Retirement Planning

Back in the late 1990s, I went on a personal quest for a tropical paradise. For one thing, I wanted to get away from the cold winters of Canada’s Alberta foothills, but I was too restless and too young to just head south and flop on a beach. First I tried the Caribbean, but it was overcrowded and overpriced. I was born too late to get started there. The best spots in the Caribbean were developed twenty or more years before I set out on my search.
The prime parts of Mexico were also overdeveloped. A forest of high-rises filled with tourists on package tours was not my idea of paradise. I prefer boutique hotels to mega-resorts. So I started looking in Central America. Costa Rica attracted me. What’s not to like? It’s peaceful and prosperous with everything from mountains to beaches and a democratic government to boot. I bought some land and embarked on a small venture.
Working in western Canada, based in the free-market province of Alberta, I was spoiled, plain and simple. Titles pass easily through the system, as they do in the United States. Throughout much of the English-speaking world, the land survey regime is open, accurate, and, above all, easy to understand if you move from one place to another.

I considered Costa Rica. It is a wonderful country; however, I discovered, after spending time in the capital, San José, and travelling throughout the country, that it was already developed and prices were too high to get in on the ground floor. It seemed that the elevator had left the lobby long ago. Another problem is the country’s legal and land-transfer systems. Frankly, it is a nightmare. For someone used to British common law and the transparency at work in countries such as Canada, the United States, and the United Kingdom, Costa Rica and other Central American countries, as well as Mexico, are very frustrating places to invest. The laws are based on the old Spanish civil code. Everything is in Spanish. It means lost time, money, and endless frustration.
You might think that because of all this I would have run. However, I was young and impatient to prove my investment savvy. So, I bought some property. It didn’t take me long to realize that I had made a mistake. I took a hard look at the place and decided, after I owned property there for a short while, that the country was not for me. I quickly soured on Costa Rica as a place to live and make money.
While I waited to sell my property, I looked at the map, and saw Belize, formerly known as British Honduras. It wasn’t a random flip through the atlas; a friend of mine tipped me off to the place.

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My first trip to Belize convinced me it was the spot: an undeveloped, affordable paradise with everything going for it.
I quickly found that there were big differences between Spanish-speaking Costa Rica and English- speaking Belize, not the least of which was language. The common language and culture may explain the friendliness toward Americans and other English speakers in Belize — something that is noticeably different from the kind of grouchiness that exists in many parts of Spanish-speaking Latin America and even in some of the other English-speaking countries in the Caribbean.
From my experience — and I am a man of colour — they embrace all newcomers in Belize. In the town of San Pedro on the island of Ambergris Caye, where I spend a lot of my time when I’m in Belize, visitors are treated as if they are locals, which to my mind is the highest compliment. There are three main streets in the town, with the beach at one end, and the ferry terminal at the other. Simple. And that’s how life is there, too. It is difficult to describe just how friendly the place really is without seeing it with your own eyes.
Not only is there respect for people of all types, there is also respect for private property here — something that is very much part of the British heritage of Belize. This means that the state doesn’t act in an arbitrary way, enacting laws that penalize foreign property owners, as often happens in neighbouring Mexico. This respect for property means the law makes it extremely difficult for people to seize property under so-called squatters’ rights. That sets it apart from most Latin American countries.

I’ve been fortunate enough to give hundreds of talks about personal finance, mortgages, and real estate investing across Canada, from teaching MBA students at two of Canada’s top MBA programs to speaking to large groups of “everyday people” at major convention centres. I’ve learned many lessons from these talks, and I believe any speaker will tell you the same thing: as much as we try to add value to our audience members’ lives, we probably receive more from them.
Of all the lessons I’ve learned, I believe the core lesson is about the general psychology of money. It comes down to this: In spite of our best efforts, we fail to think mathematically about money. Instead of calculating income, expenses, taxes, and ROIs, we act emotionally and instinctually. We allow the momentum of past generations to decide our financial future.
I’ve often started talks with a simple question that demonstrates the time value of money. You can play along at home by asking yourself this:
Would you rather have $1 million today or a penny that doubles every day for a month?
Keep in mind that attending a live event is akin to entering into a social contract. You often know that the speaker will try to disorient you, challenge you, and alter your perspective. With this social contract in place, you’d think audience members would expect a challenge question and that the correct answer would be obvious. When a speaker asks such a question, the counterintuitive choice must be the correct one.
But even knowing that I’m asking a challenge question, the audience’s response is typically heavily weighted to the answer that will give them far less money. When I ask them to raise their hands if they would take the $1 million, a large majority puts up their hands. When I ask who would take the penny that doubles every day for a month, the number of hands that go up is a small minority.
I need to stress again that the audience will do this in spite of the fact that it must be obvious I’m presenting a challenge question. It’s a tangible example of how we struggle to think mathematically when it comes to money.
Now, $1 million sounds like so much money compared to a little old penny, but due to the power of compounding interest, that little old penny is worth $5,368,709.12 by day thirty. If you want to consider a thirty-one-day month, it would be worth $10,737,418.24. In both cases, that little old penny has been transformed into a magic seed, and, not unlike a seed, we don’t see its possibilities until it has grown.
The typical audience response is instructive, as this is exactly what happens in the daily financial life of most individuals. Due to a failure to think mathematically, or a misunderstanding of compound interest and the time value of money, we make impulsive decisions that are bad for our finances. If we can’t visualize compound interest and the time value of money even when the example is extreme (doubling daily), what chance do we have with the pedestrian conditions of real-world finance, where a strong return might be only 7 percent over an entire year?
Once you add in market fluctuations that result in paper losses some years and poor decision-making that leads investors to pull out of the markets, you end up with the shaky and often difficult-to-understand reality that most investors face. Because we fail to understand the opportunity cost and time value of money, we continue to make short-term financial decisions. We are willing to give up $10 million for $1 million. Is there any wonder why we struggle to take control of our financial lives?
Our mental models around personal finance are largely broken. Failing to invest early is the greatest of these weaknesses. Business Insider recently told this age-old story graphically using imaginary investors — Bill and Susan.
Susan invests $5,000 each year between the ages of twenty-five and thirty-five, for a total investment of $50,000. As I hope you never would, Susan stops investing at age thirty-five.
Meanwhile, Bill doesn’t start investing at age twenty-five. But he smartens up at age thirty-five and starts investing $5,000 per year (as Susan did for only a decade). Bill decides to make up for his failure to invest early by investing longer than Susan. He invests $5,000 every year between the ages of thirty-five and sixty-five. Overall, he invests $150,000 of initial capital compared to Susan’s $50,000.
But, in spite of investing a third of the initial capital, Susan’s portfolio at sixty-five is significantly larger than Bill’s. Due to the power of compounding and the principle of investing early, Susan has $602,070, while Bill has only $540,741.
But we Canadians are prudent folks, aren’t we? Surely most of us live more like Susan than Bill? Actually, statistics suggest otherwise. The household savings rate in Canada has plummeted in the past few decades from around 20 percent in 1981 to slightly below 5 percent today.2 There are a lot more Bills than Susans. Pun intended.
Bill is probably average. But on the lower side of the average, many people have next to nothing in their retirement accounts. Failing to invest early is the biggest, nastiest risk of all the retirement risks. But who can blame Canadians for not saving early? Life is expensive, and many people simply don’t have any cash left over at the end of the monthly bills. Plus, who wants to live a spartan life without some of the simpler enjoyments, like a family vacation or two every year and a car that doesn’t squeal?
I won’t (yet) talk about Canadians’ tendency to borrow money to purchase expensive liabilities like boats and vacations. But even without these needless expenses, many people don’t have the resources to get started investing young. Hence the savings rates are low. This is the changing nature of our personal finance environment. It sounds bad, and for many it is bad. But, more than anything, it simply represents a change in the marketplace — and Canadians need to adapt.
You can change your approach, however, so that you can take advantage of massive sources of capital that are just sitting there, right now, to be used. Tapping into this “dormant equity” will allow you to overcome this first major hurdle on your way to a successful retirement. It will allow you to invest early and, therefore, profit longer.