Re: Pensions vs. Mortgages

Kumari Beck

Associate Professor

Co-Director, Centre for Research on

International Education;

Co-Academic Coordinator, Equity

Studies in Education

Faculty of Education

Simon Fraser University

Unceded Coast Salish Terrtories

On Nov 16, 2018, at 4:05 PM, Baharak Yousefi <byousefi@sfu.ca> wrote:

Hi everyone,

I am sharing a story about seeking professional advice that may be of interest to those who haven’t spent much time thinking about/planning for retirement and, if at all possible, would like to keep it that way.

I have been at SFU since 2012 and due to student loans and Vancouver rent/mortgage have made zero personal contributions to date. I went to see a financial advisor at Sun Life recently to find out how much I should be contributing if I want to retire at 65 (in 22 years).

Mid sales pitch, I mentioned to him that this DB plan may become an option for me. At that point, he told me that if that’s the case, we should wait and see because there’s nothing he can offer me that would be as good as that (large, stable, well-managed, etc.). Given that I have little interest in spending the rest of my working life figuring out whether or not I can afford to retire, I have voted YES. I hope this is useful to some of you.

Best,

Baharak

From: Tamon Stephen <tamon@sfu.ca>
Sent: November 16, 2018 3:24 PM
To: academic-discussion@sfu.ca
Subject: Re: Pensions vs. Mortgages

Hi all,

Acting on some good advice, I would like to retract my comment below about the referendum process. It is certainly correctly run as per the SFUFA constitution. I'd also like to again thank SFUFA leadership for working on this issue. I think it is good for everybody that SFUFA is actively trying to improve our questionable pension situation, rather than just being satisfied with it or ignoring it.

Best regards,

Tamon
________________________________________
From: Tamon Stephen <tamon@sfu.ca>
Sent: November 16, 2018 2:20 PM
To: Nadine Schuurman; academic-discussion@sfu.ca
Subject: Re: Pensions vs. Mortgages

Hi Nadine and Francesco,

Thanks for the comments, which I think are helpful. In many ways I would say you are both right*, but framing it differently. Nadine's framing is the framing that SFUFA has promoted fairly aggressively. It's fine for those whose expenses are fixed (i.e. they own their homes outright and live in a city without inflation). But particularly for those that have debt (mortgage, student loans) or find their expenses going up (e.g. because they rent) or are saving for a down payment, I believe Francisco's framing is more relevant.

I think there is a good case for trying to think about this from an equity perspective. This is an example of why I am not entirely on board with Martin Hahn's logic [We cannot know how (personal preferences) are distributed/Thus there is no way to know how to vote altruistically/So everyone should vote in their self-interest]. We certainly could try incorporate some notions of fairness into our thinking. One effect of pooling longevity risk with other faculty is that Martin's longevity risk will be pooled with female faculty. This seems like it would be good for them and bad for Martin, assuming their circumstances are otherwise similar. It can be hard to make progress for minorities if most voters consider only self-interest.

With respect to fairness, should we also consider younger faculty as group? In fact women faculty may(?) be overrepresented in this group, for instance due to the culture and hiring practices 20 years ago. With their increased longevity risk, arguably young women are even more in need of the flexibility to manage it via real estate. To elaborate on my comments yesterday, in fact both my grandmothers lived in their own homes until they were 95+, and in many ways this is what allowed them to live well on so-so pensions. (There was certainly no concept of trying to correct them for pay equity or years lost to maternity leave back then.)

Getting back to altruism vs. self-interest, my personal suggestion would be first, to try to figure out what your self-interest is As many people have pointed out, it isn't at all clear in many cases, and professional advice may help. If there is a strong-self interest, then you should surely vote based on that. If it is actually quite ambiguous, as I think it is for many, then it probably makes sense to ask if your time at SFU has left you with any altruism, and if so, what your priorities are. For instance Nilima Nigam mentioned that she is considers that fact that BCCPP invests in Transmountain is a reason to vote no. Concern for equity may be a reason to vote yes if you think about older female faculty or no if you think about younger female faculty. To the extent that I am considering altruism as part of my thinking on my vote, my strongest concern is for younger faculty, which leads me to vote NO. Also one of my main motivations in starting this thread is to get their attention in the hopes that they will think about these things now and vote. On this subject, I would like to again thank people for the many worthwhile comments I am reading, and I hope that we are not all feeling crushed by the sheer volume of e-mail in our inboxes.

Finally, if you find it hard to figure out where you stand based on either self-interest or altruism, I would urge you to vote NO simply because the process has been shambles, and that voting yes likely means an extremely significant and irrevocable change to our working conditions, while voting NO lets us step back and think about things (and perhaps improves our leverage if we do eventually decide we want to go this way).

Best regards,

Tamon

* Although oddly, you are both wrong in the sense that the real number is about 7% using the figure from question 4 in the SFUFA's consolidated FAQ. The point being that one should use an after-tax figure so $100000 vs. $90000 is really more like $73000 vs. $66700. I'm not quite sure where the 5% comes from, possibly the pension calculator which really goes out of its way to hide the costs by adding the removal of MSP, a wage increase and a step increase into the gap between Year 0 and Year 1. To get my numbers I just plugged $10000 and $90000 into the calculator and looked at the Year 0 figure in each case.

________________________________________
From: Nadine Schuurman
Sent: November 16, 2018 9:25 AM
To: Francesco Berna
Cc: Tamon Stephen; Nina Saklikar; academic-discussion@sfu.ca
Subject: Re: Pensions vs. Mortgages

Francesco hi,
Respectfully, an employee who makes $100,000 right now will receive more more than $90,000 under the new defined benefit plan. Because you get the credit for the pension contribution as has been pointed out by several others including SFUFA. As the calculations presented to us demonstrate, you will only lose about 5%.
Plus, in two years you will be back to exactly the same take-home salary as before the implementation of the new plan.

Finally, there is a equity component to this plan. A woman has to pay about $170,000 more than a man to buy a $50,000 per year annuity. This is because women generally live longer according to actuarial tables.

Nadine

Sent from my iPhone

> On Nov 16, 2018, at 8:26 AM, Francesco Berna <francesco_berna@sfu.ca> wrote:
>
> Dear all,
>
> I think that having the possibility to choose between a DB or DC is a fundamental right. And that is why I was enthusiastic about the SFUFA proposal to explore the possibility to add this option to our retirement plan.
>
> But the recent turn of events concerns me greatly.
>
> SFUFA current proposal is now to move everyone to a DB plan, without the option to continuing staying on a DC plan. The proposed DB plan will be obviously more expensive for SFU and its employees than the current DC plan.
>
> Moreover, at this stage the proposed DB plan has a lot of fundamental unknown. One of which is how will a 2008 crisis be handled by the proposed DB fund.
>
> On the other hand, the current DC plan, although not ideal, it is indeed very flexible by offering different investment options. That means that we know exactly the composition, the management, the costs, the risks and the benefits of the several options available to us.
> Not to mention that has the great advantage that the stocks or bonds in the DC plan will be inherited no matter what by the family.
>
> Finally in terms of Pensions vs. Mortgages the obvious difference is that today with a salary of for instance 100,000$ per year one will get 10,000$ from SFU in the DC plan (so it is like one's making 110,000$ per year).
> With the proposed DB plan is already clear that with the same 100,000 salary per year one will get 90,000 in the paycheck. This is a great financial limitation for people who would like to invest in real estate.
>
>
> Francesco Berna
> Associate Professor
> Department of Archaeology
>
> I respectfully acknowledge SFU is on unceded Coast Salish Territory; the traditional territories of the xʷməθkwəy̓əm (Musqueam), Skwxwú7mesh (Squamish) and Səl̓ílwətaɬ (Tsleil-Waututh) Nations
> ________________________________________
> From: Tamon Stephen [tamon@sfu.ca]
> Sent: Friday, November 16, 2018 12:59 AM
> To: Nina Saklikar; academic-discussion@sfu.ca
> Subject: Re: Pensions vs. Mortgages
>
> Hi Nina,
>
> Thank you for the very detailed and thoughtful comments. These questions you ask are ones that we should all be thinking about. I've not yet reached the point you have of needing to care for parents, but I did see some of the issues my parents had caring for 3 relatives who lived into their 90s. I suggest that it is very a worthwhile exercise for everybody to work through your questions 1. through 5. first in the case that you own your home, and second in the case you are renting, but have additional savings either through DC or DB. This is very important in our current context where it is now marginal if young faculty can enter the housing market at all. I feel that in this context it is not enough to tell them that it is "best to put money away for a future retirement", even if it means their never owning their own home.
>
> The two main lessons I took from my own relatives, whose experiences in the 1930's made them extreme savers, were:
>
> A. Two of them owned their homes, which has a hugely positive impact on with respect to questions 1., 2. (where applicable) and 5. because living in a paid off home keeps expenses quite low, and the equity can then be used to cushion the final years or provide an inheritance. The one who was renting, but otherwise did a good job of saving, left a difficult dilemma when he arrived at point 3. below. At what point do you close out the apartment if the renter is sick and may not be able to return? Even a good pension will evaporate quickly if you are paying for long-term care _and_ renting an empty apartment.
>
> B. With respect to point 4., life at 95 is fairly different than life at 75. If you are lucky enough to make it to 95 in pretty good shape, in many ways you are going to be living cheaply (excluding rent) not because you have to, but because you want to. You may spend a bit on taxis after you give up driving, but probably less than you used to spend on your car. Perhaps you'll be able to enjoy your library if your eyes are still okay. Likely you'll watch a lot of TV. These days some people in that group become Internet trolls. But you're not going to do all the stuff that you might try at 75 (if you make it to 75 in good shape).
>
> The current context of Vancouver sharpens the divide between owners and non-owners in retirement. The two relatives I mention who owned their homes had them liquidated after a fairly long grace period once it became completely clear that they could never return. They were in Ottawa, not Vancouver, and sold in not great markets (esp. one after 2008). In one case the house had gotten a bit run down. But although the home equity was not huge in either case, the money worked out fine because they hadn't been pouring money into rent or a mortgage for something like 40 years. In the current Vancouver context of course the equity would be much more.
>
> What if you are renting? Well, a DB may provide a steady, inflation-adjusted income. But inflation-adjusted does not mean rent-adjusted. We in fact see rents going up much more quickly here than our salaries or BCCPP pension payouts. There are many terrible stories of seniors being renovicted and not having anywhere to go as comparable housing is not available (and they may not be in a good position to move as it is). The one expense that is likely to go up towards the end is if you have to move to long-term care. The DB payouts are unlikely to be sufficient for anything nice (although you may hardly notice the difference). If there is not the release of the home equity to get the care you need, then you probably won't get it.
>
>
> I can add that on the whole it's not that I'm personally bullish on Vancouver real estate (have no ability to read it at all), but more that I think that real estate is arguably a better way of handling longevity risk than a DB income stream, mainly by reducing housing costs later in life. Older faculty have maximized their opportunity to invest in Vancouver's real estate market under the current DC scheme with the (perhaps unusual) 0% required contribution. At the moment, it looks like older faculty who have gone heavily into real estate have done pretty well by it (including myself, though not as much as people who got in earlier). The next 20 years may of course look quite different, certainly in terms of asset appreciation, but I do not think that we should deny younger faculty the same opportunity by sucking away 10% of the money they may be trying to scratch together for a down payment. Appreciation or not, ownership is still a very strong longevity hedge.
>
>
> Thanks also to Nilima for great comments today, Julian for a very good general response to the various scenario analyses "... arguments based on a higher average expected income in one plan or the other rely on too many assumptions." (which is why you should probably get advice if you want to vote strictly on economic self-interest), and Jeremy Snyder for asking a good question that SFUFA is probably not going to answer.
>
> Best regards,
>
> Tamon
> ________________________________________
> From: Nina Saklikar <nsaklika@sfu.ca>
> Sent: November 15, 2018 1:46 PM
> To: academic-discussion@sfu.ca
> Cc: Nina Saklikar
> Subject: Re: Pensions vs. Mortgages
>
> 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:
> http://www.sfu.ca/~pendakur/Beischlag_pension_memo.pdf
> 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
>
>
> *********************************************************
>
> 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.
>
>
> ******************************************************************************
>
>
>
> Nina Saklikar,
> Head, eBranch
> Simon Fraser University Library
> Email: nsaklika@sfu.ca / Tel: 778.782.5861
>