Retirement income planning - issues for all of us | General financial discussion | Discussion forum

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.

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.

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.

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.

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/