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Retirement income planning - issues for all of us
August 26, 2014
10:11 pm
Loonie
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http://www.cbc.ca/thecurrent/p.....ent-money/

Everyone who is concerned about pensions and retirement should listen to this, I think.

August 26, 2014
11:43 pm
Jack Manning
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Loonie, I listened to radio program I noticed that they are not explaining RRSP's correctly. They keep talking about fees on the RRSP's are high but it is not the RRSP itself. An RRSP is a tax sheltered plan introduced by the Canadian government.

An RRSP is not an investment own its own. It is the mutual funds or other equity based investments that have high annual fees. I read somewhere that Canada has one of the highest annual mutual fund fees in the world.

ETF's in Canada at most cost between 0.25% to 0.75% annually which they did not mention at all. They are much lower cost alternatives to mutual funds in RRSP's.

Loonie, personally my parents taught us to save and invest money and take advantage of RRSP's and other tax advantaged plans. Also, get rid of mortgage debt within 10 years if you can and don't get into high interest debt and other debts.

My parents do not have any union or workplace pensions and they did it all through RRSP's, non-registered investments working, saving, investing for 42 years. They get about $2,300 a month in C.P.P., O.A.S.

They have no debt, no mortgage and are debt free for 25 years now.They own their own home. They have all their money in fixed rate interest paying investments, no stocks, equities, mutual funds, ETF's etc.

Their annual interest is about $35,000 a year from mostly government bonds, GIC's, higher interest savings accounts. I guess this where I learned that we don't like taking risks with our money.

The points about shared pension plans earning 8.00% maybe true but what they do not tell you is that unlike RRSP's, TFSA's, non-registered investments, pensions usually pass on to a spouse at 60% to 65% only plus no estate, joint owners, family members, adult children etc. get anything, $0.00 dollars.

It is true, it is not easy to fund one's own retirement but what is easy in life. Nothing is.

August 26, 2014
11:58 pm
Jack Manning
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Loonie and anyone else, listen to this about retirement and real estate, http://www.cbc.ca/news/busines.....-1.2728209

If this does not work type in Google Your home may not be the best retirement nestegg and click on it or on listen.

This seems to be a growing problem with Canadians depending too much on their primary residence having much more debt.

August 27, 2014
3:34 am
Loonie
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I agree, they did not clarify what they meant by RRSPs and fees.

However, we know that an awful lot of people will never be as frugal or as disciplined as your parents, and that they will end up being funded by the rest of us unless we get a better contributory pension system than what we have now. RRSPs are not solving that problem. Defined benefit pension plans do solve that problem and they work most efficiently when they are large and can have long horizons. A pension plan is not intended to be part of intergenerational wealth transfer. Its purpose is to provide for the beneficiary and spouse for as long as they live. Even with RRSPs, you can't be sure you'll have enough money when you consider the effects of inflation and low returns. Too many people make bad investment decisions when they run their own "retirement plans".

Your parents have done a great job but I would like to know how well they would have done if a defined benefit pension plan had been available to them. Most of these plans have some kind of cost of living formula, which you can't get from an RRSP or from your own savings, so that people don't have to worry so much about outliving their savings. The latter is a huge concern right now for people in their 60s. In the early retirement years, it may seem like you've got enough, but then inflation catches up with you and you can be in trouble. For many of them, there will not be enough money left for anyone to inherit when they die, and for some of them their children or the gov't (us) will end up making up for the fact that they didn't have a good pension plan.

I speak from experience. This happened to someone I knew a few years ago. Even in his early to mid-80s, it seemed like he would have enough money, or at least that's what his advisors told him. He had no pension plan, just CPP, OAS and personal savings. He had been frugal and sensible all his life. But then a stock that he had invested in (blue chip) tanked, interest rates fell, and it also turned out that he needed a lot of supplementary nursing care. By the time he died, there was nothing left and his kids had been paying his way for 2 years, cutting into their own retirement plans. If he'd had a good pension plan, he wouldn't likely have been invested in that blue chip stock personally, his pension plan payout would have adjusted to inflation, he would have had significantly more income, and his kids would have been better off in the end.

I think this is one of the major points that the people being interviewed were trying to make, namely that making the kinds of investment decisions that we are trying to make is not a game for amateurs. It's too scary (or too expensive, depending) for individuals to make the kinds of decisions that we are now making because most of us do not have the expertise, very few of us have the financial clout to get the best deals from investment houses, and only a minority of us are willing and able to take the time and have the wits to do it. The big pension plans have all the things that we lack. And they don't have to worry about whether it's a good idea to buy long bonds because the beneficiary might not be alive by the time it matures because their role is to fund pensions on a continuing basis, so that each beneficiary can benefit from investments made much earlier.

I agree that depending on one's real estate to fund one's retirement is risky, but a home will always be worth something. So far, though, young families still want houses. There is a huge scarcity of inventory in places like Toronto, never mind the price. There just isn't much for sale, and good properties regularly attract multiple offers. There will be huge pent-up demand for quite some time, if nothing else. If prices fall, then there will be speculative buyers picking them up for cheaper but not for free.

August 27, 2014
7:05 pm
Jack Manning
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Loonie, I would have to agree with you to a certain point. C.P.P. and O.A.S. is a great base for income security for Canadians. I would like to see that be a higher amount by at least 26% than it is now.This should of been done over the last 10 years or so.

In the case of my parents, this would mean $2,900 C.P.P. and O.A.S. versus $2,300 today. Also, C.P.P should not be cut to 60% or less depending on the formulas the government uses.

The quickest way for women to become poorer right away is loosing $300, $400 etc. + annual C.P.I indexing a month just because their spouse is deceased through no fault of their own.

Both my parents paid for C.P.P so it makes no sense that the surviving spouse gets a much lower pension of 60%, 55% etc. C.P.P. is a contributory pension and is not a form of financial assistance, low income social program.

As for defined pension plans and other workplace plans, I have seen many and they all work the same. The longer you live the more money you will get and the less you live than tough luck. This goes for a spouse as well.

Me, personally do not want to be worrying about if I will live an extra 5 or 10 years thinking that I am going to get short changed by people running a pension plan and they set rules that can change. If I get short changed then my family gets short changed.

I like choice because after all I work for my money so it is mine. It is not the union's or the employer's money and if I want such a plan of monthly retirement payments then I can buy an fixed term certain annuity, life annuity, inflation indexed annuity etc.

I don't think people understand that when a pension plan states that they made an 8.00% return in a given year they think as the pensioner he or she made 8% that year.

This is not correct. The money stays in the pension plan and does not go directly in your pocket. Loonie, you said you wonder if my parents would be better off if they had a defined pension plan. They currently have $985,000 in total savings, non-registered investments, RRSP's, TFSA's etc.

By the way, the $35,000 in annual interest income is from their money only which is earning 4.79% per year. He inherited $200,000 from my grandparents who are both passed away since 4 and 5 years ago.

The other inherited money is earning an additional $10,000 a year from GIC's, bonds etc.

We calculated and looked at this many times, they would have about $550,000 less today and looking at most defined pension plans, their pension at 65 just 4 years ago when they retired would be $33,000 a year plus a maximum 3.00% annual C.P.I. adjustment.

If my father lives to 86 just like my grandfather did and annual C.P.I. is 3.00% per year, the total pension received is $946,324.

My parents currently have a 4.79% average bond rate for the next 24 years on this $550,000 which is $26,345 interest a year. In 21 years just the interest income will be $553,245+$550,000 principal=$1,103,245. This is not even including compound interest of reinvesting if the money is not spent.

Loonie, I will continue more information about this subject in the next post.

August 27, 2014
7:16 pm
Jack Manning
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Loonie, this $1,103,245 will be paid no matter who is alive and survives in our family so pension plans have an inherit major risk which is in life things happen, death by a car accident, disease, natural disaster, crime etc.

As for the point about inflation and nursing care etc. my grandparents spent 6 year total getting home care, nursing home care etc. which cost them $302,000 in total.

They still were left a $200,000 inheritance to my father and my uncle each. My grandparents had only C.P.P, O.A.S and no other workplace pensions etc.

Their savings, investments, RRSP's etc. got them through many decades of retirement. As for a primary residence, house, condo etc. it is an asset and is not an investment. In the U.S. people learned the hard way recently using their homes as ATM machines.

Reverse mortgages are ATM's for the retired, elderly that put most of all their life savings in their house. This is a desperate attempt to hold on something that is no longer affordable to them.

This is why we need financial education, financial literacy and people taking more responsibility facing reality and not being stuck in an awful house rich cash poor vice that will ruin them.

August 27, 2014
7:22 pm
Jack Manning
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Loonie, your point about costing us society to pay for others that do not have pensions. There is no free lunch in life. Pension plans pay a portion usually 50% or more contributions may it be from a private employer, through a union collecting from an employer or government as an employer, city, province, country.

This extra costs of pension plan contributions paid by employers costs us higher taxes, fees etc. plus higher prices through companies passing on those pension costs to us, consumers.

August 27, 2014
8:01 pm
Loonie
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I appreciate what you are saying, Jack.

Let me speak to the other sides of the argument, as I see it, for a moment.
CPP is indeed contributory, and I can see why you would think that therefore both spouses should benefit equally for as long as they live. I think we would all hope that could be true. On the other hand, the payout rates are based on the assumption that when one dies, the other will only get 60% of the deceased pension, so that in fact the payouts, overall, are higher than they would otherwise be. They have intentionally arranged it so that they people who made the contributions get the bigger part of the paybacks. Also, if both parties worked, it is very likely that the surviving spouse will in fact get the maximum CPP payout because the spouse's 60% is added to whatever the survivor is getting, maxing out at the prevailing maximum payout for any individual. Because of all this, I think they have arranged it the payout system fairly.

Your parents, in addition to being excellent money managers, probably have made some lifestyle sacrifices in order to do so well with their savings. If I understood you correctly, you said that your parents are now receiving an income of about $35,000 from invested assets which they earned and that you had calculated somehow that if they'd had defined benefit pension plans, they would have been receiving $33,000 four years ago. As these figures are not very far apart and since it is hard to calculate retrospectively for what-ifs, and since returns can vary (in fact I would think that in 10 or 20 years, your calculations might work out differently since your parents' current income would not have an inflation clause whereas the DBPP would), I would conclude that at best the payback is about the same, but I think it's likely that if they live as long as your grandfather, that they would have been better off with the DBPP. It seems to me that what may have happened is that your parents made the necessary sacrifices and are now in a good position financially, but that if they had had DBPPs, then they would had had to put less of their own money into it, had more money to use for other things, and would now be able to count on inflation protection in their returns.
The remaining factor is the one of inheritance. It is undeniably true that whatever your parents have saved, invested, and have left over will be available to pass on (minus probate where applicable!), and that this will give all of you satisfaction, although many things can happen in the interim to diminish the result such as inflation, health costs and so on. But I (who do not have a DBP myself) would be more than happy to have had one. I have saved, made many lifestyle compromises, and I will be OK, at least compared to the majority of Cdns, However, I would love to not to have to be worrying about my investments at this stage and not have to worry about who will be managing my investments when I am no longer able, and not to feel that an annuity at very low rates (now and in foreseeable future) was my only option. I would much rather be part of a broader scheme which was not so dependent on prevailing rates (be it annuity or ordinary interest), and that this was all looked after by a competent pension manager. So far, these pension plans seem to have done just that. When I look at what they are invested in, I sometimes shudder (CPP being a case in point) because I would never consider investing in these things, but I recognize that I don't have the background to make the investment decisions that they have made, and that they can afford to take risks of much longer duration than I, with bigger rewards.

As an aside, I recently had the opportunity to look at the CPP Contributions Summary for a person who is now 85 years old and has been collecting CPP for the last 20 years. It was issued a few short years before he retired completely, and I know for a fact that he barely worked at all after age 60. I was truly shocked at how little he had contributed over time. It was really a very small amount in total, and often not at the maximum allowed, just a few thousand dollars in total. Also I bore in mind that I think CPP came into effect when he was about 35 years old, so not like today's new retirees. He does not receive the maximum CPP, but still above the average, at about $9500/yr. (If he dies first, which seems likely right now, his wife, whose CPP is currently about $4800, will get an additional 60% of $9500 (in today's dollars) = $6500. Combined with her own CPP, this will bring her up to about $11,300, which is not quite the maximum payout allowed by CPP. One of the reasons this man is getting so much, compared to what he put in, is that the employer had to match it. This is never the case with savings that one has to put aside for oneself.

August 27, 2014
8:25 pm
Jack Manning
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Loonie, let's just say we disagree on this one. I don't want more control over my finances and my family's finances by the government and other administrators public and private. There is already C.P.P., O.A.S and many social programs and income support programs. Make these better for all Canadians for a decent retirement income base.

The money our family earned and earns is from hard work, long, long hours. If someone like yourself and others think that others will manage your retirement money and other money better then make it be by choice and not forced by a union, employer, government etc.

Our family has done well and we paid more than our fair share of taxes to all 3 levels of government. We are not frugal or cheap, we make no sacrifices as these words are used to make it sound that we are living like hermits but just managed our money wisely and took the time to actually not trust every wild high returns promised by mutual funds, pension plans etc.

People want easy money, an easy life. There is no such thing and until people start to learn this, they will never be better off no matter what government and others think is best for us.

I don't want to make $100,000, $200,000, $300,000 etc, more money from a forced public or private defined pension plan that depends if I live longer than a fellow Canadian or Canadians.

August 27, 2014
9:46 pm
Loonie
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I can certainly agree that CPP and OAS need to be made to meet the basic needs of all of us. Not everyone's hard work and long hours are equally well rewarded (thinking of cab drivers, for instance, which I have never been), so of course something has to be done. I think CPP should be beefed up substantially but that does not seem to be a popular opinion right now. It could really save us a lot of money though in the long run by not having to subsidize people later.

And I can understand the reluctance to have anyone else controlling where one's money is placed. I don't really like it myself, but I think in very large pension plans (such as CPP and many DBPPs), it works.

Just to be clear, I doubt that anyone in your family has lived like hermits, but if you have to fund the majority of your retirement without matching contributions, I can't see how it would not cost you more, reducing spending choices. The impact would be correlated to income, which I did not make clear before.

Certainly we can agree to disagree on the desirability of participating in Defined Benefit Pension Plans.
For anyone who would like to read an explanation of how they work and why they might be a good idea, I would recommend Pension confidential : 50 things you don't know about your pension and investments. by Drummond, Robert Johnston (Toronto: Lorimer, 2012.) I read this a little while ago and found it helpful. Drummond is a retired professor from York University, and I have never met him.

August 27, 2014
11:19 pm
Jack Manning
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Loonie, all I am asking is give people a choice. Let them decide as I said before we already have mandatory contributions C.P.P.

We already have O.A.S, GIS, allowance of the survivor benefits, provincial and municipal supplements etc. for all Canadians of all backgrounds and economic, financial circumstances.

ORPP is coming in 2017. Another mandatory pension plan of employer,1.90%+employee, 1.90% to start and will grow every year by at least C.P.I, probably 3.00% on average taken from each paycheck. Enough already with forced pension plan contributions taken from our paychecks!

The Canadian government already gives a generous tax deduction of 25% to 50% for RRSP's.The reinvesting of these RRSP tax refunds will multiply money much, much faster.

TFSA's are income tax free and clawback free but both plans have compound interest and growth on their side.

RESP's structured carefully can come out almost income tax free taken as income for the student and not the actual owner, parent, grandparent etc. plus up to a $500 annual or $7,200 lifetime free money as a grant.

There are non-registered investments and income tax splitting so more investments can be made for all the family.

Loonie, income is not the only most important thing. It is wealth accumulation, debt elimination and staying debt free which is very important for present and future generations. This protects everyone in the family financially against premature death of retirees unlike those that have only or mostly pension income. Loonie, if it is not in my account then I don't have it.

Defined benefit pension plans may seem better first but it is based on others dying sooner so more money is left in their plan. I guess if you are more lucky than others this looks good but I never have been lucky and I know for myself and my family that our path is a much better one for us.

Loonie, people like me at 39 years old will not get a ORPP, C.P.P. and O.A.S. pension until between ages 72 to 75. This will give even more compound interest, growth for my investments, RRSP's, TFSA's to grow by at least a few hundred thousand, probably by $500,000 or more.

Pension plans can be also complicated and full of rules, laws, terms, conditions, bureaucracy that can change without contributors and pensioners approval. Someone like me is not going to accept this.

Sorry, Loonie, but I know what works for us and this is what we will stick too. Wait until GIC's, bond rates go back to 4.75% to 5.25% or more in 7 years.

August 28, 2014
3:07 am
Loonie
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By all means, stick to what works for you. You seem to be doing a very good job. Unless you happen to get a new job with one of the few employers who still offer DBPPs, then there is no danger of you ever having to participate in one.

I'm not sure that I trust the managers of these big pension funds either but I have to admit that their business model makes sense, and they have generally done very well.

I will say, though, that all the people I know who have these Defined Benefit Plans (and I know quite a few) are glad they have them. They don't always like the deductions initially (in which case they probably wouldn't have saved the money if left to their own devices anyway), but as retirement approaches they are really glad. I have never heard anyone complain about the fact that their estate doesn't get anything out of it or that they might die before they get much back. (They all seem to expect to live quite a while anyway. Even my friend who died a year ago at age 68 after collecting it only a few years did not complain of feeling shortchanged in terms of pension, although he had two children and a spouse.) Perhaps there are plan members who feel this way but I have never heard that expressed. Mostly they seem to feel lucky that they are among the lucky few who have these plans. Most, if not all, of them ALSO have RRSPs, although they are necessarily smaller because they have less contribution room after funding their pension plans. And almost all of them have lost money at one point or another because they were in over their heads when it came to investments and/or had accepted bad advice from advisors and brokers.

The main reason Ontario is introducing another pension plan, as I understand it, is because the Feds refused to beef up the CPP sufficiently. If I were still working, I don't think I'd be too keen on contributing to yet another pension fund either. The solution is through CPP. Why set up yet another level of bureaucracy etc and an outfit with an unproven track record? I guess it creates employment for the investment managers! But I understand, I think, why they are setting this up, because the provinces do bear a very significant load in terms of resourcing impoverished seniors, and this occurs in a lot of ways that are not so obvious as GIS etc. (e.g. they have to pay for anyone in a nursing home who can't afford their share) . Simply put, the province can't afford to do this indefinitely and with an aging population. As has been said many times on this forum, it's the taxpayer that gets stuck with the tab. So, the province is trying to minimize its liability by getting more money into pension funds so that people can fund their own retirements. It is far from being an ideal solution, and I really don't know how the lower income people are going to afford it without a significant wage hike.

August 28, 2014
10:20 pm
Jack Manning
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Loonie, I don't know how people feel but someone passing away at 68 is a real pill to swallow for their family and financially will hurt them hard especially with hundreds to thousands a month less in pension income.

Most of my family members own a business or in sales in some kind. We work long hours and to see us leaving little to nothing to our family would be a complete financial failure.

We want our children to be better off and having a decent to great amount of financial resources by leaving a business, investments, savings, RRSP's, life insurance, annuities, rental property etc. whtever it maybe is better than a pension plan that expires at the first 2 parents and that is it.

Loonie, you can't get blood from a stone. We all know that someone like me at 39 years old will not get a pension at 60, 62, 65 etc. It will be most likely 72 to 75 and those 30 and under can expect pension ages of 78 to 80.

As for the working poor and low income workers. It is not easy to find a solution but taxing everyone more and more call it a pension premium, health tax, income tax, toll, fee etc. will not fix the problem but probably make it worse.

You can't spend, tax your way to prosperity. It has to be done through a growing economy and rising wages within reason that keep up with inflation+ maybe something on top of that. Look at all the socialist countries and their policies, most of them are either bankrupt, don't exist or have a very low standard of living.

Also, Loonie, you can't stop people from making terrible, moronic, self destructive decisions and expect everyone to keep bailing them out. This also goes for governments, companies etc.

Loonie, All I know is everyone in our family works for what we have and we must save, invest, strategize to make the most of it. I think the falling apart of families in the last decades to today is a big part of why more people are looking toward others like government to solve or help their more difficult situation.

Education and experience from elderly and older family members is priceless for the younger generation. Great having these discussions with you, Loonie.

August 28, 2014
10:43 pm
Loonie
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I ran into this on the internet today and found it encouraging in the sense that there seemed to be a way forward that takes into account some of the concerns that have been raised in terms of dealing with poverty and worrying about gov't budgets. Please skip over the religious references if they bother you, as I think this stands on its own without them.
What I find interesting is that he manages to draw from the strengths of all the political parties.
http://www.toronto.anglican.ca.....at-church/

August 28, 2014
11:04 pm
Jack Manning
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Loonie, I think a better way is to pay people a decent wage based on productivity and skill set. This means training and retraining as employment changes in a major way ever 25 to 30 years.

Also, every worker no matter where they work should get a minimum 2% annual wage increase and C.P.I. by province not Canadian C.P.I. when inflation is more than 2.00% per year.

This happened at least 3 times during the last century and history has many examples of major changes in employment.

If we start giving more money to more people without actual producing goods and services there is a good chance that we will devalue all our money with higher inflation which will make us all poorer. This is a real problem that many do not understand.

Loonie, there is no land of milk and honey, a utopia. There will always be richer and poorer in society. If there was a solution to this problem we would of found it by now.

I do agree that charities and other donations by private citizen and organizations to help the needy and poor is a good idea and should be encouraged much more. For example, you can give up to $2,000 a year from Self-employment, employment, RRIF, pension, annuity, RRSP, interest, dividend and other investment income and pay $0.00 income taxes.

Loonie, what I said before of family is very important. What do we do in Canada? We encourage them to move out and be an adult by 18, 19, 20, 21 years old.

Many other cultures stick with their family and help each other respecting each other. This is so true especially the elderly. It is a big mistake that the majority of us don't do this in Canada.

Please write your comments in the forum.