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August 28, 2016 | The End

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Kate and Paul are so typical. Big bucks for the wedding. Bought a house and now the focus, (“like, 100%”, he says) is paying off the mortgage. Neither have corporate pensions, and both expect to job surf for most of their careers. “Whatever we save, they’ll eventually tax the crap out of it. So why bother?” Now in their mid-thirties, making $145,000 between them, they have a plan. A bad one.

So, 65% of us (2011 numbers) have no pension. None. Zilch. Of the rest, 29% have defined benefit plans and about 9% work for companies offering a defined contribution plan. The trend is scary. The feds say from the late 1970s until lately, the number of working men with any kind of pension dropped from more than half to little more than a third. (Pensions for women, in contrast, ticked a little high, since many more work for the government.)

Sure, nobody in their 30s worries much about being in their 60s. But with the cost of houses and kids, the dearth of pensions, plus the paucity of public retirement pogey, it could easily take three decades to grow enough to survive the 25 or 30 years after you quit a paycheque. So Kate & Paul are myopic throwing everything for years at a 2.4% mortgage on an asset that might decline in value and certainly won’t generate an income stream when they start wrinkling.

Thus, it’s time for a little primer on pensions. So stop fidgeting and sit up.

“Many of us have DC pension plans through our work. There’s little understanding of them though,” blog dog Gord says. “What are they? How can we maximize them? In my case I contribute 5 per cent, and my company matches dollar-for-dollar. I can’t pass that up because I can’t ignore the 100 per cent rate of return in year one.

“After that the wheels sort of fall off though. I feel like I don’t get very good returns and the fees are too high. Should I be transferring this out as soon as possible into my SDRSP account? Are there legal or financial barriers for doing this?”

What the heck are DC and DB pensions, anyway?

Ask postal workers – since this is exactly what they’re going on strike about. A defined benefit plan (typically what government workers enjoy) sets in stone a formula determining exactly what a future pension benefit will be. The employer’s on the hook to contribute enough money to keep the plan solvent. All contributions are pooled, managed by an administrator, and employees have nothing to say about how the thing is run. DB plans are gold-plated, but many (like that of the post office) are seriously and dangerously under-funded.

So Canada Post wants to evolve it into a defined contribution plan. Here the employer and employee (typically) both contribute, the money goes into market-based assets like mutual funds and the amount paid out in retirement is unknown until it happens. So, it’s like a glorified RRSP, but one you do not have much influence over. With DB, employers take the risk. With DC, workers do.

How can I max my company’s lousy plan?

Most companies with DC plans hire a mutual fund/insurance outfit like Sun Like, Great West or Manulife, to run them. These guys typically offer employees a choice of their own mutual funds (bond, balanced, aggressive growth etc), and will sometimes nip their inflated fees. So what should you choose? Simple. Make your fund choice complement the investments you have outside your company plan. If you have a balanced approach, a good choice in the plan is a bond fund, because MERs are usually low and then you can manage the growth assets more actively outside. Also check how often (if at all) you can move funds out and into your own RRSP. Do it.

What if I leave my job? What happens then?

DB plans usually keep your money, paying out an earned benefit when you start wearing thirsty underwear. But DC plans travel with you, often becoming regular RRSPs or locked-in plans (LIRAs), which you can’t raid until retirement (exceptions are below). You have the right to move both your contributions and any returns earned on them, and anything the company’s chipped in so long as it is vested (usually happens after a couple of years on the job).

Can I get money out of a pension plan early?

Maybe. Sometimes. The unlocking options include financial hardship (low income or high medical costs, for example) or the fact your doctor says you have a shortened lifespan. Also, if you leave Canada and stay away for two years and are no longer employed by the company whose plan it is. Or, when 55 you can move half a LIRA into an RRSP and withdraw money (taxed). Or, if the LIRA contains a small amount – under approximately $28,000 – and you’re 55, you may cash in the whole plan.

How much is it possible to withdraw then?

All of it, if you move or expect to croak soon. In the case of financial hardship (from not reading this blog) withdrawals may be up to $27,450 if you have no other income, and diminish until nothing is allowed if you earn $41,000 or more.

I’m allowed to commute my pension. Should I?

‘Commuting’ has nothing to do with road rage. It simply means you’re given the right to take a pension (usually a DB one) and remove it from the administrator’s control. For most people this should be done in a heartbeat, even though a portion of it will come as taxable income (it all ends up being taxed, anyway). While it may be scary to leave the womb of a big pension plan, the benefits are compelling. You control your own retirement destiny and income, you can engineer less tax, you escape the danger of being locked into an under-funded plan that could nip benefits, and your family owns the cash, so it can be passed along to a spouse or basement-dwelling, needy Millennials when you expire.

Soon I will tell you how much you’ll need to retire. So prepare.

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August 28th, 2016

Posted In: The Greater Fool

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