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Where can one invest a LIRA in GIC's?
May 22, 2023
8:51 am
AltaRed
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NCC1701Z said
An annuity isn't about returns, it's an insurance product that protects one against longevity, variable market returns, mental deterioration and even irresponsible spending and scammers.

If your surviving spouse does not have any investment skills, knowledge or interest the annuity will provide them with a guaranteed income. For many this would be one of the main incentives. Vettese recommends to annuitize ~20% of your funds to provide some protection.

It's puzzling that everyone envies the coveted DB pension that has no estate value after the last survivor but they shy away from annuities.  

Well said though post #39 addresses a key point. People with DB plans tend to feel they are getting something for nothing IF the employer kicks in some of the funding. That is really just 'smoke and mirrors' though as employer contributions are simply a component of the employee's compensation package. The employer does that math.

To put it in perspective, if the employer paid the employee 3% more but the employee had to put that 3% into the DB plan, the net result would be no different BUT the average employee would likely perceive it to be different. They really are one in the same.

Annuities, whether CPP, DB plan, or a commercial annuity from a lifeco, have a legitimate place (base - foundation) in one's retirement plan. I am rather pleased to have taken my DB plan as an annuity when I retired, and not a lump sum. While relatively small, especially after a division of property in a divorce, it is still a great source of comfort for that payment to show up monthly in my bank account just like CPP. I don't care that it vapourizes upon my death. My estate will have some residual legacy for heirs anyway.

May 22, 2023
9:54 am
Loonie
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The DB pension or annuity and the lump sum DIY are cousins but not identical twins.
The issue with the lump sum DIY, and it's a big one, is that the individual has to make wise investments over a period of time. Statistically, it seems most can't do that or won't.
All the material I've looked at suggests that bigger is almost always better when it comes to pension investing. In other words, being part of a large pension plan is likely the best deal. It affords the diversification and expertise that the average person can't meet.

May 22, 2023
10:13 am
COIN
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Those who are taking their DB in installments should make sure that the payor will be solvent for the next 20-30 years. This is probably not a concern if the payor is the federal government as they can always print the money but is a concern for a private sector company/entity.

A few years ago my broker told me that two of his clients were retired Nortel employees and they took a 30% haircut on their Nortel pension when Nortel crashed and burned.

"A bird in the hand is worth two in the bush." You may or may not want to take the lump sum now. It's your risk and your money.

May 22, 2023
10:25 am
Norman1
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Don't take a lump sum commute for the DB pension because of that. The lump sum can still not be enough for the pension later on.

The commuted value calculation uses an estimated future rate of return of investments. Same estimate is used to determine the contribution levels. As employers found out the past thirty years, it is an educated estimate only.

Once one takes the lump sum, the employer is relieved of any future liability to top that lump sum up should it not turn out to be enough to buy the annuity years from now for that amount of pension.

Ditto should the employer go bankrupt. If those invested contributions, employer and employee, grow to only $75 million instead of the estimated $100 million when it comes time to start paying the pensions and the employer is no longer around to kick in another $25 million, then there will be a 25% haircut in the pensions.

As Loonie described, one may not be a competent DIY investor and not achieve that estimate actuarial rate of return on the lump sum. The resulting shortfall will also be on the person taking the lump sum.

May 22, 2023
10:51 am
COIN
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It wasn't just Nortel, I heard that GM pensioners also took a haircut.

Anyway, your risk and your pension. I offer no advice either way. I am offering only anecdotes.

May 22, 2023
11:20 am
AltaRed
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The number of corporate DB plans failing to honour obligations is rather small, albeit catastrophic to those affected. I would not broad brush corporate DB pensions due to a small number of failures. Most of them are solid with their surviveability far exceeding our own mortality. Each of us needs to make that judgement call at the time of election. My own DB plan is with a blue chip corporation and I have had no concerns/misgivings about doing so.

May 22, 2023
11:41 am
Norman1
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The shortfall in returns is not unique to the Nortel pension fund. All the DB pension funds that have been around for decades are affected. The Canada Post pension fund, for example, is also short, around $5 billion.

Not like an Alice Industries pension fund can somehow continue to invest in Government of Canada bonds with a yield of 10%+ while CPP and the Teachers funds can only buy the bonds for 4% to 5% yield.

As well, GM is gone too. Company went bust around 2009. GM sold its GM name to a new company that uses the GM name today. Original company was renamed Motors Liquidation Company. Any liabilities not assumed by the new company remains with Motors Liquidation Company.

May 22, 2023
12:47 pm
NCC1701Z
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iirc my company's pension funds were invested outside with a life insurance company so even if the company failed the funds were safe. We paid very little into the plan even though it was a DB pension. The formula was 5% of salary - CPP contributions which must have been modified as CPP is > 5% today! Today, the federal employees pay ~10% up to YMPE and 12.5% over without the CPP reduction, with about the same benefits as we had.

May 22, 2023
1:16 pm
Norman1
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All registered pension funds are a trust separate from the employer. That's why there's zero additional employer bankruptcy protection from taking a lump sum out into an individual locked-in RRSP.

Decades ago, the estimated future rate of return was much higher. So, a 5% contribution rate could have been estimated to be enough. Investment returns are much lower now. So, the contributions have to be more than 5%.

One can see that in annuity rates. I found earlier that, in 1992, a 70-year old male could buy an annuity that pays around $565/month for life for $50,000. So, $100,000 back in 1992 could buy around $1,130/month for life. Nowadays, $100,000 will buy only around $650/month (LifeAnnuities.com 2023 annuity rates).

May 22, 2023
2:16 pm
NCC1701Z
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View post on imgur.com

Wow, what a difference! I found some annuity quotes in the Sun from 1992 Male 10 yr age 70 for $510/mo (FVRL link)

Not sure what the RRIF monthly income is all about, looks like a 20 yr term certain at 7.8%? 20 year term is ~$295/mo per 50k today

I remember long term corporate bonds paying ~10% back then

May 22, 2023
8:58 pm
Norman1
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The RRIF monthly quotes do look like they are for insurance company RRIF offerings.

One offering seems to pay an increasing income based on the minimum withdrawal formula to withdraw all the principal and earnings by age 90. The other offering pays a level amount until age 90:

RRIF MONTHLY INCOME
$50,000 proceeds
Age MIN. INC.
1ST YEAR
LEVEL INC.
TO AGE 90
55 125.00 354.00
60 145.00 366.00
65 173.00 385.00
66 180.00 393.00
67 187.00 395.00
68 196.00 402.00
69 205.00 409.00
70 214.00 417.00
71 225.00 426.00
May 23, 2023
9:11 am
Rail Baron
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This thread has covered a lot of ground, so I thought I would add one more data point into the mix.

Last year, I transferred my assets from a DC pension plan that had been closed by my employer, as they transitioned to a DB plan (!). I got lucky in two ways - first that my employer was one of very few that joined an existing DB plan in 2021.

Second, when I dug deeply into the DC funds that were holding my assets, it turned out that these Sun Life Assurance Guaranteed Funds were backstopped by Assuris only up to a $100,000 maximum, just like a GIC at a federally chartered bank. But after 18 years, I had more than double that amount in accumulated pension benefits, meaning that I was exposed to losing more than 50% in the event of Sun Life's insolvency.

This connects back to the LIRA topic because I now have moved these assets to MAXA where they are 100% guaranteed by the Deposit Guarantee Corporation of Manitoba. I feel fortunate to have pulled these funds out of Sun Life's limited guarantee given the growing uncertainty about financial markets these days.

DC pension plans leave the employee with most of the investment risk, and even though I thought that I was protecting against that by putting my pension assets into SLA "Guaranteed" funds, it turns out that there were significant limits to that guarantee which one had to dig deep into the fine print to discover.

May 23, 2023
8:36 pm
Norman1
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The risk with the Sun Life Assurance Guranteed Funds is not significant.

Province of Ontario has a DBRS rating of AA(low). Bank of Montreal has a DBRS of AA.

Sun Life Assurance Company has a DBRS debt rating of AA. So, the estimated risk of default is about that of a provincial bond or an uninsured Bank of Montreal deposit.

May 24, 2023
8:00 am
Rail Baron
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Norman1 said
The risk with the Sun Life Assurance Guranteed Funds is not significant.

Province of Ontario has a DBRS rating of AA(low). Bank of Montreal has a DBRS of AA.

Sun Life Assurance Company has a DBRS debt rating of AA. So, the estimated risk of default is about that of a provincial bond or an uninsured Bank of Montreal deposit.  

I agree on the risk being low. But the premium to invest in these guaranteed funds was not low, compared to non-guaranteed funds open to invest in my DC investment portfolio. Had I known that there was only a partial guarantee, I would have trimmed the amount of those guaranteed investments, and would have likely come out tens of thousands ahead over the years I was stuck in this plan.

I am very happy to be in a DB plan now (BC College Pension Plan), even if it's only for the home stretch of my working life. And I'm even happier to have my DC funds earning 5.1% for 5 years in a LIRA at MAXA.

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