Categories
Wealth

What if the Canadian Government Gave Everyone $45k at Birth

Governments exist to provide public goods (like streetlights) and to socialize certain individual costs (like healthcare) for the overall benefit of its population. It can be argued, therefore, that in addition to free healthcare it might be in a society’s best interest to ensure a secure retirement for every citizen.

Many governments already do this to some extent. In Canada, for example, people who contributed to the Canada Pension Plan will benefit from a schedule of payments upon retirement. Those who haven’t contributed may receive alternative retirement funding, such as the Old Age Supplement and the Guaranteed Income Supplement.

None of these provide for a particularly flush retirement, however it keeps most of Canada’s retired residents housed and fed.

What if, instead of providing supplemental income at retirement, the government gave a lump sum to each person born in Canada? The lump sum would be untouchable until retirement, and would be invested on the baby’s behalf until he reaches age 65.

Assuming a nominal return of 7% and inflation rate of 2%, a $45,000 investment at birth would equate to $3.7 million in nominal terms and just over $1 million in real terms (after inflation) by age 65. All things equal, this should provide a comfortable retirement for every person born in Canada, eliminating the need for OAS and GIS. Moreover, employees would no longer need to contribute to CPP or individual retirement portfolios, freeing up more money for consumption, if desired. But for the sake of simplicity, let’s assume people continue to contribute to CPP.

Providing $45,000 to every resident at birth would likely lead to a number of unintended consequences – such as birth tourism – but let’s leave that to the side and examine whether the broad idea is even feasible. This is a high-level conceptual look, not a thorough scientific analysis, and is meant to spark ideas and generate discussion, not propose ultimate solutions.

According to Statistica, it is expected that about 375,000 babies will be born in Canada in 2020. Therefore, to provide $45,000 for every baby born would cost about $16.875 billion annually. A ton of money. Yes, but not in relative terms.

How could $16.875 billion in new spending ever not be a ton of money? According to Employment and Social Development Canada (ESDC) – a department within the Canadian federal government – planned spending on OAS and GIS in 2017-2018 was $51.155 billion. Far more than the cost of the lump sum at birth, with much worse end results. Using the 4% rule of thumb for sustainable withdrawals, a $1 million portfolio could sustainably generate $40,000 in annual income (in today’s dollars). In contrast, OAS and GIS currently provide maximum $7,368 and $10,992 in annual income.

That’s 54% less retirement income at 3 times the annual cost to the Canadian government. While this analysis doesn’t consider all the nuances and knock-on effects, the idea seems worthy of further discussion.

2017-2018 Planned spending figure

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Categories
Life Work

Cash for Life

I have to be pretty bummed out to play the lottery.

I know the odds of winning are infinitesimal and the lottery is essentially a self-imposed tax. Yet, sometimes I just need the fantasy of quick riches to infuse some hope into a crappy week.

With that said, I’ve only bought a couple tickets over the last several years. I guess I’m generally happy.

But what if I did win? I joke that I’d quit my job if I won 10 grand. Of course, that’s not realistic. To be honest, I’ve thought a lot about this and I’m still not sure how much I’d need to feel like it’s time to quit my job.

I am working towards financial independence, but it’s a moving target. I do set goals, but every time I approach my goal I stretch it. Over the short run I’m fortifying my finances. Over the long run I’m trading my finite time for money.

Most of us are only on this planet for about 80 years, so there comes a point at which you must choose to live life your way. That’s easy to write but hard to do.

Although I moan about it sometimes, I have a great job and I have worked hard for the equity in my career. I have to admit, I’m scared to walk away from a career that many would gun for. Partly, my fear is that I’d quit and discover that I didn’t have enough money. My other fear is that people would think I’m stupid for walking away from a great job. I shouldn’t care, but that’s human nature I suppose.

However, eventually one must prioritize what they truly want out of life. The fact that you are alive to read this is a fluke of magnificent proportions. Life is a gift that can’t be wasted on committee meetings and the general circle-jerk of corporate nonsense.

“Walking away” isn’t about abandoning work completely. Instead, we need to seek fulfillment, whether that comes from painting pictures, teaching children or renovating kitchens. This could also mean de-prioritizing money.

Fulfillment comes from making a meaningful impact, seeing the fruits of your labor and helping people. Fulfillment doesn’t come from leasing a new BMW every five years.

Building wealth and financial freedom isn’t just about chasing money. It’s about having what you need to live an interesting and productive life – a life that will be remembered.

I still don’t know when enough is enough. However, when walking away from something it’s important to have something to walk towards. Without first discovering what you find fulfilling you’ll never be able to walk away – no matter how much money you have.

Categories
Wealth

Should Parents Pay for College?

A friend of mine (let’s call her ‘Jane’) recently brought up the cost of putting her children through college. It turned out she was paying all the bills.

This would be great if she could afford it.

But she can’t.

Jane is 51 years old and earns roughly $90,000 per year. She will likely happily work for another 15 years. Currently she has about $400,000 in retirement savings and plans to aggressively save during her remaining working years.

To help her children pay for college, she has withdrawn some of her savings and tapped into a line of credit.

As a parent, I can understand the instinct to do everything you can for your children. However, I don’t believe parents should put their retirement at risk to pay for their kids’ education.

I realize I’ve probably ticked off a few people.

What is the parental obligation?

The moral argument that parents are obligated to provide an education for their children is strong. I agree that people shouldn’t have kids if they’re not willing to set them up for the world. However, what that means has evolved over the decades. Today that might mean a masters degree. But what were parental obligations 50 years ago? And what will they be 50 years from now?

The parental obligation seems to have grown over the years. Regardless, parents with college aged children today should have known what they were getting into, but at what point does the obligation end? Maybe never. I don’t know.

Of course, the decision is more than moral. It’s pragmatic. Money doesn’t appear out of thin air, and for that reason there are many additional considerations.

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Who’s paying for retirement then?

Let’s put the moral argument to the side.

There is a pressing financial issue facing parents today. The cost of post-secondary education continues to rise faster than incomes. While it is increasingly necessary to get a college education, it is also increasingly financially unattainable for many people.

This is happening while much of the world faces a retirement crisis. People simply have not saved for retirement. Jane is one of the lucky ones, yet she still faces a shortfall if she doesn’t continue to aggressively save and invest.

Jane’s ability to fund her retirement is at odds with her desire to pay for her children’s education. She probably cannot do both.

Her window of opportunity to remain self-sufficient in retirement is closing. The more she financially commits to her children’s education the less likely she will retire as planned. Of course, plans have a way of going wrong anyway. Any number of unexpected events – ill health, redundancy – can cut her timeline to retirement in half. Jane has limited time and lots of downside risk.

In contrast, her children will have 60 years ahead of them once they graduate from college. If they pay for their own education, this is plenty of time to repay debts. If they pursue the right career path, they likely have much more upside than Jane has downside. Moreover, if Jane’s retirement is adequately financed she will retain independence. If Jane sacrifices her retirement to pay for her children’s education she will invariable depend on them (perhaps even live with them) once she stops working. Whether this is good or bad is up to the family to decide, but you must recognize that each option comes with trade-offs.

The biggest trade-off for Jane’s kids if they self-fund their education is they will be saddled with debt on day 1 of their working lives. That seriously restricts their ability to take entrepreneurial risk. It also forces them to take the first job that comes their way, perhaps sending them down a path they didn’t envision. Debt is restrictive and stifling.

As you can see there are no clear cut answers (unless you’re rich), but here is what I think:

  1. The decision to go to college and pursue a stream must be carefully evaluated. College is simply too expensive to use as a place to find yourself. Students (and parents) must have a path in mind and need to fully understand the return on investment of a college degree.
  2. Education costs should be shared by both parents and children. Everyone needs a stake in the game. Not only does this reduce the burden, I believe it builds commitment. The more a student is aware of the difficulty in paying for college, the harder they’ll work to get the most out of their education.
  3. Avoid paying for college using debt. If any debt must be incurred, the child should borrow (not the parent). The downside risk for a middle-income, middle-aged parent struggling to save for retirement is simply too large.
  4. Prepare well in advance. In anticipation of college costs (even if the child is still a toddler) cut some expenses. Forgo a trip or two. Importantly, the child must participate in these sacrifices starting at an early age. And when they can get a part time job, a significant portion of their earnings should be stashed away for school.

I don’t have all the answers, but I hope I have provoked some discussion.

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