By Gordon Pape, Editor and Publisher
During these anxious times, the number one priority is to protect the health of you and your loved ones. If you have to venture out of the house, a facemask and gloves have now become indispensable.
The number two priority is to protect your savings, if you are fortunate enough to have any. Many people don’t and will be dependent upon the Canada Emergency Response Benefit to survive the next few months.
But some older Canadians have a significant amount of money tucked away in their retirement plans and they don’t want to lose it. They’re depending on those RRSPs, RRIFs, and LIFs to support them in the coming years.
Understandably, they’re nervous. The stock market has taken a beating, there’s turmoil in the bond market, and they don’t know where to turn.
As an example, I received this email from a reader.
“When our bond ETF dropped 7 per cent on one day in March, my wife and I decided to liquidate our portfolio, ending up down 7.5 per cent year-to-date. Yes, I know the truism ‘don’t sell at a time like this’, but I guess our risk tolerance has taken a big drop, considering our ages (I’m 78, she is 68). We also think that market lows are still to come (how can they not?). So, what would you recommend we do with our money in the meantime?”
Clearly, this couple is frightened and has put everything into cash. That’s not something I would recommend. I’d prefer to have cash reserves to cover two years of expenses and invest the rest in government-issued fixed income securities, high-quality, dividend-paying stocks, and some gold funds or stocks.
But that’s more risk than this couple wants to take – and I expect there are many more people thinking the same way. Keeping the money in cash means it will earn virtually nothing but at least there’s peace of mind in knowing it’s there if needed.
There are just two problems with this approach.
The first is the potential for inflation.
Central banks are printing money at an unprecedented rate to boost the economy and governments are running huge deficits to provide support payments to individuals and businesses. This flood of cash is keeping us afloat for now. But there may be a price to pay in terms of inflation down the road, which would reduce the purchasing power of cash reserves. One economics professor I spoke to estimated we could see inflation running at over three per cent in two to three years.
The second concern is possible bank failures.
Don’t misunderstand me here – Canada’s banks are well-capitalized and among the strongest in the world. A report prepared earlier this month by the University of Calgary’s School of Public Policy concluded that a 1930s-style run on the banks that leads to insolvency is not likely in this country.
But failures among smaller institutions do happen. There were 41 casualties between 1980−1996, the last one being the collapse of Security Home Mortgage Corporation 1996.
“While physical distancing and reduced bank hours might restrict the withdrawal of physical forms of money, bank runs are still possible as individuals can withdraw money electronically. This puts some banks at risk,” says report author Christos Shiamptanis, an associate economics professor at Wilfrid Laurier University.
The way around that problem is to make maximum use of the protection offered by the Canada Deposit Insurance Corporation (CDIC). Most people are familiar with the basics – the CDIC protects cash deposits and GICs up to $100,000. But you can actually shelter a lot more money if you set up your accounts carefully.
For starters, each separate account has its own $100,000 limit. So, two spouses can each have their own account plus a joint account. That’s $300,000 in coverage right there. On top of that RRSPs, RRIFs, TFSAs, trusts, and mortgage property tax accounts are each eligible for the $100,000 protection – but only to the extent they hold cash or GICs. If your TFSA is invested in the stock market or mutual funds, it’s not covered.
You can also expand your coverage by spreading the money among several financial institutions.
Keep in mind that not all financial institutions offer CDIC coverage. Credit unions, along with other small institutions, are covered under provincial insurance plans, which vary in the amount of money protected and the financial backing for the program. Ask what coverage is offered before making a deposit.