registered Retirement
Savings Plans.4. Finance, Personal. I. Title.
HG179.R492 2010 332.024'0145 C2009-906286-0

Visit the website of John Lawrence Reynolds at www.wryter.ca
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FOR HILARY,

WITH GRATITUDE AND CHOCOLATE

It is easier to make money than to save it.
One is exertion. The other is self-denial.

THOMAS CHANDLER HALIBURTON

Listen, when a man makes money
he has to keep two steps in front of the people
trying to take it from him. You find it. They take it.

SIR HARRY OAKES

CONTENTS

INTRODUCTION

Life is hazardous. Survive the challenges of childhood and you enter adolescence, an endless flood of risks involving illegal substances and immoral temptations. Emerge from there to encounter uncertainty in your job and relationships, perhaps eventually adding the responsibility of protecting your own kids from the risks you managed to navigate around, if you were fortunate.

Then, as though compensating for the anticipated selective dysfunction of old age, the warm glow of retirement looms on the horizon, much of it funded by registered retirement savings plan (RRSP) contributions. Its the end of the rainbow, a pot of gold unguarded by leprechauns and unsullied with the guilt of government handouts. It bears your name. Its yours to spend. And when you step away from your job for the final time, it will be waiting for you.

You hope.

These days, projected pension benefits are as common as 10-cent beer and 50-cent pantyhose. Set aside those dreams of sailing the Mediterranean in June and walking warm beaches in January for a moment. Step over here and meet Retirement Reality, a slobbering beast with hairy earlobes, handing out debits for savings accounts, a nasty monster showing up on the doorsteps of too many ready-to-retire Canadians.

The Pension Plan You Always Wanted Is the One Others Are Enjoying

A generation ago, virtually all employers offered their workers a pension plan, usually promising defined benefits. This kind of plan determined a fixed amount paid each year through your retirement, employing a formula based on your income. Typically, your retirement income would represent 70 percent of the earnings you received during your final five years of work. Having shed many expenses of your working years, such as mortgage payments, commuting costs, your kids budgets, and other drains on your income, and qualifying for various tax breaks and government handouts to be added to your bank account, this was likely to be an adequate amount. With a little planning, you could anticipate a lifestyle close to the one you had when you were rising with the sun each morning, gnashing your teeth at the boss all day, and dreaming about retirement at night.

Defined-benefit pensions were a product of the Age of Innocencemeaning pre-1980, when large corporations such as Northern Telecom (Nortel), Massey-Ferguson, General Motors, Canadian Pacific, and others were expected to keep operating forever, or at least over the lifetimes of their pensioned employees.

My, how things have changed. Many of those companies have vanished; the rest are feeble and struggling. And while the corporations promising the defined-benefit pensions are becoming extinct, the rest of us are living far longer than the designers of those old-style pensions expected. What was once reasonable for companies to provide for their retirees now appears impossible because the nest egg is being tapped longer than planned. To make things worse, many of the companies that are committed to these plans, if theyre still around, employ fewer people to generate the profits needed to keep the money flowing. General Motors, its rumoured, has five retirees receiving pensions for every worker building its cars, explaining one of several reasons why automotive companies have practically run off the road entirely.