Do You Truly Understand Your Employer-Sponsored Pension Plan?

read

Post

By iA Private Wealth, June 20, 2019

Workplace pension plans used to be commonplace, but they’ve become a luxury in recent times. Today, only a minority of working Canadians (37.5%) have one1. However, understanding the ins and outs of pensions – whether you participate in one or not – can offer more context concerning your own retirement planning and how best to maintain the lifestyle you want after you stop working.

PENSION PLANS 101

The two main types of plans are defined benefit (DB) and defined contribution (DC). While both help you reach your retirement goals, they’re each designed very differently. With DB plans, what’s “defined” or known in advance is the amount of income you’ll receive in retirement, typically based on your annual earnings and the length of time you’ve been in the plan. With DC plans, benefits are typically based on contributions you and your employer make, plus any investment income you earn on those contributions. While contribution amounts may be pre-set, the level of retirement income you receive from your DC plan depends on a number of factors, including the amount contributed to the plan, the number of years that money has had to grow and what it earned being invested.

The biggest difference between DB and DC plans lies in the bearer of the investment risk. Another key difference is that DC plan members have the ability to choose from a variety of investment fund options depending on risk tolerance and other factors, while with DB plans, investment management is handled entirely by the pension fund manager.

THE ADVANTAGES

The obvious plus of being part of a pension plan is that they’re employer-funded, sometimes 100%. Opting out or choosing not to contribute to a plan is like saying no to free money. You also benefit from a disciplined savings approach and lower investment fees than tend to be available to individual investment accounts.

KNOW THE RULES

Benefits aside, you can set yourself up for a better experience as a plan member by being well-versed in the specifics of your plan, which could include:

DEFINED BENEFIT PLANS

  1. Vesting
    Your plan’s vesting schedule determines whether you receive a full or partial pension and may factor in your decision to change jobs if you’re fully vested and don’t want to negatively impact your plan proceeds.
  2. CPP offset
    If your plan is integrated with the Canada Pension Plan (CPP), you’ll receive a lower monthly pension from your employer to account for your government retirement benefits.
  3. Ancillary benefits
    Some DB plans provide extra benefits, including for disability and death, and early retirement options.

DEFINED CONTRIBUTION PLANS

  1. Investment choice
    Having the right asset mix is integral to ensuring you generate enough retirement income. When you enroll in your plan, you will likely be asked to choose from a number of all-in-one managed portfolio products that cater to a variety of risk profiles; you may also be given the option to go it alone and hand pick the individual investment funds that best suit your needs.
  2. Performance
    Understand the historical performance of your investments and pay attention to fees as they also impact your bottom line.
  3. Financial literacy
    If you decide to build your own portfolio, it is crucial to be well-informed about the markets and investing best practices.

WHAT HAPPENS IF I LEAVE MY EMPLOYER BEFORE I RETIRE?

Common options for receiving accumulated pension funds include:

  • Leaving your savings in the plan
  • Transferring your savings to a new employer
  • Transferring your savings to a pension retirement fund (LIRA or LRSP)
  • Purchasing an annuity
  • Cashing out some or all the plan’s value depending on your age and financial situation

DO I STILL NEED TO SAVE ON MY OWN?

Even with a pension plan, you may need to also save money in a Registered Retirement Savings Plan (RRSP) if, for example, the value of your pension isn’t enough to sustain the length of your retirement. This can happen when you haven’t been with an employer for long enough.

Another option for building a nest egg outside of your pension is a Tax-Free Savings Account (TFSA). Withdrawals from a TFSA are tax-free, as is any of the growth from its investments. And TFSAs have the flexibility to be used to fund a variety of short- and longer-term savings goals that don’t necessarily have to be retirement related.

WHAT HAPPENS TO MY PENSION WHEN I DIE?

The short answer is, it depends. If you’re married and part of pension plan when you retire, your options for survivor benefits will likely include continuing payments to your spouse upon your death, unless they waive their entitlement. This allows your spouse to receive a lifetime pension after your death, typically between 50% and 100% of the monthly amount that was paid to you. Your spouse would continue to receive these payments even if they remarried.

If you die before you retire, your spouse would automatically be the beneficiary of your pension. If you didn’t have a spouse, weren’t living with them or they waived their entitlement, the death benefit would be paid to your named beneficiary or your estate if you had no named beneficiary. Be sure to consider your survivor benefit options carefully to make the choice best suited to your financial needs and life situation.

AN INVESTMENT ADVISOR CAN HELP

With so much to remember about pension plans, it can be easy to lose track of where you stand when it comes to being retirement ready. A trusted and knowledgeable advisor can help you better understand how your pension works and create a retirement income plan that meets your needs – before it’s too late to adjust course. Contact an iA Private Wealth Investment Advisor near you.

1 https://www150.statcan.gc.ca/n1/daily-quotidien/180627/dq180627e-eng.htm

This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.

Related insights

Downsizing as Retirement Smartsizing

read

By iA Private Wealth, December 20, 2019

Do you have a “guest room” in your home that hasn’t seen a guest in years? A basement of clutter you haven’t looked through for even longer? Maybe you’re considering retirement – not just for yourself, but also for your lawnmower and snow shovel.

Downsizing can carry a negative association of a meagre life in a cramped, empty nest. In reality, downsizing can be healthy for your lifestyle and your wallet and doesn’t necessarily involve shrinking your living space. Think of it as rightsizing – choosing to live somewhere that effectively supports your finances, family needs and physical abilities.

Why rightsize your home

Many Canadians are “house rich, cash poor,” meaning the majority of their net worth is tied up in their homes. According to the National Bank of Canada, average spending on housing eats up almost half (43%) of Canadians’ pre-tax income1. Though home affordability improved throughout 2019, average spending is still well above the 30% affordability benchmark used by the Canada Mortgage and Housing Corporation. That means you could be investing in the equity of your home at the expense of your retirement savings. For retirees and pre-retirees, rightsizing can represent an attractive opportunity to use the value of their home to fund their golden years.

Rightsizing options

Rightsizing is about capitalizing on where you live to support the lifestyle that works best for you. Examples include selling your current home and moving to a smaller one, such as a condominium, or relocating to a neighbourhood that’s either less expensive and/or closer to amenities. Some rightsizers sell and then move to a rental unit. An alternative to moving is to renovate and turn extra living space into rental property that provides additional retirement income. Remember that in retirement, homeownership can become more living expense than investment. Your income is fixed, but the cost of running your home isn’t and has the potential to increase over time. In that sense, it’s not so much the size of your space that matters as its net cost to you. You don’t want your dream home to be a money pit that takes away from enjoying life.

Getting started

At the same time, you may no longer want or have capacity for the upkeep of a big house. There are ways to determine the size of home you truly need to enjoy the lifestyle you want. Taking these steps can also help you declutter and free up living space while providing a simple and effective means to boost your home’s resale value.

Step 1: Go on a walking tour of your space, paying close attention to big items, like furniture and exercise equipment, as well as smaller appliances. Tag or note the ones you hardly use.

Step 2: Check your closets and shelves for things you aren’t using and that are likely taking up unnecessary room – clothing you haven’t worn in more than a year is a good example.

Step 3: Organize and sort the items you’re ready to part with into what can be given away to family or friends, sold, donated to charity or free recycling services. Disperse accordingly.

Step 4: Identify areas of your home – like the finished room in your basement that’s full of boxes – that you’re using mainly for passive storage. Living space that you use for storage may indicate you have more home than you need.

Step 5: After completing your audit, take stock and be realistic about the amount of space you need to complement your retirement plan so that you don’t over (or under) downsize. For example, if you like hosting family and friends, you’ll need space to accommodate guests. If you envision your retirement including a lot of travel, a small pied-a-terre may suit you better than a 3-bedroom house.

Wondering if rightsizing your home is the right decision for you?

Whether you’re already retired or just starting to prepare, now is the time to look at what your home really costs – in money as well as time and effort. Reducing your mortgage debt and expenses by rightsizing can make a real difference financially and as your physical abilities diminish with age. You may even be able to eliminate your mortgage altogether and have money left over.

Still unsure of what the smart move is for you? Contact one of our Investment Advisors, who can help you assess whether your living arrangements, income and assets align with your retirement wealth plan.

1 https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/housing-affordability.pdf

Women and Retirement Planning: Why It’s Different

read

By iA Private Wealth, June 20, 2019

Although numerous gender barriers have been broken down over the years, at least one remains – women have less money saved for retirement than men. It’s been recently reported that 25% of Canadian women have contributed fewer dollars toward retirement than their spouses1. The same survey highlighted that women worry more than men about meeting their future financial needs and don’t feel as prepared for retirement. Indeed, research shows that fewer women than men have a formal retirement plan (22% versus 32%, respectively), while 43% of women age 55 and older indicated they had no formal plan at all.2

Historically, household financial responsibility has tended to fall to men, but gender politics alone don’t explain the retirement savings gap. There are systematic reasons why women lag behind men in building their retirement nest eggs.

Living longer

On average, women live four years longer than men3. As a result, they need their money to last longer. Women who underestimate their life expectancy may also miscalculate their retirement income projections and leave themselves susceptible to running out of money too soon.

Earning less

The gender pay gap persists, with women earning on average 87 cents for every dollar that men make4. This limits how much money women tend to have available for long-term savings and means they need to be more disciplined with the funds they do have.

More caregiving

In addition to earning less income, women typically spend less time in the workforce. They’re still the ones who tend to stay home to take care of dependents, including children and aging parents. Consequently, they have a shorter window of opportunity to make enough money to sustain themselves long term.

Singledom

Whether through divorce, widowhood or by choice, the number of single senior women is growing. Among Canadians aged 85 and older, there are nearly two women for every man5. The majority of women will be solely responsible for their money at some point in their lives. As a single person, life can be more expensive with no one else to rely on or share expenses with. Having sufficient income is all the more important when you’re on your own.

Better planning for a better future

With the unique challenges and opportunities facing them, women can help to ensure their future well-being through proper retirement planning. For women, having a plan in place:

  • Increases their knowledge about their individual circumstances so they can be more informed and feel more confident about money matters
  • Keeps them on track to meet their short- and long-term goals with a budget, spending and investment strategy
  • Provides them with a holistic approach and a “big picture” view of their financial situation

The results of good planning and working with an experienced Investment Advisor include empowering women to overcome the risks specific to them and turning fear about the future into peace of mind. As a leading wealth management company with one of the largest independent advisory networks in Canada, iA Private Wealth understands the unique wealth planning needs of women today.

Contact us to speak with one of our Investment Advisors about how we can help.

1 https://www.hsbc.ca/content/dam/hsbc/ca/investing-and-retiring/investments/hsbc-ca__investments__women-in-retirement--en.pdf
2 
https://www.newswire.ca/news-releases/am-i-saving-enough-to-retire-vast-majority-of-canadians-just-dont-know-cibc-poll-673311343.html
3 https://www.who.int/countries/can/en
4 https://www150.statcan.gc.ca/n1/pub/89-503-x/2015001/article/14694-eng.htm
5 https://www12.statcan.gc.ca/census-recensement/2016/dp-pd/hlt-fst/fam/Table.cfm?Lang=E&T=11&Geo=00

To Retire With Enough, Plan Enough

read

By iA Private Wealth, June 11, 2019

Are you heading into your pre-retirement years? You may be wondering how, when and if you should move to safer investments. You’re right to start thinking about potentially transitioning your portfolio to be more income-focused ahead of actually retiring. After all, investing heavily in stocks may be okay when you’re younger and willing to take on more risk for higher returns, since you have time to rebound from market declines. But it can be an aggressive strategy that leaves you vulnerable to severe market downturns as you near the end of your working life.

That doesn’t necessarily mean shunning growth altogether. A healthy 65-year old could easily live well into their 80s and beyond, and that means there’s a real possibility you’ll need 30 years or more of retirement income. Without thoughtful planning, you could easily outlive your savings and be left to rely on government support alone, which likely won’t be enough to cover all your expenses. The key is striking the right balance between growth and security in your portfolio.

What’s the right balance? It depends on your individual financial situation, including:

  • Your level of savings and anticipated retirement income
  • How you plan to fill the potential gap between government retirement benefits and your lifestyle needs
  • Other variables specific to you, such as your tolerance for risk, short- and long-term goals and life expectancy

Living the fixed-income life

As you shift from growth to income in your portfolio, you may also need to shift your mindset. For example, investors comfortable with stocks may have a hard time adjusting to the notion that a mix of securities, such as dividend-, yield- and interest-generating investments, might better achieve their income goals – even though this more conservative asset mix doesn’t provide the same return potential as equities.

Besides your investments, it’s as important to calibrate your day-to-day behaviour with the change from growing your portfolio to drawing it down. How quickly you spend your money obviously makes an impact on your bottom line, so knowing your monthly expenses and budgeting accordingly can help to ensure you don’t live beyond your means.

Women face unique retirement planning considerations

It’s a fact, women tend to live longer and earn less money than their male counterparts – so on top of needing to make fewer dollars stretch over a longer period, most women will be solely responsible for household finances at some point in their lives. Clearly, when it comes to preparing for retirement, women have their own set of challenges. To ensure they enjoy their retirement years, women need to plan ahead, putting in place a wealth plan that’s informed by sound advice and considers the financial risks specific to them.

Retirement quick stats

63.8 – Average retirement age in Canada in 20181
53% – Chance that a 65-year-old woman will live to age 852
17,600 – Number of Canadians expected to reach age 100 by 20313
Did you know? The growth rate of the Canadian centenarian population has often been one of the highest of all age groups in the last 40 years!
36.6% vs. 21.8% – For those 85 and older, percentage of women and men, respectively, who live alone4
$723.89 monthly – Average amount of CPP for new beneficiaries aged 655

Work with an Investment Advisor and plan to retire well

Whether it’s addressing lifestyle requirements, determining income sources or estate planning, being properly prepared for retirement demands a holistic approach that analyzes your individual financial circumstances and allows for the development of a retirement strategy focused on your needs and goals. If that sounds complex, it’s because it is. However, there are places you can turn to for invaluable help. Accessing professional financial advice can make the difference between retiring, and retiring well.

Get retirement planning advice from one of our experienced and knowledgeable Investment Advisors by contacting iA Private Wealth today.

1 https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1410006001
2 https://www.soa.org/globalassets/assets/Files/Research/Exp-Study/research-2014-rp-report.pdf
3 https://www12.statcan.gc.ca/census-recensement/2011/as-sa/98-311-x/98-311-x2011003_1-eng.cfm
4 https://www.comfortlife.ca/retirement-communities/our-aging-population-statistics
5 https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/amount.html

Are You Saving Enough to Retire?

read

By Erin Gendron, May 15, 2019

Polls consistently show that the vast majority of Canadians do not have a retirement plan in place to help them achieve the lifestyle they dream of in their golden years – and women are even less likely than their male counterparts to be retirement-ready.

How do your retirement savings measure up against these findings? Can you confidently say you’re on track to live your retirement years in comfort? Here are four tips to help you develop a financial plan that can give you greater security and confidence about the future.

Start now

We can all benefit both financially and emotionally from purposeful planning, but getting started can feel daunting. Here are a few things to keep in mind: consider both your short- and long-term goals; engage your family, as a financial plan needs to support everyone’s life goals; start by putting a plan in place to track where your money is going; follow a budget; pay off debt; and start saving. Even if it’s a minimal amount, never underestimate the long-term impact of small savings habits. Here’s an example of how saving a little today can pay off big tomorrow: If you set up an automatic investment of $50 per pay (bi-weekly), earning an annual average of 5%, it will grow to over $90,000 in 30 years.

Not sure where to find the money? Consider this tip from Warren Buffett: "Do not save what’s left after spending, but spend what’s left after saving."

Redefine retirement

A number of dynamics over the last few years have made it more challenging to save and plan for retirement. We’re seeing house prices escalate by double digits and debt levels rise higher than ever. Wage increases are crawling by single digits, savings rates are low and there’s a decline in company defined benefit pension plans. Not to mention, people are simply living longer.

Perhaps “retirement” needs to be redefined or re-imagined in less traditional terms. Instead of working towards a set date or age at which time you stop working and start receiving a pension in place of a salary, consider a staggered retirement, transitioning to something part-time and low stress, picking up an “encore career” or turning a hobby into a small income-producing venture.

As we age, we tend to fall into routines and leave the years of learning or trying new experiences behind us. As time goes by, the days and memories blend together making it seem as if the years are flying by. To slow time down in later years, your retirement goals should include activities to keep your brain active. Get out of your comfort zone, learn new skills, have different experiences and visit new places.

Plan your retirement income

You work hard over many years to save up for retirement, making RRSP, TFSA and possibly non-registered or corporate account contributions. Now it’s time for those savings to live out their purpose. Creating an income stream involves taking a leap and shifting your mindset from one of accumulation to dispersal. This shift to begin drawing an income from those hard-earned investments can be emotionally difficult and financially complex.

The other piece of the puzzle is determining how much you will receive in government pensions. It may surprise you that, although the maximum Canada Pension Plan retirement benefit in 2019 is $1154.58 per month, the average amount received for new beneficiaries (as of October 2018) was only $664.41. So be sure you are up to date on how much pension money you will actually receive, as it may be lower than you anticipate. Find out how much you are entitled to.

As of 2019, Old Age Security (OAS) adds another $601.45 per month. One caveat to be aware of is that the OAS amount will be “clawed back” 15 cents for every dollar your net income exceeds $77,580, and withheld entirely when your net income reaches $125,969 (all figures are for 2019). Wouldn’t you like to hold on to as much of your OAS as possible? With a bit of strategic planning it’s possible.

Don’t forget the unpredictable

Individuals facing sudden retirement as a result of an unexpected life event, such as job loss, business failure, personal injury, family sickness or death, can usually manage the loss of income associated with some of these challenges through an insurance plan. But many financial risks associated with a serious illness or injury can only be addressed through a comprehensive retirement financial plan that includes critical illness and long-term care coverage. This is an important consideration when you take into account that with today’s medical advances you are far more likely to fall critically ill and survive than to die unexpectedly.

Although a detailed retirement plan won’t help you avoid what life has in store, it can help you successfully navigate any rocky financial challenge that comes your way.

In Your 50s? How to Get Ready for the Retirement You Want

read

By iA Private Wealth, May 03, 2019

While 50 may be the new 30, it’s simply not the case when it comes to saving for retirement. For that, there’s no turning back the clock. When people reach their 50s, they tend to realize that retirement is no longer such a distant concept. Yet a recent poll found that 32% of Canadians between the ages of 45 and 64 have nothing saved for retirement1. Even among those with retirement savings, the average value of their nest egg is $345,000 while most (49%) have saved less than $250,0002. If you're in this age group and haven't started to focus on the looming reality of life after a paycheque, there’s no time like the present to get serious about preparing for your golden years.

Make the most of the opportunities to move the needle on your retirement planning with these five tips.

1. Take stock of your spending

Understanding where your money goes is the first step in assessing your financial health and knowing whether you’re on course to meet your future goals. Start by tracking your day-to-day expenses to get a clear picture of your spending habits and the level of income that will allow you to maintain the lifestyle you want. From there, you can determine if you’re in a comfortable position heading into retirement or if you need to adjust your behaviour – or your expectations.

2. Live like you’re already retired

In planning for retirement, you may create what you believe is a sensible budget, but you can’t really be sure you’ll able to stick to it until you try it. If you have trouble living according to your retirement budget while you’re still working, chances are you won’t be any more successful with more time on your hands to spend money. Whether it’s downsizing your house, taking fewer vacations or generally adopting a more frugal mindset, you can start retirement “training” now. Doing so will also make a big impact on your lifestyle costs today to help ensure you have enough money for tomorrow.

3. Decrease debt

Living within your means includes cutting back on your dependence on credit. If your retirement is 10 to 15 years away, it’s time to reduce rather than increase your use of high-interest credit cards and loans. Move down the line of interest rates until you take care of all your liabilities, including your mortgage. If you’re over your head in debts, consider consolidating them to lower your interest payments and give yourself some breathing room. Owing zero (or very little) money means you’ll enjoy a more carefree retirement.

4. Assess your investments

The key to smart retirement investing is having a mix of stocks, bonds and cash that makes sense for you. Like all investors, your goal is to achieve the highest possible return with the least amount of risk, but that can be easier said than done. As you near retirement and replace employment income with money from your investments, you may want to look at ways to minimize volatility and capital risk while maximizing the amount of income your portfolio generates. Your overall asset allocation will depend on many variables, including your tolerance for risk, other retirement income sources, savings rate and life expectancy. In other words, your asset mix needs to be customized based on your individual situation and there’s no one-size-fits-all solution. Getting outside guidance from a qualified professional can be invaluable.

5. Expect the unexpected

Even the best-laid plans don’t always work. Among other unforeseen circumstances, you may retire earlier than you originally thought, experience health changes or need to care for a loved one. Regularly reviewing your plan and having contingencies in place prepare you for the unexpected and make it easier to shift gears without suffering negative consequences. Although disruptions can be unavoidable, being ready for them minimizes their potential to derail your finances.

Planning can be complex, but you don’t have to do it alone – our Investment Advisors can work with you to provide advice and education, and take a holistic approach to your finances so that the only thing surprising about your retirement will be how much you enjoy it.

Contact us today to start planning for the retirement you want.

1 https://www.newswire.ca/news-releases/am-i-saving-enough-to-retire-vast-majority-of-canadians-just-dont-know-cibc-poll-673311343.html
2 Ibid.