Hello all,
I have been actively investigating retirement funding for a few years (along with my spouse), saving like mad, and investing heavily. I am in my early 50s and hope to retire in my mid-50s.
I have also managed my mother's finances for the past few years so have direct knowledge of how retirement happens when one is elderly.
I share with you some of what I consider my most significant concerns/findings/questions re: retirement funding in case they help you. I am a strong supporter of the defined benefit pension plan option based on the following.
(This is an extremely long email but it's also an extremely important matter so I have left in the details.)
1.
Will I outlive my money?
A DB plan takes away the fear of outliving one's money. I will not stay awake at night worrying if I will be old and without enough cash to cover basic living expenses. The money from a DB plan would come in each month for as long as I live. I believe that I will never have to ask friends or family for money.
2.
What will happen to my spouse? Will he have enough money to live comfortably if I predecease him?
With a DB plan, my spouse will have his living costs covered and I know that if I choose the appropriate option re: pension survivorship, he'll be OK for the rest of his life.
3.
Who will manage my retirement funds if I either don't wish to actively manage them or I can't due to mental and/or physical impairment?
Most people I know don't wish to think too much or at all about money or retirement. The fact that the DB plan will provide a deposit into my bank account each month just like my salary now will be a relief especially if I am no longer able to actively invest.
Hopefully, at some point, I will have better things to do with my life than sit in front of my computer, re-balancing my portfolio, etc.
My elderly mother can't manage her money now. She is not unique. It's hard to imagine oneself as infirm but it can happen.
Do you have someone you trust completely who will manage your money well if you can't?
4.
How much money will I have to spend in retirement? Will I have enough money to cover my basic costs?
With a DB plan, I'll know exactly how much money I can expect each year and I can plan my retirement funding reliably and with ease. The DB plan will give me a degree of certainty.
I can save and/or invest accordingly if I feel the need to make up a gap but I believe a DB plan will cover my basic living expenses well.
Related:
Can I retain full control of how my money is invested in the DB plan?No. I would, of course, prefer to always be in control and the DB plan is not good for this.The flip side of losing the power to control my assets is that I don't have to worry about actively managing my money or realizing that my calculations are wrong or optimistic. I know enough of investing to know how little I know and that there are professionals who run DB plans who know way more than me and can spend their entire day managing a portfolio successfully, which is something I don't have time for. Even a low maintenance or couch potato portfolio needs some time spent on it.
There are many variables that one has to take into account with the DC option, including determining a safe withdrawal rate, correct life expectancy (i.e. life expectancy at birth, at age 65 now and in the future), current age, interest rates, inflation rate, years to retirement, taxes, stock market returns, etc. etc. The DB plan obviates the need to take these variables into account in one's calculations.
[I believe the safe withdrawal rate here:is 5% although I may be wrong and my apologies if I am. I believe as the "norm" is usually 4% and gurus like Wade Pfau have been downplaying the 4% number - https://retirementresearcher.com/difference-safe-optimal-withdrawal-rates-retirement-spending/My husband and I use a conservative 2% rate and were alarmed when talking with a financial advisor, who said that she uses safe withdrawal rate of 1.8%!]
I also don't want to have all of my money subject to the ups and downs of the stock market aka subject to sequence of return risks. I don't wish to have to reduce the amount I have available to spend if the market takes a downturn especially if I am very old and can't afford to ride out a downturn. I like that the DB plan can better withstand fluctuations in market returns than I could as an individual investor.
Note also that I've learned to be leery of financial advisors. If they are providing advice at the same time as managing your investments, then that's a conflict of interest because they will lose out if a large portion of your savings go into a DB plan. If they're fee-only, you probably won't be paying them much of a fee in the future if all of your money is managed in a DB plan. It's still good to talk with them, though, but it's good to be aware that many of them make money even if you lose money and that, if your situation is straightforward, you may not have much need for them.
5.Will I be able to bequeath my hard-earned savings to someone special who isn't my spouse if all of my savings are sitting in the DB plan?Nope, basically. If you need to make sure that a dependent or cause receives all of your money in the event of your death, the DB plan isn't good for you. This, for me, is the biggest downside to the DB plan.The DB plan does have some survivor options, but, in my opinion, they're not as good as simply willing your money over to someone (a non-spouse, pet) as you see fit.
If you are in the fortunate position of being able to save money outside of a DB plan, then you could hedge your bets and keep both options, using the DB plan to make sure you can fund your needs and don't outlive your money. As the DB plan gives excellent returns, you might save enough from DB proceeds to add to the amount you bequeath to someone else.
For me, if both my husband and I die early on, then I would consider the fact that the money I put into the DB plan will go to my colleagues as a kind of socialism, somewhat akin to my willingness to pay taxes for things from which I don't directly benefit. Or maybe it's like insurance where one pays but may not realize any benefits other than piece of mind. I know this kind of thinking isn't for everyone, but, once again, looking at risks, having enough money to live for life and not being a burden to others vs. not being able to bequeath money as I wish, is an OK trade-off.
6.I have money in the DC plan because I've been here for a while and am no longer young. What should I do with it if we join the DB plan?For me, this is the best of both worlds.I could leave money in the DC plan if I wish and have another chunk in the DB plan thus diversifying my retirement income stream and ensuring that all of my money is not in one basket.The DB plan payout will give me a nice, small pension that will pay for things like groceries, if I choose not to buy back years in the DB plan.There is nothing forcing me to move the DC money into the DB plan.My husband experienced a winding down of a DC Sun Life plan. Sun Life moved his funds into an individual rather than group account and did indeed raise the investing fees. :-(One can, of course, move this RRSP money into ETFs and no longer pay those big fees.
I think it's been established that an annuity from a private company doesn't compare favourably to what the DB plan will provide, especially for women and their longer life expetancy.
If I was looking to fund my retirement from the money in the DC plan (I don't contribute from my own monies to that plan), the money in the DC plan wouldn't cover my retirement and I've worked here for a long time. The fact that we're all having these discussions means that our current DC plan won't cover our retirement costs.
7.
In general, the DB plan produces better returns (i.e. more money) from about the age of 40.
Below the age of 40, DB vs. DC can be a bit of a toss up although, either way, the DB, if it goes through, will allow for more money for extended medical benefits.
I reproduce at the very end of this long email a sample calculation that I shared with the Academic Women's list as an illustration.
8.
I am completely sympathetic to my colleagues who will struggle with an extra 10% or so taken off their paycheques. I don't know what to say to this other than it is best to put money away for a future retirement and that future will come quickly even though, if you're young, it seems like a long ways off. I am hopeful that you would be able to absorb the cut to your take home pay and soon have it become something you didn't think about soon, perhaps like CPP deductions.
I think there is a reason why non-public sector workers are so envious of those in the public sector who have DB plans -- DB plans are not considered "gold-plated" for nothing.
Cheers,
Nina
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Here's a sample calculation:
My spouse and I have been outlining scenarios re: retirement funding and I include one comparison of what sort of income one could have based on where one puts one's retirement money to illustrate the advantages of the defined plan.
We don't have any particular expertise in the following, just an interest in optimizing our retirement income. There may be errors or omissions in this analysis. We have definitely used some simplifying assumptions so that this email isn't even longer than it it already is.
We examined a few strategies to compare with the BC College Pension Plan and assumed the following: single woman, age 60, retires at age 65, earns $100,000 per year. This person contributes $10,000 per year either to the BC College Pension Plan or an RRSP for 5 years starting at age 60. SFU matches this contribution. (note that I know that RRSP contributions are at 18%)
1.If this person joins the BC College Pension Plan.
Annual payment is $10,000 for life. This is not a major amount of money but for such a small contribution period, it will be enough of a payout to cover things like our groceries and/or strata fees...The payout is partially inflation adjusted each year.
2.If this person does not join the BC College Pension Plan then they will have $100,000 in savings in their RRSP. They use one of the following 3 strategies:
a.Buy an annuity from RBC insurance for $100,000.
Annual payment for life is $5600.No inflation adjustment.
b.Invest $100,000 in the stock and bond market and execute a 90% safe (90% chance they won't run out of money before they die), safe withdrawal rate strategy.
Annual payment to age 95 is $3100.Full inflation adjustment.
c.Invest $100,000 in 5 year GICs at 3.28%.Annual payment to age 95 is $4100.
2% inflation adjustment.
Some details:
1. To calculate the BC College Pension Plan income we used the formula (years of contributions)*.02*(final salary) = 5*.02*$100,000 = $10,000.
2. We have ignored taxes. I believe contributions to defined benefit pension plans are tax deductible similar to an RRSP. See:
https://www.taxtips.ca/pensions/rpp/dbpensions.htm
https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/about-registered-pension-plans-rpps/about-registered-pension-plans-rpps.html
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-207-registered-pension-plan-rpp-deduction.html
3. We used the annuity pricing calculator from RBC here:
https://www.rbcinsurance.com/annuities/annuity-calculator.html
4. We used the Morningstar table of safe withdrawal rates Exhibit 17 page 20, 90% safe, 60% equity, 30 year retirement here:
https://video.morningstar.com/ca/Safe_WithdrawalRates_ForRetirees_CA_010517.pdf
5. We used 5 year RRSP rates posted here:
http://www.cwbank.com/investing/rrsp-products/rates
6. We have ignored potential for gains on money contributed to an RRSP.
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Nina Saklikar,Head, eBranchSimon Fraser University LibraryEmail: nsaklika@sfu.ca / Tel: 778.782.5861