The distinction this blog often makes between findependence (simply a contraction I coined that means financial independence) and retirement becomes crystal clear in this Wikipedia sentence: “It does not matter how old or young someone is or how much money they have or make. If they can generate enough money to meet their needs from sources other than their primary occupation, then they have achieved financial independence.”

Exactly! It goes on to point out that if you’re 25 years old, with expenses of $100 a month and sufficient financial or other assets to generate $101 a month, then “they have achieved financial independence, and they are now free to do things that they enjoy without having to worry as much.”

Millionaires aren’t always findependent!

But here’s the compelling flip-side to this concept, which hammers home the idea that young people with simple needs can aspire to “early” findependence: the polar opposite is also true. Older folks with expensive lifestyles and large expenses may find findependence eludes them even after they reach what we used to call the traditional “retirement age.” As Wikipedia puts it, someone who is 50 years old and earning $1 million a month will not be financially independent if their expenses exceed $1 million a month. “They are not financially independent because they still have to generate the difference each month just to stay even.”

A good example of this phenomenon straight from the news is the strange case of CNET co-founder Halsey Minor, who once had a net worth of US$350 million, but recently filed for Chapter 7 bankruptcy and reputedly now has a net worth of negative US$90 million! At the other extreme are the various tales of folks living the simple life of findependence while in their 30s, some of whom have written books on how they did it. (They call this retirement, but I call it findependence). One such book is listed at the end of the Wikipedia entry: Jacob Lund Fisker’s 2010 book, Early Retirement Extreme: A philosophical and practical guide to financial independence. Interesting that he used both terms in his title.

Inflation can kill findependence

Note too the Wikipedia paragraph on inflation, which warns that someone on a fixed income may lose their financial independence if the cost of living rises faster than their financial assets. That’s an idea that hadn’t occurred to me in quite those words, and reinforces the traditional wisdom that we must always strive to inflation-proof our portfolios. At MoneySense, retirement writer David Aston wrote an excellent piece on this topic in the April issue. Given the rampant money printing of the world’s central banks, inflation is not something you can dismiss.

Thanks to Roger Wohlner, (@rwohlner on Twitter), of the Chicago Financial Planner, who first made me aware of this Wikipedia entry after I wrote a guest post for him a few weeks back. The actual Wikipedia link was contained in his own earlier blog, 5 tips for financial independence.

Falk, a partner with Illinois-based Focus Consulting Group, reminded the audience of (mostly) financial advisers that the concept of retirement is still relatively young—about 120 years—going back to agrarian societies when bodies gave out earlier than minds do in today’s service economy, and life expectancies were far lower.

It’s arguable that modern retirement constitutes a loss of labour for society as a whole and is a waste of talent, Falk said, adding that the age demographic of 55 to 64 is showing increasing levels of entrepreneurial activity in recent years.

In his own country of the United States, Social Security was created in the wake of the great depression of the 1930s, motivated in part to intentionally discourage saving and coax so-called “job hoggers” into retirement: in effect, paying citizens to be unproductive. Canada’s equivalent system of CPP/OAS and GIS is structured similarly, he said. “When it comes to retirement, it makes no sense to pay people to be unproductive but these are our policies.”

However, he warned those who may be counting on nothing but government programs that Canada’s Old Age Security and the Guaranteed Income Supplement are funded from general tax revenues. “But if (economic) growth stinks, where is the revenue going to come from?” When the system was  created, the retirement age to begin collecting benefits was 70,  later reduced to 65. But in Canada it’s now moved back to 67 for younger people and will probably go back to 70 and beyond, he predicted. “Are your clients prepared for that?”

There’s a perverse logic here since many people reason there’s no reason to save if they think the government must take care of them in old age: it’s not rational to cut back one’s lifestyle today (which is what saving for the future entails) if you know you’re covered tomorrow regardless.

Relative to America’s Social Security, “in some ways, CPP looks better since you actually have the money, which is not the case in the U.S. Kudos to you.”

“Sounds like civil war coming up”

Falk also addressed declining employer-sponsored pensions. In the U.S., at any rate, taxes from private-sector employees are in effect being transferred to prop up government-funded pensions for government officials, firemen and police. Even so, the ugly truth is benefits are disappearing. Unfortunately, many retirees who were promised employer pensions took such promises as a guarantee but “they’re not,” even though those promises have impacted saving behaviour. “It sounds like civil war coming up.”

The trend is clear, in Falk’s view. “We need to raise the retirement age to make this work. Canadians are living longer and we have to be older for governments to pay us to stop being productive.” Based on biological capacity to work, and longevity and mortality trends, many could keep working until age 72 or 73.

Falk sang the praises of the benefits of working longer, pointing out the divorce rate is largest in the 60-plus cohort. “Retiring 24/7 with your spouse? For richer or poorer, but not for lunch.” And he warned about the financial consequences of divorce at this age: “Divide your assets in half and see how much retirement you can finance.”  Those who remain working have lower death rates: “Work seems to keep us going and keeps us healthier.”

Seek Findependence, not retirement!

While Falk did not use the term, this is the Financial Independence blog at MoneySense and I can’t resist adding my own thoughts to his talk. Yes, we need to retire the word retirement and my own recommended (if self serving) suggestion for a replacement is financial independence, or the contraction I’ve coined to denote it: Findependence. I’ve long argued it’s not prudent to put all your retirement eggs solely in the basket of government programs. You need to supplement that pension asset class with your own savings (RRSPs, TFSAs, non-registered savings) as well as employer pensions. That way, you are to some extent findependent of government programs or—God forbid—findependent of a corporate pension plan that fails to make good on its pension promise once you’re too old to go back to the work force.

When we dream of early retirement, maybe it’s early Findependence we really should be striving for. It doesn’t make much sense to retire at age 40 but it would be a worthy and achievable goal to be findependent by that age: if it’s defined as no longer depending on a single salaried source of employment income to survive economically.

For more on this theme, see this blog I wrote last week for The Chicago Financial Planner or a spinoff blog on my own site: Seek Findependence, Not Retirement.

None of this should come as a surprise to investors or anyone making long-term financial plans. As the late John Lennon sang on his final album, Double Fantasy, “Life is what happens to you while you’re busy making other plans.” (By the way, he may not have been the first to say this. See here for details.)

CNN reported on an Ameriprise Financial survey of Americans aged 50 to 70 with at least US$100,000. Nine in 10 of them had already experienced at least one economic or life event that hurt their retirement savings, while almost 40% had been hit by at least five unanticipated events that caused their average loss to hit US$144,000.  The takeway, Ameriprise said, was to “expect the unexpected.”

Despite all the fancy retirement calculators available to modern investors, these tools provide at best rough guesses of what may or may not happen in the future. Who 20 years ago could have anticipated the minuscule interest rates that now afflict fixed-income investors?  Stock market declines come around with unwelcome frequency and as we saw in the 2008 financial crisis, home prices are equally subject to price volatility. Putting aside money for children’s education or taking care of ailing elderly parents can also take a toll on savings.

Stress testing financial plans

BMO makes the valid point that merely having some sort of financial plan isn’t enough: you need to stress-test such plans to make sure they can withstand major declines in financial markets, as well as major life events like job loss, illness or disability, death of a spouse and other events.

Far from Lennon’s double fantasy, such disruptions can inflict what BMO terms a “double shock” of both loss of income as well as unplanned extra demands on spending.  Little wonder BMO finds Canadians’ biggest fear is the stress of not having enough money to retire.

If you’ve read this blog before, you’ll know what’s coming next. By all means, save and invest wisely, live below your means and do all you can to establish financial independence. This is not the same as retirement. If you can establish a modicum of findependence by your 30s or 40s (paying off all debts plus building a nest egg), you should do so: the sooner employment income is an income supplement rather than the sole means of financial support, the better.

Just keep working

If you’re healthy, have a good job or business and still expect decades more of life, the best insurance against unexpected financial setbacks is my three-word mantra of “just keep working.” Overshooting on retirement savings is a much more benign outcome than the opposite situation of under-saving followed by an unexpected job loss, business setbacks or marital splits.  If you dislike your current career so much that you’re obsessed about “retiring” solely to get away from it, perhaps you should consider going back to school or retraining and find a career that’s more compatible with your nature. If you can’t see yourself doing what you’re doing now well into your 60s, that’s a clue you may be on the wrong track. (See also this Marketwatch column on the 8 habits of highly effective retirees. The point is you need to retire TO something, not FROM something!)

Sure, there are ways to increase the odds of surviving financial setbacks. BMO talks about disability insurance, long-term care insurance, maxing out Tax Free Savings Accounts (TFSAs) as a source of ready emergency funds, and various other actions. It spends some time discussing the “financial impact of widowhood,” pointing out that a couple with no life insurance would face the double shock of loss of income of a deceased spouse, even as the bills and expenses continue to mount up.

But you shouldn’t view the sudden death of a spouse as a “black-swan” event coming out of the blue. We all know we are mortal, as are our partners. In Canada, the average age of widowhood for women is a relatively young 56, according to BMO. And of course, even if both spouses live to a ripe old age, there’s the ever present spectre of divorce. BMO talks about the phenomenon of “grey divorce,” pointing out the only age group seeing a rise in divorce in this country are couples over age 50. If you were counting on two sets of RRSPs or RRIFs, two employer pensions and two sets of CPP and OAS payments, clearly cutting everything in half would amount to a major haircut to your financial plan. A good “stress test” would be to project your resources solely on your personal assets and pensions.

Seen thus, you could argue every Canadian should build their financial plans solely around their own resources, viewing any spousal contributions as a welcome bonus should illness, premature death or divorce not come to pass. I do this myself, despite the fact I’m in a solid marriage and hope to continue in it for decades to come.

If you’ve not discussed these things with a financial planner, now is as good a time as any, especially in light of the still-surging stock market.

I would normally view a book with such a title with considerable skepticism even though, as the previous blog post reveals, I’ve long been a believer in having a 5 to 10% position in some combination of gold or precious metals stocks, mutual funds or ETFs, or the underlying physical metals (coins or bullion bars).

• For more on Chevreau’s take on buying gold, listen to his recent chat with 680 News’ Mike Eppel:

But $10,000 as the price of a single ounce of gold? That’s almost a seven-fold rise from the most recent post-correction price of $1,460. There are at least two reasons why I even dignify the idea with a blog post. The first is I’ve known the author—Bullion Management Group founder Nick Barisheff—since the turn of the century. I followed with interest his four-year struggle to create an RRSP-eligible mutual fund that held not just gold bullion but also equal amounts of silver and platinum. It finally saw the light of day in 2002.

The second is that I’d also watched the development of this manuscript over the years and note with interest that it has finally been published by perhaps the most credible North American publisher out there in the field of financial non-fiction: Wiley (in this case, John Wiley & Sons Canada). Furthermore, Wiley has chosen to publish this as a hard-cover edition at a suggested retail price of $39.95. That’s at the upper end of the range for such books and I note the irony that such a price is slightly over the $35 price of an ounce of gold that held throughout a large part of the early 20th century.

There’s little doubt that Barisheff has immersed himself in at least a decade’s worth of research on this subject, which is one reason that slowly but surely he has become a go-to source for journalists writing on the topic of gold and precious metals. Of course, journalists normally seek out at least two sources on any topic, generally to provide a balanced perspective that includes insights from two different camps.

A counterview might have strengthened the manuscript

If there is a weakness in $10,000 Gold, it is this: anyone viewing this industry with some objectivity would be forced to put Barisheff himself in the “gold bug” camp, however much he or Wiley might disclaim such a characterization. The book’s subtitle is “Why Gold’s Inevitable Rise is the Investor’s Safe Haven,”  but you’d expect such a conclusion from someone whose day job is providing gold and precious metals in various types of investments, wouldn’t you?

The manuscript could have benefited from a co-author less aligned with the industry, or at least an extensive foreword from an outsider. Similarly, too many of the back-cover blurbs come from sources close to the precious metals industry, such as David Morgan (founder of Silver-Investor.com).

That all said, anyone looking for a one-stop investment guide to all things gold can hardly ignore this book. Students of paper (aka “fiat”) money, central banks, inflation and hyperinflation will find plenty of grist for their mill here. Even investors who have a small amount of gold exposure as “insurance” may find Barisheff’s cautions against ETFs like GLD or SLV of interest. These two ETFs in particular are arguably one reason gold investing became so popular over the decade-long bull market the precious metal has enjoyed. Both appeal to people who prefer owning bullion to mining stocks that are really just paper claims on precious metals. Barisheff, however, seems to view precious metals ownership via such electronic vehicles as one or two steps removed from the real thing, making them suspect if things came to such a pass that investors really wanted to collect on the insurance they thought they’d purchased.

For now, I’ll put my review copy of the book in my extensive financial library, for handy reference. Time will tell if $10,000 Gold belongs in the same category as such overly bullish stock-market books as Dow 36,000 or Dow 100,000, or whether Barisheff will ultimately get the last laugh.

Gold & Financial Independence

P.S. For more on this theme, see “Gold and Findependence” here.

Having just given a talk over the weekend to the Real Estate Investment Network (REIN), I agreed with this person that real estate certainly can be considered a haven of sorts, assuming it’s one part of a broadly diversified portfolio of financial assets.

Both gold and real estate are solid tangible items and I’d be comfortable owning each asset class to the tune of 10% or 15% of an investment portfolio, not counting a principal residence. Personally, I prefer ETFs holding REITs but as I mentioned in my talk, I can certainly sympathize with the realtors’ preference for bricks-and-mortar over mere “blips in a computer,” even if it entails the multiple headaches of being a landlord.

The four camps of gold investors

As for gold, I’ve always been in the intermediate position of a 10% weighting, which means I’m feeling a bit battered after Monday’s action. Over the years, the experts and financial advisers I’ve talked to have been in four main camps about gold. Here they are:

Camp 1: Zero exposure. They view gold as a “barbarous relic” that pays no income unless you choose volatile dividend-paying gold stocks.

Camp 2: The 5% “insurance” camp. This camp is similar to Camp 1 but views a 5% position in bullion as “insurance” should economic Armageddon unfold. As with fire or car insurance, this is a policy you hope you never have to collect on.

Camp 3: The 10% camp I inhabit myself, with roughly equal exposure to bullion, including silver and platinum, plus precious metals stocks. This camp views inflation as more or less inevitable, given the fact the world’s central banks continue to put their printing presses into overdrive. Gold, like real estate, can be viewed as a solid inflation hedge. Both asset classes are mentioned in David Aston’s excellent retirement column in the current issue of MoneySense (Slay the Inflation Dragon) on newsstands now.

Camp 4: True believers and gold “bugs.” Those with 15%, 20% or more exposure to gold I’d categorize as the true gold bugs. No doubt this group is chastened by the past week’s action but from the commentary I’ve seen so far, they are nowhere near close to capitulating. True to form, most view the current setback as the proverbial buying opportunity. We’ll see.

What I can say is that if you have zero exposure but think the 5% insurance allocation makes sense, now is a much better time to start building a position than when gold was close to $2,000 an ounce. The same goes for those in the other camps although caution and gradually testing the waters would seem to be the prudent way to go here.

No single asset class is a “safe” haven, not even cash

Whether you swear by gold, real estate, cash, bonds, reverse index funds or even dividend-paying stocks, the lesson of this gold crash is that no one asset class can be considered a safe haven. Treasury bills paying 0.25% interest aren’t safe: not with the money-printing that’s going on. Long bonds aren’t safe havens either, given the danger of capital losses if interest rates get hiked.

Dividend lovers may look fondly at blue chip stocks paying 4 or 5%, which is a vast improvement on GICs and bond yields but of course at any moment stock prices could plunge, as they did yesterday, and a generous dividend may pale in comparison to the massive capital loss.

No, Virginia, there is no single asset class out there that can be considered a safe haven. We’re left with those dull platitudes the financial industry constantly reiterates: it’s all about prudent asset allocation and geographical diversification. A big bet on any one asset class, whether it’s long bonds, gold or stocks, is a bet that can quickly turn sour. Just ask the gold bugs.

Since this is the Financial Independence blog, it may seem odd to some that I have so far refrained from comment on this here, particularly as today marks my one-year anniversary at MoneySense. Some might infer from this silence that since I can now take early Canada Pension Plan (CPP) benefits, that I have therefore chosen to do so, along with any employer pensions to which I’m entitled, and abandoned the workforce for a permanent vacation.

Findependence is not the same as retirement

However, the day after Findependence Day may be almost exactly the same as the days preceding it, except that you’re more conscious of the fact you’re choosing to continue to work, rather than feeling one has no choice but to continue. As I note in the book: “Financial Independence is not the same thing as Retirement. It means you continue to work because you want to, no because you have to.”

The new edition features a foreword by Kansas City-based fee-only planner Sheryl Garrett, founder of the Garrett Planning Network Inc. (You can read it free here, along with the first two chapters). When I expressed my ambivalence by email she replied, “Remember, financial independence doesn’t mean quitting. You’re living what you preach through the novel.”

Do retirees have weekends?

In the current issue of the magazine now on newsstands, Speed Reader focuses on Kathleen Wronski’s aptly titled book, If I Retire, How Will I Know When It’s the Weekend?

Well, if it’s anything like the weekend I just experienced, I won’t be able to tell the difference between the workweek and the weekend because I’ll be reading, writing, blogging, tweeting and organizing an event. I took last Friday off to prepare for the party and book launch, filed my income taxes, had lunch with my financial adviser, then met with my website developer to rejig findependenceday.com for the book launch. Saturday was full of party prep and several hours of blogging and social media agitation on behalf of the new edition. Sunday was a clean-up day in the party’s aftermath, then researching for a speaking event looming on the horizon.

I won’t go so far as to say it was restful to return to MoneySense‘s offices Monday morning but the point is that in my vision of Findependence, the lines between work and leisure get very blurry. I enjoy reading, writing, blogging and interacting with the public on social media. I enjoy investing and monitoring the media coverage of the global economic and political scene. MoneySense is a great place to work with fabulous benefits and people. A talented team of writers, editors, artists, photographers and production people put out a quality product that enhances people’s financial lives and it’s a pleasure to be a part of that creative process. On the business side, an equal number of people mobilize advertising, subscriptions and the growing digital part of the enterprise.

Shorter work weeks and phased retirement

Just because it’s now possible to collect modest government benefits doesn’t mean it’s advisable to do so. As we all know, life is long and these days life expectancy is increasing. One of the people invited to my party is 96 years old and still going strong. Given my hardy gene pool and relatively healthy regimes on the dietary and exercise front, it would be crazy to slow down now, although I can see the attraction of a four-day-week and eventual phased retirement as the traditional retirement age of 65 approaches. Of course, as Wronski pointed out in her book, financial planning would be much easier if we knew the precise date of our death!

But let’s indulge in a little thought experiment on this idea. If I knew my number was up next month, would I still come to work? Probably yes, at least to finish the issue now in production. And if I knew tomorrow were my last day on the planet would I still come to work? No, I  would choose to spend the last day wrapping up estate planning issues and being with my family. I believe most people would do the same.

Poverty and boredom at a single stroke

Financially speaking, given today’s low interest rates and volatile stock markets, it takes a hefty portfolio to spin out enough income to live life in style. We all know that the longer you work into your sixties or even seventies, the bigger the payout from CPP, OAS and workplace pensions and the less of a load will be placed on investment portfolios. As I wrote in a blog some months ago about a line from the TV show Midsomer Murders, retiring too early can mean “poverty and boredom at a single stroke.”

God and my employer willing, I’ll continue to do what I enjoy doing for some time yet. To reiterate, financial independence is not the same as retirement. Ideally, it precedes retirement by decades. Findependence means freedom and flexibility. Why wouldn’t you want that as early in life as possible? It lets you be creative and a little more inclined to take risks. In fact, creativity is not possible without taking risks. I’m taking one right now with the book and this installment of this blog.

I wouldn’t have it any other way.

This is the first budget that really showed a deep awareness of the role social media plays in disseminating information in this SmartPhone world we all now inhabit. Even before the lockout ended at 4 pm, many of the early snippets came via Twitter and the hashtag #eap13 (for Economic Action Plan 2013).

What was actually tweeted in considerable volume was however relatively insubstantial,  compared to some prior years.

Good riddance Labor Funds

Like most federal budgets, Economic Action Plan 2013 gave with one hand and took away with another. No sophisticated investor will mourn the loss of labor-sponsored venture capital funds: Ottawa will gradually phase out the federal tax credit in 2015, following Ontario and some other provinces in eliminating such enticements.

It’s hard to argue with stiffer measures to combat tax evasion: after all, dishonest tax payers just make life harder for the majority who comply with our admittedly byzantine tax code. But I’ll believe the tax system will be made simpler when I actually see it. (While I’m at it, let me mention that the new April issue of MoneySense just hitting mailboxes and the newsstands contains a 4-page last-minute tax-filing-tips spread compiled by Deputy Editor Sarah Efron, with the assistance of our tax columnist and prolific tweeter Evelyn Jacks.)

A family affair

The Tories threw a bone to seniors by providing tax relief for senior home care services and, continuing the family theme, introduced an enhanced adoption tax credit to provide some financial relief for adoptive parents. And as telegraphed in pre-budget leaks, parents will get some tariff relief on baby clothing and athletic equipment, thereby narrowing the egregious gap between American and Canadian retail prices of such goods.

No safety box deduction? Oh no!

The loss of tax deductibility of safety deposit boxes is a tiny loss and at this stage of the game few expected any significant improvements to the retirement and pension regime: no changes to RRSP contribution rules that I could see in the early coverage and we’d already enjoyed a hike in TFSA contributions to $5,500. We await the balanced budgets of 2015 and beyond for TFSA room to jump to $10,000 a year per person.

While the TFSA has been described as a sop to the wealthy, it’s also a boon to both low-income seniors and young people just entering the workforce who have little or no earned income to accumulate in an RRSP.  In fact, Ottawa seems to be moving to making it even harder for so-called High Net Worth families to shelter their high incomes.

As Evelyn Jacks tweeted, small-business dividends are going to lose some of their advantages and investors will see tax increases on non-eligible dividends paid after 2013.

Training and retraining incentives welcome

But there will be no surplus funds to invest if you don’t have an income to start with. Too many young people are unemployed and we can’t forget older workers who are in similar circumstances or barely getting by because they’re significantly underemployed. It’s particularly hard for the latter to land well-paid salaried jobs with all the benefits typically offered by large corporations. Hopefully some of the Budget’s new measures will make it easier for this group to land jobs or at least contracts with smaller companies, or motivate them to strike out on their own with new entrepreneurial ventures.

As the parent of a 21-year old about to graduate from university, it’s hard not to be supportive of the new Canada Job Grant. I know how hard it is for young people to get a first step on the job ladder. There’s always been a mismatch between what young students choose to study at school and the skills employers actually value. Hopefully this gap will be closed now that the feds will provide up to $5,000 per person to enhance such skills: to be matched by provinces and employers. Training will be available at community colleges, career colleges, polytechnics and even union training halls.

Small Business hiring credit

The government also added $225 million to expand and extend the temporary Hiring Credit for Small Business. Small business owners will also welcome the rise in the capital gains deduction to $800,000 starting in 2014, after which it will be indexed to inflation.  An accelerated capital cost allowance for manufacturers investing in new machinery and equipment is also welcome.

It’s good to see the Government encourage the young to get in the habit of giving to charity via the new (and temporary) First Time Donor’s Super Credit, which adds a 25% tax credit for the first $1,000 of cash donations to charity: on top of the standard donation credit of 15% of the first $200 and 29% beyond that level.

To close in the spirit of #EAP13, I invite you to tweet or retweet this blog, post it on  your Facebook timeline and/or alert your Linked In network to its existence.

Ayn Rand and looters

Ironically, I was watching Rogers Video-on-Demand on Saturday night, roughly when the story was breaking over social media. It happened I was watching the lukewarmly reviewed movie Atlas Shrugged, based on Ayn Rand’s most famous novel. It’s all about how “looters”—generally government-led legal plunderers of private-sector wealth—enable society’s “have nots” at the expense of those who build wealth and jobs. In the end of the book, the captains of industry effectively go on strike (hence the “Atlas” shrugging) and the wheels of commerce grind quickly to a halt. Literally, in the case of the movie, where one of the final sequences shows trains managed by incompetents imploding in tunnels.

Whether the Cyprus implosion succeeds in reversing the hard-won rise of confidence in Europe this year remains to be seen. The 9.9% tax being levied in Cyprus over a certain threshold of savings (100,000 Euros; the rate is 6.7% below that level) is mind boggling, given the tiny return that most bank savings accounts payout in a year. I don’t know what they pay in Cyprus but as North Americans well know, bank accounts these days pay effectively zero. In fact, the “real return” net of inflation is almost certainly negative. In Canada, at least, even if you manage the princely return of 1% a year, if you’re in the top marginal tax rate, you can kiss goodbye to almost half that meager return.

Outside TFSAs or RRSPs, savings accounts are futile even in Canada

In other words, the combination of rock-bottom yields, inflation and confiscatory taxation has long rendered savings accounts a losing proposition in this country, along with equivalent vehicles like savings bonds, short-term GICs and money market mutual funds.

If one really must “park” some funds in such instruments, it’s best done inside Tax-Free Savings Accounts. But outside RRSPs or TFSAs, it’s certainly a losing game, which is why now-retired actuary and retirement expert Malcolm Hamilton used to regard any savings or investments outside tax shelters as essentially “futile.” He even viewed longer-term fixed income instruments and equities as equally futile.

When you think about it, it’s pretty outrageous how “safe” cash equivalents and bonds are taxed even on this continent. I once wrote an editorial for the Financial Post that made the case for TFSAs. I felt the average consumer is only half aware of how hard it is to build wealth outside tax shelters. Once you do realize it, you may feel that the tax being levied in Cyprus—while an order of magnitude more egregious—isn’t all that far removed futility-wise from what we already experience.

Consider what happens if you want to put $1,000 into some cash vehicle paying 1%. To get that $1,000 capital, someone paying an average tax rate of 33% first has to earn $1,500. About $500 of that goes to income tax, at which point you now “invest” in a “safe” money market fund or equivalent. If it’s not held in an RRSP or a TFSA, each year, that $1,000 investment will spin out the princely return of $10, which at tax time will incur a $4.60 tax liability, leaving you with $5.40 net. If inflation is at 2%, you’re actually losing ground, since your original $1,000 of capital now has enough purchasing power to acquire about $990 worth of goods. And of course if you’re in the top tax bracket with a top marginal tax rate of 46%, the situation is even more dire: as a reader commented below, it would require $1,850 of gross income to generate $1,000 after-tax capital.

Little wonder gold seems to have bottomed

Remember, that’s not Cyprus: that’s right here in Canada. Now if our government were to emulate Cyprus, you’d experience the further outrageous “tax” of $99 from your $1,000, or $67 if you’re a small saver. Anyone in their right mind would prefer to put paper money under the proverbial mattress or better yet, buy gold or silver coins or bullion and put it in a safety deposit box. Maybe that’s why the price of gold has been up since this Cyprus story broke.