"What exactly is a bear market?" asked Megan. "It's defined as a drop of at least 20 percent in a benchmark index like the S&P/TSX." "Sounds nasty. Do these bear markets occur frequently?" "There have been at least eight of them since 1950," Jim confirmed. "That is why there are so many years when overall stock returns are negative." "Is that bear market the reason that 1946-1975 turned out to be the worst-ever period?" Brett asked. "It's one reason. Another is that inflation starting rising in the mid-1960s and was still climbing by 1975.

It caused interest rates to rise, which created losses in the bond portion of one's portfolio." "Just how bad was 1946-1975?" Jim consulted his chart for a few seconds, "The average real return in that period was 2.6 percent a year, compounded." "So even in the worst-ever 30-year period, our investments would still be beating inflation by 2.6 percent a year," said Megan thoughtfully. "That doesn't sound so bad." "For sure," Jim agreed. "This chart here shows the average return over all 30-year periods, both in nominal and in real terms.

" Jim gave them a page with a chart labelled Figure 1. [Figure 1] Brett frowned, "Doesn't the return depend on how you invest?" "Absolutely," says Jim. "I should have mentioned earlier that I'm assuming a 60-40 asset mix. Jim noticed Brett and Megan exchanging glances so he added, "A 60-40 asset mix means 60 percent of the assets are invested in stocks (or at least in some pooled or mutual fund that is composed of stocks) while the other 40 percent is invested in bonds, in this case longer-term government of Canada bonds." While his audience digested that information, Jim continued, "I'm not saying that 60-40 is the ideal asset mix for you but it is pretty standard for pension funds and retirement saving in general. Later, we'll try to improve on it but for now, let's assume that your savings are invested in a 60-40 mix. Now I need to ask you two, how much are you currently earning?" Brett hesitated a moment, "I have no problem in giving you that information, Jim, since you're like our financial priest. But why is it important to know our earnings? Don't people need to save the same percentage of pay whether they're earning $25,000 or $250,000?" "Actually, no," Jim replied.

"It is important to include your pensions from OAS and CPP to really understand your retirement-readiness. When you do that, you find that the higher your earnings, the more you might have to save in percentage terms since OAS and CPP become less and less important to your overall financial wellbeing.".