Can your pension pay for 30 years?

Wednesday, March 1, 2017|Managing Investment Risk|
  • Can Your Pension Pay For 30 Years

I recommend keeping close tabs on the financial health of your employer pension plan. The family retirement depends on it.

A worthy nugget of information often lands within my purview. One that musters important implications for investors.

A U.S. headline from last fall read: “State pensions are awash in red ink”. The estimated shortfall ballpark was one trillion dollars. Ouch!

Today various pension plans are underfunded, while others could easily be heading that way. Some pension income benefits may be reduced if the weaker funding levels don’t improve.

Say your family plans to retire around age 60 with a pension and at least one spouse lives to 90. Ask this critical question: “Can your pension pay expected benefits for 30 years or more?”

Anyone who is a member of a pension plan should take note of this unsettling situation. Both those who are still contributing, along with those now receiving pension benefits.

Pension plans rely on three sources of funding:

  • Employer contributions.
  • Employee contributions.
  • Investment returns.

Ongoing low returns are devastating for many pension plans. Longer life expectancy places additional burden and demand on pension payouts.

A U.S. headline from last fall read: “State pensions are awash in red ink”. The estimated shortfall ballpark was one trillion dollars. Ouch!

Some pension plans may incur problems in paying all the promised benefits. Pensioners should assume pensions can undergo changes – even CPP, OAS and Social Security.

Participating in pension plans may mean making some irreversible decisions. Notable pension events occur when:

  • A choice is presented to join a pension plan, buy back past pension service or retire either normally or early.
  • An early retiree is offered the option of staying with the pension plan or transferring the commuted value.
  • Accepting a commuted value shifts responsibility to provide in retirement to the employee’s hands.
  • Switching from defined benefit to defined contribution keeps employees working longer.

Steady pension income has always been an important part of the retirement puzzle for many families. Pension reductions can rattle some pillars and assumptions of retirement planning.

Consider what could happen to your retirement if the expected pension was reduced, say by 20%. Here are some key matters that arise:

  • How would you make up the potential income shortfall?
  • How much more investment capital would you require?
  • Is there sufficient time to accumulate the additional funding?

Pension administrators typically provide an “annual pension summary”. Upon receiving it, every pension member should:

  • Check the estimated funding level with the pension department.
  • Review the most beneficial pension options to achieve family goals.
  • Determine whether it’s more desirable to commence the pension earlier or later.
  • Understand the implications of pension income splitting and the $2,000 credit.

No doubt, some retirement plans will face difficult choices. Hence, I favour starting this analysis at least five to ten years before retirement.

Long-term income goal adjustments may be necessary others. There are no simple answers, even for pension plans that are rock solid today.

Be savvy and don’t assume that your pension remains iron clad forever. It may be called upon to deliver benefits for 30 years, perhaps more.

About Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA  My expertise in the investment and financial advisory profession began in 1972. I graduated with the Bachelor of Electrical Engineering from General Motors Institute in 1971. I then attended the University of British Columbia, graduating with the MBA in 1972. I have attained the “Discretionary Portfolio Manager” professional designation. I am committed to offering clients the highest standard of personal service by providing prompt, courteous and professional attention. My advice is objective, unbiased and without conflicts of interest. I’m part of a team that delivers comprehensive services and best value in managing client wealth.

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