My long-term client Todd and I were sitting on the deck that overlooked his beautiful garden. Glasses of cool lemonade and his portfolio were on the table in front of us. The sun was shining, the birds were singing, and everything was green and growing. Which was timely as Todd asked me,
“Adrian, why are we leaning into these growth assets? Can’t we just keep things ‘safe’ and predictable in GICs or a savings account?”
“I hear you.” I responded. “You’ve made so many important decisions in your practice that it can be tempting to stick with low or no risk investments as you approach retirement. The problem is, all that does is lock in how much of a loss you will have every year.”
THAT got his attention. He almost choked on his lemonade.
“A loss every year? I know there’s taxes to pay, but how would I lose money from low or no risk investments?” he replied.
I took a sip of the lemonade.
“Todd, you wouldn’t be losing money, but losing what your money can do for you. Let me explain with something we’re all looking forward to as the summer approaches. Do you like having barbeques?” I asked. That seemed a bit weird I admit, but I’m going somewhere with this….
“Well….yeah of course,” he said. He’s known me a long time so he knew something was up!
“Hamburgers, hot dogs, fries, pops….that kind of thing?”
“Well….maybe wobbly pops for us, but yes, pops for the kids,” he laughed.
“You’ve made so many important decisions in your practice that it can be tempting to stick with low or no risk investments as you approach retirement. The problem is, all that does is lock in how much of a loss you will have every year.”
We quickly listed a bunch of the everyday things we usually buy when planning for a summer barbeque. Meat, hot dogs, buns, and all the fixings and condiments. Then we headed over to one of my favourite places…wait for it…Statistics Canada!
Yep – Stats Canada was in my BBQ analogy!
(Yes, and I love to spending time looking at stats there. Remember I proudly wear the title of financial nerd!)
The 48% Markup
Todd and I went back 10 years on the Stats Canada site to look up the prices of our grocery list in 2017, and compared them to the most recent prices they had as of March this year. A basic barbeque spread would have set you back about $56 in 2017.
Today? That exact same grocery list is $83.
Todd shook his head. “What the heck? That is nuts!”
It was a 48% increase in just nine years! When we crunched the numbers, that’s an effective annual inflation rate of 4.39%.
I looked at him and said, “Okay, Todd, so how does this relate to how much of a loss you’d have had every year if we’d just stuck with ‘safe’ investments?”
“Let’s dive into one of my favorite financial tools! Prepare thyself!”
The Rule of 72: You don’t want to get BBQ’d by it!
4.39% inflation might feel like a small number. But let me show you how that “small” number works against you using the Rule of 72.
I love The Rule of 72.
It’s a quick way to see how long it takes for a something to double. You just take 72 and divide it by the inflation rate, and as I’m never, ever separated from my calculator, we saw that the BBQ food cost would double about every 16 years at the 4.39% rate (the $83 barbeque today would be $166 in 16 years, and so on).
Another way to look at it, is that at 4.39% inflation?
What your money purchases is cut in half every 16 years. So for example, if we said that “so-called” safe investment earning 4% will lose 1% to tax, and then has an inflation rate of 4%…well, now you’ve locked in a 1% loss every year. Which really sucks!
Todd took a big gulp of his lemonade and looked at me.
“Holy crap, Adrian – I am so glad we didn’t invest in the no fee/low fee stuff!!”
So, Why Do We Hold Safe Investments at All?
Don’t get me wrong, we do want things like GICs in your portfolio, but for a very specific reason.
I use them as a “buffer” to keep enough for about three years of your spending to allow you to ride out a market decline without ever being forced to sell any assets at a loss. This is your sleep-at-night buffer to ensure you never run out of money.
But for the rest of your savings?
It needs to have enough “horsepower” to outrun that 16-year clock but still allow you to do all the things you want or need to do throughout retirement.
This is another reason in my book “Retire-ish”, I argue against the wisdom of “live off the income and don’t touch the capital”. Are you really working so hard to never spend the money you’ve saved?
(I didn’t think so either.)
We use GICs to buy us time, but we use growth investments to buy your future.
Does your current plan have the horsepower to double your income in 16 years? If you aren’t sure, let’s look at the math. I’ll buy the coffee…before prices double!
Because no one wants their hard-earned money to get BBQ’d.
I’d love to hear from you! I’m always interested in hearing about the unique financial situations doctors have. Send me a note! And if you’d like to learn about my unusual 5 Bucket formula? Please check out my newest Amazon bestselling book, Retire-ish: What Doctors Need To Know Before They (Sort Of) Retire
