How to make the best of a bad situation

Sherry Cooper, the Toronto-based chief economist at investment dealer BMO Nesbitt Burns, is the author of The New Retirement: How It Will Change Our Future. The bestselling book has just been released in paperback.

By Noreen Rasbach

Globe Investor Magazine online, February 19, 2009

What will people need to think about during this RRSP season?

I would imagine people will be more risk-averse than ever because they've seen what's just happened. But this may be exactly the wrong thing to do because markets begin to turn around when everyone thinks that the very worst is happening.

What do you think it will take for markets to turn around?

The stock market leads the economy. And so once the stock market believes that the economy is going to turn around in, let's say three to six months, I think we'll see a bottom in the stock market. Unfortunately, we're not there yet. I don't think we'll be there till mid-year.

You've said people-the boomers in particular-are very anxious about the markets and their investments. What advice do you have for them?

There's no question that people don't know what to do now. What I urge is that this is not the time to stop saving. I urge that people continue to save as much as they can, to max out their RRSPs, to use the new tax-free savings accounts to the maximum possible.

It also depends on your horizon. If you're young and you're investing for a 10-year period or more, I think that investments in diversified quality portfolios will do quite well. But if you're living on your portfolio right now, obviously you're not that interested in taking much more risk.

What kind of mistakes are people making in planning for retirement?

I think the whole idea of defined contribution pension plans as they are today is a huge mistake. And unfortunately the boomers, especially the older boomers, are the first generation to deal with them. Corporations eliminated their defined benefits plans because they became too expensive, because people lived so much longer. Now that means they've taken the risk from their shoulders and put them on to the individual employee. What we're finding is that most people just can't save enough to maintain their living standards in retirement. And not only do you have to save enough, but you have to manage that money in a way that you can guarantee yourself at least a 4% or 5% annual rate of return. Just living through a year where there's been a minus 40% rate of return; it takes an awful lot to make up for that.

Do you think that one of the silver linings of bad economic times is that people will take the time to plan for their future?

Yes, and to really consider what they need versus what they want, what matters and what doesn't. I think it's a real wake-up call. There is a new frugality out there, and I think that's one thing that could end up being a permanent imprint for this generation of boomers.

Does it have to last longer for it to make a permanent imprint?

Probably. If 2009 was a great year, we'd forget this. But given what I think, which is that it's going to be a deep and long recession, then it could be a significant imprint. Any last pieces of advice? Yes. Just save more than ever.