Pension Scam – Conversation

Great dialogue about pensions and the sweet spot to invest. Moved from the forum by Mr. English:

Hi all,

I’d be interested to hear what everyones take on pensions is the merits etc and the negs.

My position is that they are a scam whereby the bankers use the money that is invested to play the OPM ( other peoples money ) thing, with , I imagine the final figures having some kind of government backed insurance to cover the risk from the investments they are making with the contributors pension money. The government tax incentive obviously lightens the treasury burden for government pensions hence the tax break but I also think there is an ulterior motive for it. That said I was toying with the idea of a sign in name of The Conspiracy Kid, but for me this is the likely answer of pensions.


Reply by Finance Mod:

Haha,

This question I CAN answer, and it applies to all developed countries.

The fact of the matter is this: Banks earn BILLIONS a year off of your money.

Let’s go through a regular example of how the bank operates.

First, you need to put your money some place. Well guess what, the bank is the best option, BUT you need to pay them exorbitant fees to do it. So you pay THEM to house YOUR money.

The bank in tern lends YOUR money out to others and charges them INTEREST on YOUR money. That means they make money off your money while charging you money.

Not only that, when YOU want money, the bank will charge you money to borrow someone else’s money… Super.

About retirement stuff, it’s not a scam, but you get higher yields elsewhere. People still put their money in bank RSP’s or what not simple because they are ignorant and/or stubborn. Plain and simple. Smart people wouldn’t be caught dead using investment tools from the bank. All they are good for is investing your money a few year before you retired into a GIC or something so you don’t loose it right before you quit your job!

INvest in mutual funds etc., or other tools, NOT THE BANK! They’re rich enough, learn a little people!

Mr English:

I don’t pay my bank any money whatsover for just using it. Only when I go over drawn or I buy a loan from them as do most. If they loan you then they make a lot of money but hey ho that’s the system.
What is a bank RSP? Are you an IFA ? If so please explain a little about mutual funds that you mention.

Not in Canada, you pay to hold money, everyone pretty much charges.

Mutual funds are basically big companies (mutual fund companies) that have lots of money. THey pick ‘themes’ or categories to invest money… they obviously invest in the stock market, but diversify the money across a number of similar companies in the ‘category’. This will spread risk around. On average, mutual funds perform better than stock market players.

Mod replies:

Yea, usually it’s something like Japaneses ‘blue chip’ companies like ‘Nissan, Toyota, Honda, etc.’

You’ll have different kinds of mutual funds, some more aggressive, some more conservative. Equity funds typically are more aggressive and for long term investments. Balanced funds are for more short term investments.

They are essentially share funds purchased in large quantities by the mutual fund company. THe fund is HUGE with billions of dollars (usually in millions though).

I don’t know about your second question though 😛

The second question was asking about what type of growth to typically go for per annum. Is 10% a good average for growth, with income reinvested?

Depends on purpose and age. If it’s 10% for short term then that’s really good. If it’s 10% for a long term investment that’s really bad.

10% on average over 30 years is a horrible return. Canadian and American banks know consumers are stupid so give them ‘great deals’ of 3.5 – 5.5 percent! THat’s on RSP’s. That means if a kid comes in @ 16 they’ll give him the 5.5 RSP. Poor kid will never make a dime. I have equity mutual funds that have made 30% in a good year.

what do you consider short term? 1 year? I have heard 10% is good not brilliant for 1 year.
Is a RSP basicallya regular savings account that banks offer?

Overall it seems that looking at investments you have:

Savings accounts = low risk low return low rates around 5%
Bonds = slightly higher risk , slighly better returns around 5% – 10% max
Share funds/mutual funds = Higher risk, higher return around 5% – 15% although these can go down

Anyone know how bonds work? Aren’t they government backed loans or something. If anyone knows any other investments I owuld be pleased to hear about them.

The one thing I am learning about investments is that I don’t think for most people they are a route to riches just earning a little extra on what you already have. Is this about right ?

10% is quite good for investments designed only to be short term (1-3 years). You generally only get around prime (actually less than prime) for short term investments. RSP = retirement savings plans. RRSP = registered retirement savings plans.

In Canada it looks like this:

Savings accounts = no risk low return low rates around 1-3%
chequeing accounts = no risk low return low rates around .01-1%
Bonds = low higher risk , slighly better returns around 5% – 10% max
Share funds/mutual funds = Higher risk, higher return around 5% – 35% although these can go down

I wouldn’t put mutual and shares in the same category.

[Anyone know how bonds work? Aren’t they government backed loans or something. If anyone knows any other investments I owuld be pleased to hear about them. ]

Futures, options, stocks, mutual funds, etc. man there are tons! Bonds can be issued by the government, but large corporations issue bonds as well.

can you give a brief overview of the bonds , shares, mutuak funds and their core advantages and disadvantages please econmod as most seem to be able to be broken down.

e.g.

shares advantages – liquidity, personal control, better returns than most investment. disadvantages – higher risk = higher loss, less predictable than other investments like bonds & property.

Bonds etc etc. Sincerely appreciate the help.

bonds = not liquid unless they are near maturity.
stock = liquid, but highly volatile
GIC (guaranteed investments) = only use when you’re nearing retirement, safe, but low return.
savings with bank = safe, hardly any return
mutual funds = semi-liquid, sometimes you’re locked in a for a while, when done right, typically on average the best returns (long run)
the casino = high risk, no return 😛

Thanks dude. The moral of the story is investing ain’t going to make you rich but when you are rich it will help to make you richer. What say you?

NO WAY!

That’s FALSE! THat’s the problem with investing today. Poor people they shouldn’t invest cause they have ‘no money’. Result? They stay poor! Investments take time. Proper money management takes patience, something many do not have. 20 bucks a month is a suitable plan for many and would lead to financial freedom sooner, but hey, who has the patience for that crap 😛

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