Tuesday, August 5, 2008

What is Turning Us All into Investors?

In my parents’ generation, most people didn’t need to know how to invest money. They saved modest sums at the bank, but few routinely owned stocks. This question of why we’re all becoming investors is answered on the first page of The Intelligent Portfolio, written by Christopher L. Jones.

I found that this book is well written and contains many interesting subjects. However, I don’t always agree with the author. I will be discussing several topics from this book individually over the next while.

It turns out that people are living longer, making retirements much longer. The cost to defined benefit pension plans is skyrocketing. Companies don’t want to pay for these dramatically increasing pension costs. So, pension plans are being replaced with individual retirement accounts.

In Canada these accounts are primarily RRSPs, and in the U.S. they are mostly 401(k) plans. Instead of funding pension plans, many companies now match contributions to individual retirement accounts. Investing the money in these retirement accounts is the responsibility of the individual.

Blaming these changes on the fact that we are living longer is one way to look at things. However, life spans have been increasing for a long time. We have seen this coming. The real problem is that we haven’t made big increases in the retirement age.

Instead of increasing the retirement age from 65 to 75 or 80, we have done very little. In fact, many workers can retire and collect benefits starting at age 60 or 62 if they choose. If the retirement age were 75, pension funds would need much less money and many companies might still have traditional defined benefit plans.

But, increasing the retirement age is very tough politically. How do you tell someone who hates his job and has been planning a move to Florida that he has to work longer? Ultimately it is the voters who are responsible for the fact that we have all become investors.


  1. If someone is counting down the years until their job ends, maybe it wouldn't hurt to give them a little push and make them consider other possibilities.

    A lot of people don't stop working at retirement age or change to a different type of work, so people are making the change on their own. And if someone is just in their job for the money they should have a fixed timeframe to get what they want and get out, whether it's 5 years or 40 years.

  2. Richard: I agree that many people who reach retirement age continue to work. This is mainly because they need more money. This is a sign that our society can't afford to have so many people in retirement. There just isn't enough wealth to go around to make everyone happy with their standard of living. This will just get worse as baby boomers begin to retire.

    I have no objection to allowing people to change the type of work they do (or even encouraging them to do this), but this is not what the retirement age is for. Somehow we need to push the official retirement age out to at least 75. Anyone who wants to retire before this should have to save the money to do so instead of collecting from public and private pensions that are paid for by younger workers.

    With a higher retirement age we could afford to be more generous with retirees and place less of a burden on younger people who have to pay for these retirement benefits.

  3. Very interesting post. I rarely consider the effect of increased life expectancy on private and public pension plans.

    It is true that people used to have maybe 5 or 10 years of retirement, but nowadays, retirement can last easily as long as one's career.

    You've nailed a salient point: raising retirement age is tough politically. Perhaps this is why the government is pushing toward a new savings account (TFSA)? To encourage people to take charge of their own retirement planning.

    I would encourage everyone to follow your premise: "Turn into an investor!" Take personal responsibility for your own financial present and future. Save and invest for it. Of course, this advice isn't that useful to readers of your blog, since we're all doing this already. Encouraging investing here is just preaching to the choir. Amen!

    Great post.

  4. Gene: Thanks for the kind words. It's true that I'm preaching to the choir, but if our collective wisdom about investing can spread around a little, and each enlightened person helps out a few friends and family members, then maybe it's all worthwhile.

  5. Thanks for the link Michael. Even if changes are made to make retirement shorter, I'm not sure if defined benefit plans will ever come back. Whether we like it or not, the fact is that we all have to learn to manage our portfolios on our own.

  6. CC: I think you're right that it's too late to save defined benefit (DB) pension plans for non-union employees in the private sector. But, I think that the extreme costs of DB pension plans for government employees will force changes eventually. The most sensible change in my opinion is to increase the retirement age. If the retirement age gets high enough, some private sector employers may choose to go back to DB plans, but I think it is likely to skip a generation. At the very least, most people who are in the middle of their careers now who have no pension can't expect to get one any time soon.