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July 23, 2018 | It’s Coming

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.

Remember Sears? You should. There are lessons here.

Killed by bad management, competition and online retailers, the Canadian operation went down and took 18,000 jobs with it. Those people had spent years contributing to their  pension plan, which the company was also supposed to fund. It didn’t.

So when the end came the plan was $260 million short. Retirement benefits were gutted. It was a financial disaster for thousands of people who could not weather one. In fact, when promised health, life insurance and other promised benefits were added in, retirees claim Sears screwed them out of a collective $730 million.

Meanwhile, secured creditors – suppliers, banks – were paid. The residue came to $135 million. On Friday the former employees sued to get their hands on at least that amount before it could be handed off to the next tier of claimants.

So what?

Most of us don’t have secure pensions. Seven in ten lack defined-benefit plans, which provide an assured payout after a specific length of time. That’s why there’s so much pension envy for teachers, cops, civil servants, some bankers and a bevy of government workers. The rest, if lucky, are members of DC plans – basically glorified group RRSPs – funded partly by employees and the employer. There is no guaranteed benefit in retirement, since the money is invested (usually in mediocre insurance company mutual funds) and will be affected by market conditions. So, just hope you retire in the right year.

The Sears experience exposes a dirty little secret – that governments routinely allow companies to underfund pension plans, then put retirees at the back of the bus when a corporate failure occurs. Stelco and Nortel workers learned the same thing. So until this situation really changes (which may be never) don’t put a lot of faith in your company plan. It should not form the mainstay of any retirement strategy.

If you do have a DC plan with a bunch of lowlife insurance funds to choose from, pick a balanced one that will coordinate with your own investments. Don’t opt for an aggressive growth equity fund since fees and volatility will be higher. Don’t pick a bond fund now that interest rates are on the rise. And don’t go for just maple – try to find a fund which will give global diversity.

When you change employers (this is a gig economy, after all) don’t leave the accumulated pension contributions sitting with the old company’s pension plan. If you can move them into a self-directed RRSP or LIRA (locked-in retirement plan), do so. Then sell the mutual funds and replace them with lower-cost, efficient ETFs.

If lucky enough to have a defined-benefit plan that allows you to take the money out upon retirement, do that. This is called commuting the pension. Part of the funds will be rolled over tax-free into a registered vehicle (like an RRSP) and part will go to you as cash, which must be declared as income in the year you receive it. Yes, it’s taxable, but all pension money is. By paying the tax now and investing the rest you will probably be further ahead in the long run.

There are significant benefits to commuting. The funds can be invested to earn a better return than if left with the pension plan. You control your own retirement nestegg instead of leaving it to others (remember Sears). If you croak all of the money can be passed on to your family, or others, instead of having payments cut off. And it’s possible to reduce taxes by tailoring cash flow to your needs rather than getting a monthly cheque with tax withheld by the pension plan.

Over twenty years ago I wrote a book saying the Boomers would end up in a retirement crisis. Here we are. It’s a mess. But things will be even more dire for the Mills – a larger demographic without windfall real estate profits to cushion them. In fact, it’s the moisters who are busy financing the retirement of the wrinklies, taking on epic debt to buy their inflated houses. This transfer of wealth between generations is historic – from the young to the old, trading debt for equity. It’s shocking.

Here’s a prediction. Pensions will be the flash point of the future. Politicians will fail to face the issue. Do not fail yourself.

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July 23rd, 2018

Posted In: The Greater Fool

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