Erroneous Presumptions Undermine Financial Plans

Years of low rates, financial bubbles and poor saving plans have led to widespread shortfalls in household finances globally. Canadians are poster children for the consequences.

A new Manulife Bank survey finds that three in ten Canadians are so financially confused that they don’t consider their mortgage a debt; two in ten don’t consider car loans a debt either, see:  Three in ten Canadians consider themselves debt-free while carrying a mortgage.

Meanwhile, according to an earlier report from Equifax Canada, non-mortgage debt grew more among Canadians aged 65 and older than for any other age group. See Help older clients control debt:

Desire to maintain a pre-retirement lifestyle, longer life expectancies and financial pressure from family members make staying within financial means difficult for some senior clients.

…Some seniors may find that they retired too soon and cannot afford it, says Laurie Campbell, CEO of Credit Canada Debt Solutions Inc., a non-profit organization in Toronto. “Getting back into the workforce is particularly difficult for seniors, so they rely on credit to make ends meet.”

Self-serving advice from the financial sales force makes the erroneous presumption that corporate securities are attractive places to park our savings at every point in every market cycle, regardless of macro forces, valuation levels, risk or return prospects.

As a result, unrealistic return assumptions are plugged into boilerplate financial calculators that underestimate loss and volatility cycles and over-estimate compound returns, while encouraging insufficient savings/contribution levels and too early retirement dates. This is especially true since the current over-valuation cycle in financial assets is the most extreme in modern history. At the same time, we are living much longer than before, see World Economic Forum:  “We’ll live to 100–how can we afford it?”