RRSP Season - Get Your Piece of the Action

It's RRSP season in Edmonton. Middle class folks are starting to think about the looming investment deadline as the quaint "people-centered" commercials about how their banker cares about their retirement lifestyle (it's not about your money, we care about you!) start to interupt their daily television dose.

In the 1990s, the book The Wealthy Barber and commercials about Freedom 55 changed the way that people think about retirement and its funding. We now believe that we can all live like millionaires when we retire as long as we max out our RRSPs every year and sacrifice the healthiest years of our lives to our career.

Exponential Growth, Finite System

My problem is with the fundamentals of the system upon which mutual funds and the stock markets are based. This system that we have learned to worship and fear is based on exponential growth in a finite system.

If I showed you a fishbowl with two fish in it and proclaimed that the material goods and population in the bowl could keep growing forever, you would laugh in my face. Describe the fishbowl that we're all living in - it's called Earth - and there's a disconnect.

Here's an interview with pretty much any person in Edmonton:

Green Edmonton: "Exponential growth in a finite system is impossible. How long do you think the money that you invest in your RRSP will continue to grow?"

Edmontonian: "Uh, we need growth. My money will continue to grow indefinitely at a rate of 5%-10% every year, exponentially. I just need to think long term"

Green Edmonton: "How long term? You do realize that exponential growth in a finite system is impossible, right?"

Edmontonian: "We need growth. My money will continue to grow indefinitely at a rate of 5%-10% every year ..."

You get the point.

At some point - sometime in our lifetime - exponential growth will stop. What will happen to your mutual funds when that happens?

The entire system is based on the expectation of continued growth. When that expectation is changed, where will your Freedom 55 be?

If you put money into RRSPs, you either believe that the laws of physics don't apply to Earth, or you are gambling that when you're ready to retire we'll still be on the upwards slope of the curve pictured above.

So which is it?

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I'm totally not into money, but I thought I'd comment anyway.

Materially, it is not possible for exponential growth to continue indefinitely on Earth (unless we expand into space, of course). I see your point.

Mathematically, however, just talking pure numbers (which is all money is turning into in this digital age), numbers can theoretically go on forever. Just add another digit to the end.

Of course, the value of money may change. All those numbers may add up to a single dollar. That seems to be an economic change, though.

Any thoughts?

Hey, thanks for the comment!

Monetary devaluation is a very real (inevitable, if you ask me) possibility. Once the general public discovers that growth has stopped, money will be devalued very quickly.

When a bank loans out $100 at a 5% interest rate, it only does so because it is assuming that growth will continue - that is, that the recipient will be able to invest at a rate or return higher than 5%.

If the economy is not growing, the whole system gets thrown on its head. How much is $100 worth today at a -5% growth rate? Will anyone even give out loans? Or will they just "tak[e] refuge in tangible assets that the [falling value of the dollar] cannot devalue or destroy" (source)?

My "retirement" plan consists of

  1. extreme simplicity - not needing much, materially, to be happy.
  2. expecting to work part time into retirement - sitting around all day is really not fun - I'd like to work 15-20 hours a week as long as I am healthy
  3. owning my own eco-house - security from energy prices and the ability to rent out the basement suite for money.

The notion that we can all count on a growing economy to allow us to retire like millionaires is naive. It's kind of like believing in the Tooth Fairy.

Herman Daly discusses this in some of his writings.

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