All I Would Need Is…

One PercentDespite what I wrote in my previous post, I continued on and off to do more research and number crunching to figure out how far my projected retirement savings would take me if I retire at the end of 2025. The conclusion I’ve reached is that, on my current course, all I need is for the Bank of Canada (BoC) to increase its overnight rate by a measly one percent by 2020 — even leaving it at that level forever after that! — and that would let me stretch my retirement savings for 40 instead of 30 years — not that I’ll live that long. However, it could better shield me from inflation.

Fortunately, such a modest increase is very likely to happen, but at the same time, the hypothesis that rates might not ever go up very much is also very plausible.

On the one hand, many financial talking heads have been saying following this week’s financial markets volatility that investors might be looking again at bonds instead of stocks given the expected rise in interest rates as a result of increased wages and low unemployment in the United States. That being said, here in Canada, the January 2018 employment statistics came out last Friday and the number of jobs lost was far greater than expected — 88,000 instead of the expected 9,000 — but that number hides a healthy increase in full-time jobs (part-time jobs down 137,000 but full-time jobs up 49,000). While these disappointing numbers might moderate the Bank of Canada’s desire to further increase interest rates, the forecast at Trading Economics still has the expected rate by the end of 2018 at 1.75 percent from the current 1.25 percent reached this January, and 2.75 percent by 2020.

Then, on the other hand, there’s the history of the Bank of Canada’s rates since its inception in 1935, which I’ve compiled for you to consider if you follow that link. Basically, the BoC’s rate was very stable for its first 20 years. It slowly started to creep upwards by the late 1950s and then did so more forcefully in the 1970s, reaching dizzying heights in the very early 1980s which led to many people losing their homes. But the current period of low interest rates we are in now actually began as early as the mid- to late-1990s, returning to levels common in the 1950s and early 1960s. By the time the 21st century rolled in, rates were even lower than the previously historical lows of the mid-’40s to mid-’50s.

What’s instructive in this analysis is that having the BoC’s rate remaining fairly low and stable for long periods of time is not without precedent. That is why I’m “baking” into my number crunching a mere one percent increase that would remain there for a long, long time. At the same time, it makes me feel better, because I know my wish for much higher rates would be a calamity for those who owe money, like a mortgage.

I’ve found after a few years of observation that a 0.25 percent fluctuation usually translates as follows in my savings world, for such fluctuation does not translate literally depending on the financial institution and the type of investment.

Type of Investment Financial Institution
RBC Tangerine Implicity
% BoC >> +0.25 –0.25 +0.25 –0.25 +0.25 –0.25
Savings Account +0.10 to +0.15 –0.15 to –0.25 +0.10 to +0.15 –0.15 to –0.25 +0.15 –0.15
5-Year GIC 0.00 to +0.10 –0.15 to –0.20 +0.10 to +0.15 –0.10 to –0.20 +0.15 to +0.25 –0.15 to –0.20
Return Rate on February 10, 2018 (with BoC @ 1.25%)
Savings Account 0.90% 1.10% 2.00%
5-Year GIC 1.60% 2.60% 3.10%
Projected Return Rate in 2020 (with BoC @ 2.25%)
Savings Account 1.50% 1.70% 2.60%
5-Year GIC 2.00% 3.20% 4.10%

It’s little wonder, therefore, that Implicity (a credit union) is the cornerstone of my retirement savings plan.

Again, it’s the arithmetic of exponential growth — see the video of Albert Allen Bartlett I posted in the last part of my “How to Get Out and Stay Out of Debt” series — that explains how such a small percentage increase could extend my savings by about a decade. I would hope that the notion of exponential growth and my number crunching should dispel once and for all the myth that there’s no point in saving when, on the surface, the returns are as low as they are now.

Savers are not being “punished” as I so often read online. It’s just that we savers have to put more effort into achieving our goal. The days of setting aside a modest amount of money for 20 or 30 years and watching it double or triple may be gone, but a modest amount of money with modest growth is still better than just having a government pension which is designed to give only one third of your income at retirement.

{1} Thought on “All I Would Need Is…

  1. We’ve been working on our savings strategy a bit more the last couple years. We’re VERY behind the 8-ball in terms of our deferred compensation accounts which we started 2 years ago at low percentage rates, but we figured… baby steps. We both will get pensions from New York in addition to our social security, assuming neither disappears before our retirement age. We’re not too confident about the latter right now with the administration down here. I did convince Matt to open his own personal savings account (I’ve had one for years) on Ally and we also moved our joint savings account from our bank to Ally since the interest rate was wildly better. In fact, and this is where I reference your post here, I received an email last night informing us that our interest rate is now 1.45%. I couldn’t tell you what our interest rate is with our old bank. I think it’s .01%. I’m not joking. Either way, given the uncertainty of long-term employment beyond 2019 for Matt and our desire to downsize our house this year, we’re trying to work harder at the savings thing so that we have the emergency savings in a better place and additional savings happening for house/health stuff.

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