# Calculating Retirement Number with Inflation factored in?



## adamcm (Mar 27, 2019)

Hi all,

Not sure if this belongs in this forum, but I am quite confused how to figure out my "number" for retirement when using inflation. 

Let's say I could retire today and survive on 50K/year. In 20 years from now, that $50K will be much higher.

Most calculators that I have used tend to show me what I could have saved up based on investment frequency and such over the next X years. But I really haven't seen one that deals with inflation - maybe there is a good one?

Although i'm not ready to retire today, it would be nice to know what amount I would need saved right now to say good bye to work and live off the invesments for 30-35 years. My hope is that I could figure what that would look like today, see how close I am in 5 years, etc. Is there some way to calculate this with inflation somewhat (but not exactly) factored in? 

Hope this makes sense, and thank you!


----------



## RussT (Jul 11, 2016)

When I was going through the pre-retirement planning process I did not factor inflation into my living expenses or income (CPP, OAS and DB pension). When valuing my RRSPs and TFSA I used a compounding rate that was adjusted for inflation (e.g. 5% average return less 2% inflation = 3% inflation adjusted rate).

Now three years into retirement that seems to have worked well for me except that I have done a bit better than 5% I originally planned and inflation has been a bit lower. I always tried to be conservative with my planning assumptions.


----------



## agent99 (Sep 11, 2013)

As RussT said, you can ignore inflation. But then you must use Real Returns. In other words, return on investments that do not include inflation. If you do it this way, you will come up with a number in today's dollars. 

Inflation and returns can vary widely over a 20yr period, so you are only guessing if you use an average return and an average inflation. 

Looking back at some of our Total Returns there were quite a few years where those were negative and others where they were quite high. You can't just guess a number like 5% and expect to get that year after year unless you only invest in fixed income or perhaps perpetual preferreds. Equity in stock market offers higher growth and dividends, but total returns can be quite volatile.

I would use a Real Return of 2% on your savings and figure out how that will compound over 20 years as you add to your savings. That will give you a number in today's dollars that should be attainable.


----------



## My Own Advisor (Sep 24, 2012)

"Although i'm not ready to retire today, it would be nice to know what amount I would need saved right now to say good bye to work and live off the invesments for 30-35 years. My hope is that I could figure what that would look like today, see how close I am in 5 years, etc. Is there some way to calculate this with inflation somewhat (but not exactly) factored in? 

Hope this makes sense, and thank you!"

I'm not ready either / can't based on some lifestyle decisions but I do think about this often.

Personally, I'm going with 3-4% real return. 

(If I can achieve that, I will be more than happy long-term. I continue to think a $1 M saved up (outside of CPP, OAS, and my workplace pension and most importantly, _no debt_) is "enough" to provide the income I need/safe withdrawal with an equity dominated portfolio to deliver that long-term 3-4% real return.)

At just over 3%, prices double/cost of living doubles every 20 years. That's a good rule of thumb.

So, for retirement planning, I think it makes sense to build a portfolio that a) meets your spending needs first and foremost and b) factors in assets to beat or at least keep up with 3-4% inflation on average = a good mix of equities and likely < bonds than equities.


----------



## lonewolf :) (Sep 13, 2016)

Without the precise information one can not judge rationally. without knowing the inflation/deflation rate or even if the Canadian dollar will be around for the rest of your life you can not know for certain how much money you will need for retirement. I do think holding some gold & silver will off set the risk of running out of money.


----------



## Longtimeago (Aug 8, 2018)

I had the same question 30 years ago and my conclusion was that to protect against inflation, your income must be inflation proof. A simple and logical conclusion but not quite as easy to implement.

Let's take your hypothetical number of $50K. I will guess that you mean you would have enough for living expenses and also some discretionary spending. What you probably aren't factoring in there is any savings. If your capital provided $75 in income WITHOUT withdrawing from the capital, what difference would that make to your question? You would have say living expenses of $25K, discretionary spending of $25K and savings being put back in to your capital pool, of $25K. If you were putting that $25k back into savings, would you have a problem with inflation? What would the compounding of $25K per year for 20 years do to your numbers 20 years from now? If you are putting 1/3 of your income into savings every year, do you really think inflation is likely to be a problem?

That has been my approach for the last 30 years. Live on 1/3, spend 1/3 on discretionary things and continue to save 1/3 of income. Why should what you do in retirement be any different than what you did when working for a living?

You write, "Although i'm not ready to retire today, it would be nice to know what amount I would need saved right now to say good bye to work and live off the invesments for 30-35 years." The answer for me is simple. You need to know you will have enough income today to live on 1/3, have 1/3 for discretionary spending and 1/3 for savings. Inflation will never be a problem. The only numbers you need to be concerned with today are today's numbers. How much do you need today? If you have it, there is no need to worry about tomorrow and inflation, it's covered.

But most people only see that as meaning they need more capital to provide more income. That is simply not true. It's an equation with each part able to be changed, none are fixed. You can continue to grow capital by continuing to put money into savings. You can increase income by choosing to invest in something with a higher ROI. There is no law that says you must settle for a 5% ROI. You can decrease the income required by lowering your living expenses. You can manipulate the equation in any way you choose to if you do not start out by thinking it is fixed.

But as soon as I hear the words 'safe withdrawal', I know the person doesn't have enough to do what I suggest and instead are talking about drawing down capital and so must ask, 'will it work, what about inflation, etc. etc.


----------



## Longtimeago (Aug 8, 2018)

I do think that the age at which someone plans to retire makes a big difference in how people look at this. When I retired in my early 40s, it made no sense to me to look at it as being any different than if I were to continue working. I would need to generate an income to pay expenses and have some left over to continue saving. I'm sure that's how most working people look at their finances while working. Or at least I would hope they do. 

But when it comes to retiring closer to the more traditional ages, people seem to tend to look at it as a downhill slope. I just have to have enough to last me till my last days. They no longer intend or see a need to build, they just see it as winding down to the end. I hope what I am trying to communicate here is understandable. I find it a hard thing to put the right words to.

When I retired in my early 40s, I still saw myself as we all do, as immortal and likely to live forever. With that mindset, you do not start planning on when you will spend your last dollar, that day isn't even on the horizon. You plan on how you will continue to grow and enjoy your life as you have throughout your adult years to that point. 

So I COULD NOT look at it any other way. I have to have enough to live on and enough to be able to save and grow my capital just like any 30 year old would hope to do. That difference in viewpoint has I believe made all the difference. Here I am 30 years later and I am not sitting here saying, 'I hope I die before my money runs out.' That is in fact the bet people are making when they turn to 'safe withdrawal rates'. Personally, I'm hoping there will be some major medical discoveries this year or next that will result in my being able to live to 150 and if there are, I'll be fine. Of course, I'm not holding my breath on that one but perhaps some will see the point. Don't bet on your own death as a solution.


----------



## OnlyMyOpinion (Sep 1, 2013)

Longtimeago said:


> ... That has been my approach for the last 30 years. Live on 1/3, spend 1/3 on discretionary things and continue to save 1/3 of income. Why should what you do in retirement be any different than what you did when working for a living?


LTA, perhaps you could explain to adam where the 1/3 that you propse to save will end up. Your explanation is not very clear to me.

As MOA notes, most people strive to have a sufficient amount saved so that along with their CPP/OAS, pension, ... they can draw an annual retirement income without running out of money and/or leaving a desired amount to their estate. So they want to estimate how much to save, and then how much to spend each year from those savings once employment ends. 

Are you suggesting a person should have enough saved that they only have to spend 2/3 of the annual income that their savings generates, without touching the capital? That would reguire a large amount of savings, and would leave a large residual estate. That isn't what most are interested in.


----------



## agent99 (Sep 11, 2013)

My Own Advisor said:


> Personally, I'm going with 3-4% real return.
> 
> (If I can achieve that, I will be more than happy long-term.


I think many would be happy to achieve that. But for planning purposes, I would not count on it. I suggested a more realistic 2% RR.


----------



## Longtimeago (Aug 8, 2018)

OnlyMyOpinion said:


> LTA, perhaps you could explain to adam where the 1/3 that you propse to save will end up. Your explanation is not very clear to me.
> 
> As MOA notes, most people strive to have a sufficient amount saved so that along with their CPP/OAS, pension, ... they can draw an annual retirement income without running out of money and/or leaving a desired amount to their estate. So they want to estimate how much to save, and then how much to spend each year from those savings once employment ends.
> 
> Are you suggesting a person should have enough saved that they only have to spend 2/3 of the annual income that their savings generates, without touching the capital? That would reguire a large amount of savings, and would leave a large residual estate. That isn't what most are interested in.


OK, well I thought I was being clear but I'll try to clarify it more. Yes, I am saying live on 2/3 of your annual income without touching the capital. No, it does not NECESSARILY 'require' a larger amount of savings. As I wrote, it is an equation. You COULD(as you seem to suggest is the only answer) increase capital to allow you to live on 2/3 OR you could decrease living costs to allow you to live on 2/3 of the income from the capital you have. OR you could increase the income your capital provides. OR you could change any combination of the 3 factors involved in the equation. The ASSUMPTION that the only way to live on 2/3 of your income is to have more capital is just an assumption and it ignores the fact that there is an equation that involves 3 factors, ALL of which can be manipulated by you.

Re the residual estate, in a sense, I do not worry about that at all. Yes, the capital will grow with my method, so what? If I go in my sleep with no forewarning (which would be the best way to go), then my estate will pass as per my instructions in my will. When I'm gone, I really don't care where it goes do I. It will not matter to me at all anymore, I'll be gone! However, I do have a will that provides instructions, simply because it makes sense to have one. But if I had no family, friends, charities, a dog, etc. that I wanted it to go to and it all ended up going to the government, who cares. As long as I never had to worry about having enough income while I was alive, my goal is met.

If on the other hand, I did not pass peacefully and unaware in my sleep, but was made aware by the doctors that I was on a short countdown, I might decide to go out in a 'blaze of glory' in the form of a wild spending spree in my last days. 

But the point is that what happens to any money left over when you die is irrelevant, you won't be there to care what happens to it. I think the real point is that as you write, most people do in fact look at it as a downhill slope from the day they retire and are trying to figure out how to spend their last dollar on their last day so to speak. However, no one can actually plan that unless they PICK a day to die. Granted, it is possible your you to actually do that but I would not suggest it. It is far better in my opinion to plan on not dying at all and THAT requires that you plan to have sufficient income regardless of how long you do end up living.

I realize it is easy for me to say but each of us sees the world in our own way. So it's easy to say but for many it is far from easy to do. I do not expect that to change and for many it will in fact continue to be IMPOSSIBLE to do as they will simply not be able to change their viewpoint to do it. But if talking about it opens a window for one person then as they say, that is enough to make talking about it worthwhile. If one person changes their paradigm, it will benefit that one person. 

A paradigm shift is defined as, "an important change that happens when the usual way of thinking about or doing something is replaced by a new and different way."

When I was in my mid 30's I had my 'Eureka moment'. I realized I did not want to work to 65, retire to the golf course and drop dead on the 13th hole at age 67. That led me to ask myself the age old question, 'how much money do I need, to be able to retire?' If I had listened to all the 'experts' who could only see the answer to that question based on commonly accepted beliefs and practices, I probably would not have managed to retire till much later in life than I did. I was a relatively average guy, with a decent job and typical needs and wants like pretty much everyone else. 

So I looked at what the 'experts' were saying and said to myself, 'well that isn't good enough. It will not get me retired as close to NOW as possible, I need a DIFFERENT way.' That is what a paradigm shift is. That led to looking at the equation of capital/income/living costs and asking myself how I could change it. I could work smarter (not harder) in the future in order to increase my capital faster. I could look at my living costs in terms of what I could do to reduce them. I could look at how I invested the difference between income and living costs to produce a higher ROI.

I turned to the 'Rule of Threes' which I find can be applied to a great many things in life. In travel for example the Rule of 3s tells me 'one to wear, one to wash, one to spare.' You can travel forever with 3 pair of underwear using that rule. Applying it to how much I needed to retire, I came up with 1/3 for living costs; 1/3 for discretionary spending; 1/3 for savings to perpetuate the first 2/3rds. Consider again that last 1/3. It means that the capital amount you have to begin with is not intended to provide your income till you die. Your capital is intended to grow as your income needs grow. Now contrast that to 'standard thinking' which says you withdraw from capital and hope it will last till you die. Which one sounds to you like it will require more capital to begin with? 

Knowing that my plan called for my capital to grow, what it meant was that I then needed to reduce my living and discretionary costs as much as I found reasonable in order to need less capital to retire. The question becomes, 'how low can you go'. There is no concern at all about what about down the line, that's a given as being covered by the saving of 1/3.

You can start from any point you wish and everything will follow from that, if you choose to follow the 'usual way' of thinking and acting in regards to retiring, that's up to you. Or you can look for a paradigm shift that changes the whole picture.

The real elephant in the room is RISK. Most people follow the herd because they believe it is SAFE. That's really just an illusion. But it is an illusion most people share and cannot change.


----------



## ian (Jun 18, 2016)

I went conservative. Inflation at 5 points, real return at 2 points. I believed that inflation tends to be higher for seniors.

Looking 7 years in the rear view mirror I was dead wrong on both counts. Fortunately to my benefit. 

Who knows what the future will bring? The die is cast for us. The future could prove my numbers to be insufficient.


----------



## OnlyMyOpinion (Sep 1, 2013)

Longtimeago said:


> OK, well I thought I was being clear but I'll try to clarify it more. Yes, I am saying live on 2/3 of your annual income without touching the capital. No, it does not NECESSARILY 'require' a larger amount of savings. As I wrote, it is an equation. You COULD(as you seem to suggest is the only answer) increase capital to allow you to live on 2/3 OR you could decrease living costs to allow you to live on 2/3 of the income from the capital you have. OR you could increase the income your capital provides. OR you could change any combination of the 3 factors involved in the equation. The ASSUMPTION that the only way to live on 2/3 of your income is to have more capital is just an assumption and it ignores the fact that there is an equation that involves 3 factors, ALL of which can be manipulated by you.
> 
> Re the residual estate, in a sense, I do not worry about that at all. Yes, the capital will grow with my method, so what? If I go in my sleep with no forewarning (which would be the best way to go), then my estate will pass as per my instructions in my will. When I'm gone, I really don't care where it goes do I. It will not matter to me at all anymore, I'll be gone! However, I do have a will that provides instructions, simply because it makes sense to have one. But if I had no family, friends, charities, a dog, etc. that I wanted it to go to and it all ended up going to the government, who cares. As long as I never had to worry about having enough income while I was alive, my goal is met.
> ...
> ...


Thanks for the detailed reply LTA. Very interesting and hopefully some folks will find it applicable to their situation.

It is a fairly specific scenario in which you decided to 'retire' early and asap. You turned the challenge around to arrive at a plan to live off your existing savings with a modest 2/3 income level and a retained income 'buffer' to handle longevity. And of course flexibility as to how/where you lived and whether you earned supplemental income.

Kudos!

Yes, the risk of taking the road less travelled. Most of us do stay in herds (like the elephant and many other animals).

ISTM that people discussing 'retiring' are often already on a road that has a wife, young children, house, etc., that limits options and may be too comfortable to want to switch lanes (if indeed they've even thought about it).
Families you read about with the flexibilty to 'take a year off' to travel the world with kids in tow are about the most adventurous drivers I tend to see on that particular road. And even those are rare. 

I guess the takeaway is to remember that it is not for a destination that we are on the road (whichever it might be), but for the journey - so enjoy it! :encouragement:


----------



## Longtimeago (Aug 8, 2018)

OnlyMyOpinion said:


> Thanks for the detailed reply LTA. Very interesting and hopefully some folks will find it applicable to their situation.
> 
> It is a fairly specific scenario in which you decided to 'retire' early and asap. You turned the challenge around to arrive at a plan to live off your existing savings with a modest 2/3 income level and a retained income 'buffer' to handle longevity. And of course flexibility as to how/where you lived and whether you earned supplemental income.
> 
> ...


Funnily enough OnlyMyOpinion, when I first retired and actually did go 'on the road' travelling, I had a journal with me in which I had that poem written on the inside of the cover page. While you often see references to the 'road less travelled', in fact the poem is titled 'The Road Not Taken' which of course is the other road. For me what the poem said was that when you come to a fork in the road, WHICHEVER you choose to take, you cannot know where it will lead or what other forks lie ahead. Both are EQUALLY unknown. The person in the poem did NOT take the 'road less travelled' if you read it carefully, he simply took one of two possible forks, both of which were equally travelled and where they led, equally unknown.

But most people want to believe they do know where the road they choose is leading them. In terms of retirement, they want someone to tell them something like, 'if you do this, everything will work the way you expect it to do.' Certainty, not the unknown. In reality however, there is no certainty whichever way we choose to go. They want to be told that if they follow 'this path', it has no unknown forks up ahead and goes straight to the destination with no surprises along the way. That's simply not true and is also a fair definition of boring. A definition of adventure on the other hand requires something to have risk and the unknown. I'm not in favour of boring.

In the beginning of my retirement, I knew if everything went wrong that could go wrong, I had enough money to live off for around 10 years. It seemed to me that it was inevitable that some things in my life would change as the years went by and it would be how I reacted to those changes that would determine where my road took me in the future. NO decision I made TODAY could tell me what I would face TOMORROW. There is always another fork in the road and another decision we make as to which way to go. The road is never just a straight run to the destination, no matter how much some people would wish it to be.

So you have a choice, you can tell yourself, 'I know where this road will take me' or accept you do not know and embrace the adventure of the unknown with all the risks that entails. Retirement is not something anyone can plan, no matter how much they believe they can. Things will change. Some of those changes will be small and some may be very large indeed. Most people don't want to think that way. They want life to be predictable and to not have to leave their comfort zone.

Comfort zone is a very interesting thing indeed. We all have one and know when we are stepping out of it. Yet a little thought will also tell us that it is only by stepping outside of it that we can grow it. Some never step out willingly and only do so when forced to. Others are a little more adventurous and will step one step outside of it sometimes. I believe those who step out of it, will always experience more in life than those who don't. The reason any member of a herd is in the herd is because of comfort and fear of the unknown.


----------



## l1quidfinance (Mar 17, 2017)

Longtimeago said:


> When I was in my mid 30's I had my 'Eureka moment'. I realized I did not want to work to 65, retire to the golf course and drop dead on the 13th hole at age 67. That led me to ask myself the age old question, 'how much money do I need, to be able to retire?' If I had listened to all the 'experts' who could only see the answer to that question based on commonly accepted beliefs and practices, I probably would not have managed to retire till much later in life than I did. I was a relatively average guy, with a decent job and typical needs and wants like pretty much everyone else.


I dont want to quote it all but thank you for posting that. This is almost exactly where I am at in my life now. Although more late 30's. 

This approach really makes an awful lot of sense to me and I will be applying it to my own numbers.


----------



## Longtimeago (Aug 8, 2018)

l1quidfinance said:


> I dont want to quote it all but thank you for posting that. This is almost exactly where I am at in my life now. Although more late 30's.
> 
> This approach really makes an awful lot of sense to me and I will be applying it to my own numbers.


For some quite extreme thinking on how little someone can retire on l1quidfinance, have a browse on the moneymoustache forum. I am not saying I endorse all the views you will find expressed there but you may find some quite different views than those of the mainstream. One view I do agree with you will find there is a greater emphasis on how much income is NEEDED to live on. Many in that forum tend to focus perhaps too much on that aspect but at least they recognize that it is an equation. If someoene can see how they can live on say 20% less income than they initially calculated, that can result in being able to retire say 10 years earlier. If someone can figure out how to gain another 2% of return from their capital, that is another way to change the timeline.


----------



## peterk (May 16, 2010)

Using real returns as a basis for assumption is fine if the majority of your networth is in your house and stocks. If you have a large conservative portfolio though with lots of cash, bonds and DB pension, assuming a real return is less helpful as it does not highlight the potential risks of a so-called "safe portfolio" very well.

What if we end up in a reasonably high inflation and reasonably low interest rate environment for the next 40 years (as macro indicators might seem to be predicting)? High cash/bond/pension portfolios will get killed.


----------



## agent99 (Sep 11, 2013)

peterk said:


> High cash/bond/pension portfolios will get killed.


Unindexed pensions will, but so long as cash and bonds are invested with relatively short term maturity, real returns should remain relatively stable. Back when we did experience very high inflation, even GICs yielded in the mid teens for a while.


----------



## agent99 (Sep 11, 2013)

peterk said:


> High cash/bond/pension portfolios will get killed.


Unindexed pensions will, but so long as cash and bonds are invested with relatively short term maturity, real returns should remain relatively stable. Back when we did experience very high inflation, even GICs yielded in the mid teens for a while.


----------



## Longtimeago (Aug 8, 2018)

Unindexed pensions are to me, to be avoided like the plague. Even a defined contribution pension where the company matches your contribution and you then depend on a third party to invest the pension funds is to be avoided like the plague to me. I prefer to make my own investment decisions, not rely on someone else. For that reason, I spent several years trying to get out of a DC plan with the last company I worked with. The bean counters kept saying, 'it's a mandatory plan and even if you could opt out, you would lose the company's matching contribution, why would you want to do that?' They had blinkers on.

Finally, I was able to get out by going from being an 'employee' to a self-employed consultant. As such, I billed the company for my time at a rate equal to what they had been paying me INCLUDING all benefits they provided. So I had my $1 and their matching $1 to invest for myself as I saw fit.

Pensions of any kind are really no more than a kind of forced savings. That works for someone who would not otherwise do so themselves of course and that is in fact a large portion of people in general. But for someone who is disciplined enough to save and invest their own money, pensions are never the best answer.


----------



## gardner (Feb 13, 2014)

Longtimeago said:


> Unindexed pensions are to me, to be avoided like the plague.


Might as well say that failing to inherit extravagant family wealth should be avoided like the plague.

The plain fact is that we have to take what's on offer, if that is anything at all. I had a DC arrangement for many years and I had some level of control when I was employed, and finally full self-directed control now that I'm retired. I don't consider this to be a bad deal. I would never have considered changing jobs just to get a more ideal pension arrangement.


----------



## lonewolf :) (Sep 13, 2016)

Longtimeago said:


> Unindexed pensions are to me, to be avoided like the plague. Even a defined contribution pension where the company matches your contribution and you then depend on a third party to invest the pension funds is to be avoided like the plague to me. I prefer to make my own investment decisions, not rely on someone else. For that reason, I spent several years trying to get out of a DC plan with the last company I worked with. The bean counters kept saying, 'it's a mandatory plan and even if you could opt out, you would lose the company's matching contribution, why would you want to do that?' They had blinkers on.
> 
> Finally, I was able to get out by going from being an 'employee' to a self-employed consultant. As such, I billed the company for my time at a rate equal to what they had been paying me INCLUDING all benefits they provided. So I had my $1 and their matching $1 to invest for myself as I saw fit.
> 
> Pensions of any kind are really no more than a kind of forced savings. That works for someone who would not otherwise do so themselves of course and that is in fact a large portion of people in general. But for someone who is disciplined enough to save and invest their own money, pensions are never the best answer.


There are times that pensions are good & times they are bad.


----------



## Longtimeago (Aug 8, 2018)

As I wrote, employer pension plans are a good way to force those who would not do so themselves, to save. It's better than nothing. But taking the same money and controlling it yourself will always be better if you invest it wisely. That last word 'wisely' is the rub.

So yes, most people would not change jobs over it and sometimes they are good for some people. My comments were simply saying, IF given a choice, I would want to make my own decisions on investments. There is no need to defend your having worked for a company with a mandatory pension plan. There certainly is no way to defend them as being the best way to invest your money.


----------



## ian (Jun 18, 2016)

I was very happy to have a DB pension. It funded by the company, no employee contributions. There were provisions, however, whereby we could make contributions in order to purchase various enhancements. Over the course of my employment the company made some significant additional payments in order to bring the pension up to 100 percent on both an ongoing and a windup basis. The DB was not mandatory.

In 2000/2001 were given the option to move the then current commuted balance to a DC plan. Every employee I know who moved over regretted that decision in the following years...up to an including 2011/12 when I retired. They were primarily very savy IT folks who got a very quick and painful education in IT stocks and in sequence of returns.


----------



## james4beach (Nov 15, 2012)

ian said:


> In 2000/2001 were given the option to move the then current commuted balance to a DC plan. Every employee I know who moved over regretted that decision in the following years...up to an including 2011/12 when I retired. They were primarily very savy IT folks who got a very quick and painful education in IT stocks and in sequence of returns.


Volatility is more dangerous than most people think. Even though I've been investing for a long time, I only recently came to appreciate sequence of return risk and sensitivity of outcomes to timing (esp with stocks)


----------



## OnlyMyOpinion (Sep 1, 2013)

Longtimeago said:


> ... Even a defined contribution pension where the company matches your contribution and you then depend on a third party to invest the pension funds is to be avoided like the plague to me. I prefer to make my own investment decisions, not rely on someone else. For that reason, I spent several years trying to get out of a DC plan with the last company I worked with. The bean counters kept saying, 'it's a mandatory plan and even if you could opt out, you would lose the company's matching contribution, why would you want to do that?' They had blinkers on.
> Finally, I was able to get out by going from being an 'employee' to a self-employed consultant. As such, I billed the company for my time at a rate equal to what they had been paying me INCLUDING all benefits they provided. So I had my $1 and their matching $1 to invest for myself as I saw fit.
> Pensions of any kind are really no more than a kind of forced savings. That works for someone who would not otherwise do so themselves of course and that is in fact a large portion of people in general. But for someone who is disciplined enough to save and invest their own money, pensions are never the best answer.


Sorry LTA, this makes no sense to me unless this particular company's plan was very poor. 
First, company matching is beneficial (3%, even 5% is common). 
Second, your DC is only a portion of your investments (do what you want with the rest). 
3rd, you can usually choose your investments and find something reasonable. 
4th, you can eventually move your DC to a LIRA when you leave the company and invest as you like. 
5th, you need something to live on later in life, you could do worse (and arguably not better on your own) than a company-contributed DC/LIRA. 

Reminds me of a guy I knew who insisted he didn't want his pay direct-deposited. He insisted he wanted a cheque cut each payday that he could deposit. The company 'retired' him pretty quickly.


----------



## Longtimeago (Aug 8, 2018)

ian said:


> I was very happy to have a DB pension. It funded by the company, no employee contributions. There were provisions, however, whereby we could make contributions in order to purchase various enhancements. Over the course of my employment the company made some significant additional payments in order to bring the pension up to 100 percent on both an ongoing and a windup basis. The DB was not mandatory.
> 
> In 2000/2001 were given the option to move the then current commuted balance to a DC plan. Every employee I know who moved over regretted that decision in the following years...up to an including 2011/12 when I retired. They were primarily very savy IT folks who got a very quick and painful education in IT stocks and in sequence of returns.


How do you come to the conclusion that the employee has 'no' contributions? Here's how it works. An employer pays you a salary and on top of that provides you with some benefits. Whatever those benefits are including a 'non-contribution pension' are in fact PART of your total remumeration. No employer pays for anything on your behalf that you have not earned.

So for example, if someone is paid a salary of $100k and is also provided with benefits that total a cost to the employer of $50K, the employee is therefore being valued by the company as worth spending $150K to have work with them. Or does anyone think they pay those benefits out of the kindness of their hearts?

When I went to being a self-employed consultant and still working with the same company, I did not say to them, 'oh just pay me the $100K per year you were paying me in salary, I'll pay for my own benefits.' I said and they AGREED, that I was costing them $150K per year and they were willing to still pay me $150k per year. The only difference was that I would decide what I would do with the ENTIRE $150K.

Regarding those who opted to move to a DC plan, you are simply making my point for me. When it is a third party the money is being handed over to control and even when there is some input allowed from the employee, that does not mean that 'wise' decisions will be made on how to invest the money. Those people probably would have been better off with a DB plan as a means of forced savings since neither they nor the third party handling the DC plan were able to make wise decisions on how to invest the money. At least with a DB plan, the employee doesn't have to care if the third party gets it wrong, the employee is promised a Defined Benefit. DC plans by definition require that sound decisions are made in order to outperform a DB plan. That it didn't work out that way in your example ian, does not mean that DB is better than DC. DC is better when it WORKS but it comes with risk obviously.

Finally, in all of this are assumptions as to how the money is invested. I have never invested in stocks since I got caught in the Black Monday stock market crash of 1987. If those you refer to had the option to get out of both the DB and DC contribution plans and put their money into say a rental property, they may well have ended up sitting on a nice nest egg today. Not all investments are about STOCKS but some people here seem to make that assumption continually.

When I got out of the pension plan I was stuck in, I put the money into commercial real estate, I did not learn any 'quick and painful' lessons about IT stock and sequence of returns. What I learned quickly was that I could make double digits returns with very low risk, while pension plans investing in stocks were far more 'volatile' as james4beach says. Of course that isn't the way james4beach was referring to it, but it is another viewpoint on 'volatility' isn't it. There is no need to risk that volatility at all.

Not all investing has to be done in stocks and bonds and not all real estate investing has to be done in residential properties. I chose commercial real estate to invest in once I got control of my own EARNED money. I chose CRE because I had an 'in' that allowed me as a small investor to piggyback onto very large properties. I could just as easily have decided to invest in say commercial and industrial equipment rentals which also have a strong historical record of returns. There are all kinds of things someone can invest in and make money. But one thing is for sure, if someone else is making the decisions on how to invest YOUR money, you are at their mercy if they make the wrong decisions. I'd rather control my own money, make my own decisions, decide which risks to take and accept responsibility for my own mistakes OR wise decisions.


----------



## Longtimeago (Aug 8, 2018)

OnlyMyOpinion said:


> Sorry LTA, this makes no sense to me unless this particular company's plan was very poor.
> First, company matching is beneficial (3%, even 5% is common).
> Second, your DC is only a portion of your investments (do what you want with the rest).
> 3rd, you can usually choose your investments and find something reasonable.
> ...


First, company matching is just a joke given that in fact it is YOUR money they are using to 'match'. As in my response above, benefits including 'pension contribution matching' are simply a part of your total remuneration.
Second, yes a DC is only a portion of your investments perhaps. So what? Would you rather control ALL of your investments or only a 'portion of your investments'. I prefer all.
Third, I can always chose, not just 'usually' choose where ALL of my money is invested.
Fourth, I don't need to move a DC to a LIRA to be able to 'invest as I like'.
Fifth, I could do worse or I could (arguably) do better. I prefer to bet on me, not some third party. Suggesting you could do worse doesn't mean you couldn't do better. There is no reason to assume worse rather than better unless of course someone has no confidence in their own ability to invest wisely.

Reminds me of a guy who insisted his glass was half empty.


----------



## gardner (Feb 13, 2014)

Longtimeago said:


> it is YOUR money they are using to 'match'.


Your assertion is trivially true in that after they give it to you, it is yours. The company I worked for for 20 years had an employer match setup for a DC plan that was not mandatory. I could have (and in fact did, for the initial 8 months) opt out and not receive the match amount. In this instance, the match amount was not mine, although it *could have been*. In their plan the amount I put in could actually be transferred to my own RRSP, while the company match part was locked in as long as I was employed.

Arguably the employer match part was mine all along, but if I'd opted out it would not have been there and the company would have kept it.



> benefits including 'pension contribution matching' are simply a part of your total remuneration.


Yeah. Along with ESPP, stock options, disability and life coverage, extended medical -- all that stuff. But most of THESE things are not available (or are super expensive) to the average guy on the street and having the employer provide them allows you a greater benefit that if they gave you the cost amount and let you fend for yourself.


----------



## cainvest (May 1, 2013)

Longtimeago said:


> First, company matching is just a joke given that in fact it is YOUR money they are using to 'match'. As in my response above, benefits including 'pension contribution matching' are simply a part of your total remuneration.


Not sure why this would be a joke ... it's the same as getting a raise but the money is only for the savings plan. How would it be better if you didn't take this offer?


----------



## OnlyMyOpinion (Sep 1, 2013)

I don't think LTA is merely extolling the virtues of being LTA. 
I think he is telling everyone to reject your company pension (whether DB or DC), and if you can't, then quit and become self-employed so you control your own destiny like him. Anything less would be stupid on your part.


----------



## Longtimeago (Aug 8, 2018)

I realize not everyone has the option of rejecting a company benefit and taking the money instead to invest themselves. Where there is no choice, then obviously something is better than nothing. 

What I am saying is don't think your employer is giving you something you didn't earn. Every benefit your employer provides is earned by you. If you start to think of it as your money, you may find yourself starting to ask some questions as to what is being done with it. Most people with a DB plan for example probably just accept whatever number they see on their annual Pension Plan statement in regards to the monthly amount they could expect to receive, without ever asking what does that number represent in terms of ROI? If you knew for example that it represents a 3-4% ROI and you know the market overall is doing better than that, then you might want to ask why the pension fund manager is not performing as well as the market average.
https://www.benefitscanada.com/pens...-returns-flat-in-third-quarter-surveys-120975

This is YOUR money that is being invested for your retirement and if it isn't doing as well as it could be, ignoring it is indeed 'stupid on your part' OnlyMyOpinion. Talk to the 18,000 Sears Canada retirees about their pension plan and ask them if they now see it as stupid to have not asked more questions about their pension plan and just how 'guaranteed' their defined benefit was. Ask them if perhaps they should have lobbied to control their OWN money.
https://www.google.com/search?q=sea...ome..69i57.11568j1j8&sourceid=chrome&ie=UTF-8


----------



## ian (Jun 18, 2016)

Your point is a good one. My experience is that many employees simply do not care. As a manager I used to encourage employees in our DB plan to subscribe to the extra matching plan to the DB. They could put up to 3K in the plan and have it matched by the employer. Few did. Even fewer ever did an audit. I did, and found that for several years after a merger the match was not deposited by the firm. Took me all of 15 minutes to find an $8K error. And a substantial error with my final retirement entitlement.

Worse still, I saw the stats on our DC plan. I was surprised at the stats of how many ee's did not sign up for the plan and the matching 5 percent from the firm. The second surprise was the incredibly low percentage of DC enrolled ees who NEVER went in to their on line accounts after initial enrollment/choices of investments to change allocations, investment vehicles, or simply look at the numbers. It was, as I recall, about 16 percent of participants. This held true over a five year period. 

We held regular employee retirement seminars. Not well attended.


----------



## ian (Jun 18, 2016)

james...looking in the rear view mirror served to teach us the lesson of sequence of returns and inflation risk in spades. We retired early about seven years ago. Our net worth today is considerably larger that it was when we retired. Most of it is attributable to high returns over those years. Extremely low inflation also helped. I would not want to be on the opposite end of either of those. The gains we have realized have placed us in a much better position to weather subsequent downturns. It also served to make us more aware of the need to allocate as we age in order to reduce risk. I would not want to retire entering an elongated period of depressed or negative market returns or high inflation.


----------



## AltaRed (Jun 8, 2009)

DB plans by design are meant to be 'independent' of market from an employee's perspective. An employee is simply 'entitled' to a pension based on highest salary averaged over the best 1-5 year period x years of service x percentage multiplier. It is up to the employer to make sure the plan is fully funded, which by law has to be within certain boundaries. But of course, that is the flaw in the system when an employer is shaky and is behind in funding the pension plan. Some are contributory in which employees pay a percentage with employers making up the rest. And of course, employers factor that all in as part of the overall "labour burden" just like they do sick leave policy, extended health benefits, etc.

There are good books on DB pensions such as the Pension Puzzle, so I object to LTA's characterization of them to a point. They are what they are, and other than the public service in which the taxpayer always backstops them, DB plans are vanishing fairly quickly, and long term viability obviously depends on the ongoing health of the company. In the private sector, there are fewer and fewer opportunities for new employees to join an existing DB plan and that means DB plans will wind down as existing participants die off. Probably a good thing given the collapse of a number of DB pension plans. Nothing more to be said about it.

Disclosure: I was fortunate to participate in a non-contributory DB pension plan for over 25 years with an AAA/AA employer. There was no net deduction off my pay though I was fully aware that the employer's funding of the plan was all part of the overall compensation package. That was fine with me as long as actual wages were competitive within the iindustry. I have no idea now that I have been retired 13 years whether the company continues to offer DB pension plan to new employees or whether it is a DC plan only to new employees or a contribution to a group RRSP. I also have little doubt that my former employer will be around long enough to fund the pension plan until I die. The fact that my ex now has 50% of the plan is not relevant.


----------



## cainvest (May 1, 2013)

AltaRed said:


> They are what they are, and other than the public service in which the taxpayer always backstops them, DB plans are vanishing fairly quickly, and long term viability obviously depends on the ongoing health of the company.


A friend of mine who works for a very large well known company just had their DB plan stopped last year and are now are part of a DC plan. Definitely seems to be a growing trend for companies to move away from DB plans.


----------



## AltaRed (Jun 8, 2009)

Indeed. DB plans were a significant incentive years ago when: a) employees were not nearly as mobile as they are today, b) employees didn't have many easily attainable investing options other than full service commission accounts and no internet to educate themselves and DIY, c) there was much less M&A activity causing havoc with merged plans or parallel employees on different plans, etc. The DB pension plan administration burden an employer needs to manage just is no longer worth it.


----------



## ian (Jun 18, 2016)

According to the annual Mercer study DB plans in Canada, on average, have a reasonable level of funding on both a windup and an on going basis. Sure, we hear about some of the big, bad ones like Sears or Nortel. Or a few of the multi employer plans. But on balance they are in very good shape. Not unusual to actually find some that are over funded but only to the extent that legislation permits. 

DB plans are becoming extinct. On the other hand, employees are no longer spending entire careers with one employer or indeed in one industry. I can recall reading that 6 years with one employer has, or will shortly become, the norm. Not everyone wants a DB plan. The commuted value is not particularly good for younger employees who leave the plan after 5-10 years of service. The real values kick in in the last five or ten years of elongated tenure.


----------



## AltaRed (Jun 8, 2009)

This article predicts the end of the DB plan in the private sector by about 2026, at least in terms of active employees. 

https://www.theglobeandmail.com/inv...ined-benefit-pension-plans-is-almost-upon-us/ 

There will still be many annuitants still around collecting, perhaps another parallel trend line with about a 20-30 year gap, assuming the average annuitant (and/or surviving spouse) has 20-30 years of life post-retirement.

Now the question is how the hell can the taxpayer revolt against supporting the continuation of public sector DB pension plans?


----------



## cainvest (May 1, 2013)

AltaRed said:


> The DB pension plan administration burden an employer needs to manage just is no longer worth it.


It surprises me that DB plans are still around after the 2000-2010 decade. I would have figured most companies would cut corners and DB plans would be near the top of the list for them.


----------



## ian (Jun 18, 2016)

DB plans are still around though many are closed to new employees and have been for quite some time. Some are active but only with certain current employees who were grandfathered in because of age and service.

Many DB plan holders are moving the risk over to financial service providers-insurance companies and annuity providers. They want to de-risk. My employer made some serious additional contributions to our grandfathered plan between 2000 and 2010. Plus a big push in 2000 to move as many people as possible over from DB to DC. Once someone retired they either took the commuted value or a pension in the form of a bank annuity. Last I heard they were looking to de-risk the remaining balance in the plan by moving the obligation over to an insurer.

In the distant past that same company sometimes did not even have to make any DB contributions. Interest rates were high, returns were will over the threshold. The plan's investment growth met the funding requirement. Firms were happy to provide DB's in those days.


----------



## AltaRed (Jun 8, 2009)

With some googling, one can still find companies that provide DB pensions to even new employees. Don't know how long that will continue.

Added: I don't think that would be a selling point to most new employees though... given the mobility of workers these days


----------



## Longtimeago (Aug 8, 2018)

AltaRed said:


> Disclosure: I was fortunate to participate in a non-contributory DB pension plan for over 25 years with an AAA/AA employer. There was no net deduction off my pay though I was fully aware that the employer's funding of the plan was all part of the overall compensation package. That was fine with me as long as actual wages were competitive within the iindustry. I have no idea now that I have been retired 13 years whether the company continues to offer DB pension plan to new employees or whether it is a DC plan only to new employees or a contribution to a group RRSP. I also have little doubt that my former employer will be around long enough to fund the pension plan until I die. The fact that my ex now has 50% of the plan is not relevant.


AltaRed, first of all, I cannot imagine working for the same company for 25 years. That more than covers my entire working career. It would be interesting to know how you feel about your increasingly reduced pension after 13 years of inflation. What $100 bought you in 2006 (if I have calculated your 13 years correctly) will now cost you $124.54 according to this inflation calculator. https://www.bankofcanada.ca/rates/related/inflation-calculator/

A pension whose VALUE (meaning buying power) goes down every year is as I originally said, to be avoided like the plague in my opinion. But of course that assumes you have an alternative you can turn to. You did not obviously, so what you got is better than nothing. But I still can't help believing that if the company had given you the money they put into the plan, in cash, you could have done better investing it in something else. Contrast your pension with an investment that even just kept up with inflation and would now be paying you $124 instead of $100 today. 

When I began on my path to retirement at age 35, I knew that any company pension plan would not be my best bet for when I got to an age to collect it. Retiring at 43, I would still have had perhaps 22 years to wait for it. From that perspective, you see things differently.


----------



## AltaRed (Jun 8, 2009)

There was no option other than to participate in the non-contibutory, non-indexed 2% DB plan but that is neither here nor there. At retirement, I could have taken upwards to about half of it in a lump sum into a LIRA (I think). However, when an FA ran the numbers for me with a bunch of 'what if' assumptions, I recognized I already had enough exposure in DIY investable assets and calculated that the DB plan annuity would become mostly the pseudo-FI component of the portfolio. Hard to beat that annuity for fixed income equivalent.

Very simple decision for spouse (at the time) and self that has worked out well and allows us to each have 87% of investable assets in equities. I sleep well at night and so does my now ex-spouse with her 50% share of that pension. Today, for both my ex and self, one third of annual income is annuity and two thirds is investment income and growing relative to the annuity.

Added: FWIW, for the most part, I had an excellent second career with my 25 year employer. No regrets whatsoever. The last year or so dragged but I had made a multi-year ex-pat commitment to complete before pulling the plug before retiring at 57. Each to their own.


----------



## AltaRed (Jun 8, 2009)

For the OP: Further to post #43, I knew full well in my modeling at retirement time that my fixed DB pension would be worth maybe only 50-60% of its initial purchasing power value after 25 years of inflation post-retirement. Not a concern given my investable equity assets would spin off increasing amounts of income over the years, as well as gain in capital appreciation. 

IOW, my equities would give me at least a 5% long term nominal return (~3% real). That was more than good enough to stay ahead of inflation. If inflation was worse than the 2-3% assumption, equities would more or less keep pace.....if for no other reason than an expectation that I would own at least high single digit ROE equities. High single digit ROE/ROC equities will virtually guarantee that. This stuff does not have to be rocket science at a macro level.


----------



## RBull (Jan 20, 2013)

AltaRed said:


> There was no option other than to participate in the non-contibutory, non-indexed 2% DB plan but that is neither here nor there. At retirement, I could have taken upwards to about half of it in a lump sum into a LIRA (I think). However, when an FA ran the numbers for me with a bunch of 'what if' assumptions, I recognized I already had enough exposure in DIY investable assets and calculated that the DB plan annuity would become mostly the pseudo-FI component of the portfolio. *Hard to beat that annuity for fixed income equivalent.*
> 
> Very simple decision for spouse (at the time) and self that has worked out well and allows us to each have 87% of investable assets in equities. I sleep well at night and so does my now ex-spouse with her 50% share of that pension. Today, for both my ex and self, one third of annual income is annuity and two thirds is investment income and growing relative to the annuity.
> 
> Added: FWIW, for the most part, I had an excellent second career with my 25 year employer. No regrets whatsoever. The last year or so dragged but I had made a multi-year ex-pat commitment to complete before pulling the plug before retiring at 57. Each to their own.


I agree. My wife has a decent govt. pension with indexing possibility but the plan health has yet to meet funding for indexing. Regardless this provides significant peace of mind and we also have a majority of personal assets in equity investments that allow us to offset inflation and more. For us having this solid pension income (annuity) plus our own investable assets is the best combination. Sometime in the next 5-10 yrs CPP/OAS will provide another indexed shot in the arm.


----------



## Eclectic12 (Oct 20, 2010)

ian said:


> Your point is a good one. My experience is that many employees simply do not care ...
> 
> Worse still, I saw the stats on our DC plan. I was surprised at the stats of how many ee's did not sign up for the plan and the matching 5 percent from the firm. The second surprise was the incredibly low percentage of DC enrolled ees who NEVER went in to their on line accounts ...
> 
> We held regular employee retirement seminars. Not well attended.


None of which is any different than two decades ago, the intervening years or those I talk to today. Just like people ignore financial topics, they avoid asking questions about retirement ... to their detriment.

I am sure I have mentioned it before but IMO it bears repeating that during the presentation to compare the old DB pension to the new "improved" DC pension, the person sitting beside me gasped then commented "I won't get 100% of my salary in retirement from the DB pension???t!!!#@#@#$". It seems a basic thing to inquire about and for the companies I have worked for, the pension booklet spelled it out.


Cheers


----------



## Eclectic12 (Oct 20, 2010)

Longtimeago said:


> ... A pension whose VALUE (meaning buying power) goes down every year is as I originally said, to be avoided like the plague in my opinion. But of course that assumes you have an alternative you can turn to ...


It also assumes one will do something useful with the pension funds, regardless of the form it takes. Many I know are essentially being bailed out by their forced pension savings as understanding the pension, retirement or saving for it are not on their rader.




Longtimeago said:


> ... You did not obviously, so what you got is better than nothing. But I still can't help believing that if the company had given you the money they put into the plan, in cash, you could have done better investing it in something else. Contrast your pension with an investment that even just kept up with inflation and would now be paying you $124 instead of $100 today ...


For you, AltaRed, me and others on CMF that have bothered to get a decent financial literacy as well as plan ahead, probably.

Most don't do any of these things and in some cases, have done well at destroying the capital they have invested. In comparison, going with the recommended model portfolio in the pension despite higher than ETF MERs has grown nicely. 




Longtimeago said:


> ... When I began on my path to retirement at age 35, I knew that any company pension plan would not be my best bet for when I got to an age to collect it. Retiring at 43, I would still have had perhaps 22 years to wait for it ...


Does this mean you actively sought jobs/compensation that avoided a pension plan and skipped jobs that had it?
Or by chance, did your industry simply not provide them?

For some others - they'd have to change their industry to avoid it. Or they could go the halfway route of making sure to quit then transfer the pension proceeds to a LIRA (slightly better access at age 55) before the proceeds exceeded what could be rolled over tax free plus whatever one's RRSP could accommodate.


Cheers


----------



## ian (Jun 18, 2016)

I consider myself very fortunate to have worked for the same company for 25 years-through two mergers/acquisitions, multiple management change/structures, and so many downsizes that I cannot remember the number. I was able to change careers and locations several times. Just about every day was a challenge of some sort and the industry was changing quickly. Not to mention the non contributory DB pension that tripled in value during my last 10 years. I made a very conscious decision to take my supplementary pension in taxable cash and my DB pension as an annuity. It was part of our financial plan. Plus, had I taken the commuted value about thirty five percent of it would have been taxed immediately.

Annuities have a place in retirement planning. Would I want to depend on my DB over my retirement given that it is not indexed. No, but then again it only forms a part of may retirement income.


----------



## AltaRed (Jun 8, 2009)

ian said:


> I consider myself very fortunate to have worked for the same company for 25 years-through two mergers/acquisitions, multiple management change/structures, and so many downsizes that I cannot remember the number. I was able to change careers and locations several times. Just about every day was a challenge of some sort and the industry was changing quickly. Not to mention the non contributory DB pension that tripled in value during my last 10 years. I made a very conscious decision to take my supplementary pension in taxable cash and my DB pension as an annuity. It was part of our financial plan. Plus, had I taken the commuted value about thirty five percent of it would have been taxed immediately.
> 
> Annuities have a place in retirement planning. Would I want to depend on my DB over my retirement given that it is not indexed. No, but then again it only forms a part of may retirement income.


Scary but seems like my experience almost exactly. The only difference from you is I took my supplementary pension as an annuity and that part shows as Line 109 income rather than as a registered pension plan.


----------



## sags (May 15, 2010)

DB pensions declined along with union memberships. The savings to business is a trade off for the future retirement crisis.

Business avoided the cost of employee pension plans. They won't be able to avoid higher taxes to support increasing social programs for the retired.


----------



## ian (Jun 18, 2016)

Eliminating a DB plan is less costly and eliminates risk for the employer given the current investment climate.

IF I were a new hire, entering most vocations, I would never want a DB plan. I would prefer a portable DC plan. There are a few exceptions. But I can assure you that in all likelihood a 35 year old with five or six years of tenure who leaves his/her employer with have a DC that has considerably more value in it than would be the value in the in DB plan. There are lots of good things about DB plans however they are very much geared to the longer term employee. It is in those final years that the DB plan really grows in value to the employee. There are some very good DC plans out there. I recently read than an employee of BASF Canada can end up with as much as 15 percent ( ee and er contributions) year in his/her DC plan. Very rich. I would think that a well funded DC plan, above the usual five percent match, say seven percent or more, would be a much bigger draw to a perspective employee than a DB plan. Having said that I am very thankful for my DB plan.....but I am an oldie, a fossil who spent 25 years with one employer.

About the only people I saw who were interested or concerned about retirement were those is their late forties and fifties. I believe that the real problem is individual focus. My observation is that people who live within or below their means, who do not contract consumer debt, etc, are typically those who prepare at an earlier stage from retirement. No matter the income level. For many others they wake too late going into retirement or forced retirement with mortgages, consumer debt, outstanding HELOC balances and wonder how it happened. I have some close relatives and some former colleagues who woke up to exactly that. In many instances they have only themselves to blame. Even when it happened, they still do not 'get it' with little or no adjustment to their spending habits. They are of course, keeping up with their friends and neighbours because this seems more important to them than the reality of their numbers.

I have a SIL/BIL. One retired, the other about to. They operate two cars, have a three bedroom home for two of them, consumer debt, and a mortgage. No pension, no savings to speak of. That did not stop them for getting one of those reverse mortages on their 15 year old home to pay for a complete reno on their kitchen and pay off some consumer debt. New iphones and a full meal deal package from Bell for both of them. Go figure. And they think that we are 'lucky'.


----------



## AltaRed (Jun 8, 2009)

sags said:


> DB pensions declined along with union memberships. The savings to business is a trade off for the future retirement crisis.
> 
> Business avoided the cost of employee pension plans. They won't be able to avoid higher taxes to support increasing social programs for the retired.


As Ian articulated so well, people are their own worst enemies. It is their responsibility to live within their means and put money away for retirement. Not that of business which has no obligation to any employee beyond paying a competitive compensation package. That is what the RRSP is for (up to 18% of earned income per year contribution room), and now in most cases, a DC plan substituting for the old DB plans. Why are people not doing that?

As for a future retirement crisis, perhaps there will be many more GIS recipients going forward and that will be a social cost to taxpayers. Business is already paying their employer's share for the decline in pension plans by the higher YMPEs now being foisted on them by the enhanced CPP. I initially objected violently to business having to carry a share of a burden that is not their responsibility, but have resigned myself to recognizing it is probably in my children's self-interest to not have to bear a disproportionate burden paying increased social welfare to irresponsible retirees who never made use of their RRSP and/or TFSA room.


----------



## Longtimeago (Aug 8, 2018)

Eclectic12 said:


> Does this mean you actively sought jobs/compensation that avoided a pension plan and skipped jobs that had it?
> Or by chance, did your industry simply not provide them?


As I wrote in an earlier response, I actively sought to get out of the mandatory DB plan that my last employer had. I got out by becoming a self-employed consultant instead of an employee. 

Regarding some other comments by various posters, I realize not everyone can make an alternative happen for them and not everyone even thinks to consider their retirement when they are 35 but I also realize they are the same people who are not likely to be reading this thread. So my comments and presumably everyone else's, are directed at those who are reading and who are considering how they will manage their retirement financially when they get there, not the vast majority of employees in the world.

For those people, it doesn't hurt to hear of all and any possible alternatives. There is no need for anyone to 'defend' why they did what they did with their DB plan when they could not find an alternative and I do read some defensiveness in some comments. I did not 'have to change industry' to avoid it Eclectic12. A DB plan was an industry and my employer's standard. I simply changed the game for me. 

I don't know why people make assumptions like, 'would have to change industry' etc. when in fact , it is just an assumption. The company I was working with at the time, had never had a self-employed consultant rather than an employee before but I presented my case to them in a way that showed a win/win for them and for me and they agreed to it. Sometimes people accept, 'this is the way it is' a bit too quickly in my opinion. They never ask why is it this way and why does it have to stay this way?

As a salesperson Eclectic12, I habitually asked 'why' and looked to 'change the game' to one what would work for both parties, that's what professional salespeople do. When the VP of Engineering for that same company once told me, 'we can't do that function', I asked 'why can't we' and then came up with how we could. That got us the largest single order in the history of that company. I was just one PERSON in a company of around 1000 PEOPLE but I was not one who would take 'no' for an answer.

So please don't think 'would have to change industry', think, 'would have to change the norm for one person in one company in a given industry.' My comments are simply meant to tell those who are looking towards their retirement, that they do NOT have to accept 'what is', they can look for an alternative if they choose to do so. I did and I found a way. If someone else chooses to stay with the existing norm, that's up to them but it is a choice, not a given. 

Long ago I came across a saying about change that really resonated with me. 'You can be the architect of change or the victim of change. But one thing is sure, change will occur.' 

Most people go through life letting themselves be the victim of change, things just happen and they 'go with the flow'. That is in fact a choice they make whether consciously or not. The alternative is to be the one who makes things change. I understand that someone could look at this 'DB pensions are what is standard' and just accept that. But for me, it was just as easy to say, 'I don't accept that' as it is for someone to say they do accept it. It was not a big deal for me to find an alternative, it was as common as breathing to me. I didn't have to change an entire industry standard, just the standard for me. I hope what I am trying to say there is understandable. 

Someone may read this thread and say, 'huh, I'm a victim. Well that's gonna change as of today and I'm gonna find the way to change it.'

https://www.processexcellencenetwor...nding-to-change-will-you-be-a-victim-or-archi


----------



## Longtimeago (Aug 8, 2018)

ian said:


> Eliminating a DB plan is less costly and eliminates risk for the employer given the current investment climate.
> 
> IF I were a new hire, entering most vocations, I would never want a DB plan. I would prefer a portable DC plan. There are a few exceptions. But I can assure you that in all likelihood a 35 year old with five or six years of tenure who leaves his/her employer with have a DC that has considerably more value in it than would be the value in the in DB plan. There are lots of good things about DB plans however they are very much geared to the longer term employee. It is in those final years that the DB plan really grows in value to the employee. There are some very good DC plans out there. I recently read than an employee of BASF Canada can end up with as much as 15 percent ( ee and er contributions) year in his/her DC plan. Very rich. I would think that a well funded DC plan, above the usual five percent match, say seven percent or more, would be a much bigger draw to a perspective employee than a DB plan. Having said that I am very thankful for my DB plan.....but I am an oldie, a fossil who spent 25 years with one employer.
> 
> ...


All so true AltaRed, they never understand they are their own worst enemies. As I retired relatively early, I have had my fair share over the years since of people asking me questions like, 'how did you do it, what's the secret' etc. My answer has always been the same. Spend less than you earn and invest the difference wisely, it's that simple.

But while it is simple to explain, it is not simple for some people to do. Never mind the 'invest wisely' part, they can't even get past the spend less than you earn part.


----------



## latebuyer (Nov 15, 2015)

Just a comment that some db plans are inflation adjusted so i'm not sure if the value of a db plan goes down over time. In terms of longtime ago's comments that people should take the commuted value, I know in the case of my plan its 50% taxed. I know in my plan people think there is some sort of fairy godmother which is going to help them avoid the tax. There isn't. As far as I know the only loop hole was that people would create an IPP and be able to avoid the tax. That loophole was closed in this budget. It is unlikely people with DB plans are going to have much rrsp room because your room is reduced by your pension. In any event, if you know of another loophole let me know. I think people are dreaming. Revenue Canada wants their money.


----------



## ian (Jun 18, 2016)

I was in a DB. Every year I had $3033 in RRSP room, notwithstanding that my DB plan exceeded the CRA max. levels.

There was also a second opportunity. We could shelter up to about another $3K in a fund that complemented our DB. This fund was matched 50 percent by our employer. It was used to enhance our DB at retirement and could only be used for certain enhancements.....spousal, COLs, top up early retirement, etc. I think that this was a fairly new feature in the late 90's or early 2000's when my employer introduced it at the time our DB was overhauled. Several people in the HR/DB business have commented to me that this is/was indeed allowed but few employers DB plans followed up to take advantage of it. So, it total I was able to shelter $6K even though I participated in a DB.


----------



## latebuyer (Nov 15, 2015)

I use up my RRSP room. That sounds useful but I very much doubt many plans have them. To be honest, I never understood why people were gaga over commuted values. If you don't have to worry about your investments and could fully support yourself with a db plan, why wouldn't you? Its the teachers that have it made. I would love to have a "salary" in retirement. As it is right now I only have about $1000 per month, though may get more.


----------



## ian (Jun 18, 2016)

Many people want a teacher's pension. My sister had one prior to retirement. But between her DB and CPP (prior to increase in CPP rates) she had 11.8 percent deducted off the top of her cheque for pensions.

Commuted values are important. If you happen to have a health issue that will probably reduce your lifespan taking the commuted value may be a smart option. Others already have a well defined retirement financial plan and taking the commuted value may be a better fit for those folks, given the structure of their financial plans.


----------



## AltaRed (Jun 8, 2009)

latebuyer said:


> Just a comment that some db plans are inflation adjusted so i'm not sure if the value of a db plan goes down over time.


In the private sector, the vast majority of DB plans that might contain any indexing, are only partially indexed. Even some (maybe the majority?) public sector ones are that way. My spouse has a LAPP pension having been with Alberta Health Services and her pension is only 60% indexed to the Alberta CPI index. That makes some intuitive sense to cater to the remote possibility of rampant runaway inflation and the pension plan's investments not being able to keep up with 100% of that runaway inflation.


----------



## Eclectic12 (Oct 20, 2010)

sags said:


> DB pensions declined along with union memberships. The savings to business is a trade off for the future retirement crisis ...


Interestingly, there was an article saying that Saskatchewan had yet to save money from their switch out of a DB pension a long time ago.

I will have to find it again.


Cheers


----------



## Eclectic12 (Oct 20, 2010)

Longtimeago said:


> As I wrote in an earlier response, I actively sought to get out of the mandatory DB plan that my last employer had. I got out by becoming a self-employed consultant instead of an employee ...


I missed that part ... thanks for the update.



Longtimeago said:


> ... I did not 'have to change industry' to avoid it Eclectic12. A DB plan was an industry and my employer's standard. I simply changed the game for me.
> I don't know why people make assumptions like, 'would have to change industry' etc. when in fact , it is just an assumption ...


 Doesn't seem like much of an assumption when at multiple companies people tried going this route and were turned down. Their solution was to quit to work for a competitor or become independent consultant.

Some assumed they could quit, become an independent consultant to have an inside track for successful bids at their previous employer but found themselves blacklisted.


Cheers


----------



## Eclectic12 (Oct 20, 2010)

ian said:


> ... IF I were a new hire, entering most vocations, I would never want a DB plan. I would prefer a portable DC plan. There are a few exceptions ...


Hopefully the DC pension wouldn't be like the one I was offered ... four MFs with three at 2.5% MERs. I was moving on anyway but I suspect I would have made that DC pension my fixed income portion. It wasn't going to be a ton of money as it was a 1% employee and 1% employer plan to a cap.




ian said:


> ... But I can assure you that in all likelihood a 35 year old with five or six years of tenure who leaves his/her employer with have a DC that has considerably more value in it than would be the value in the in DB plan ...


For this particular DC pension ... I doubt it.

The DB pension was 5.6% employee plus employer contributions ... throw in the limited investment choices and I doubt the DC pension could beat it.
My understanding is that DC pensions have improved so YMMV.




ian said:


> ... About the only people I saw who were interested or concerned about retirement were those is their late forties and fifties ...


I'd say fifties and up for those I have talked to/worked with over the last three decades.




ian said:


> ... I believe that the real problem is individual focus. My observation is that people who live within or below their means, who do not contract consumer debt, etc, are typically those who prepare at an earlier stage from retirement. No matter the income level. For many others they wake too late ...


Whereas for me it was my dad commenting on the number of people taking work here and there to supplement their retirement funds. He wanted to stop working when retiring. I was probably in high school at the time.


Cheers


----------



## peterk (May 16, 2010)

ian said:


> There was also a second opportunity. We could shelter up to about another $3K in a fund that complemented our DB. This fund was matched 50 percent by our employer. It was used to enhance our DB at retirement and could only be used for certain enhancements.....spousal, COLs, top up early retirement, etc. I think that this was a fairly new feature in the late 90's or early 2000's when my employer introduced it at the time our DB was overhauled. Several people in the HR/DB business have commented to me that this is/was indeed allowed but few employers DB plans followed up to take advantage of it. So, it total I was able to shelter $6K even though I participated in a DB.


Ya I have this feature too, it's great. It's a savings account saved within the pension system, used to purchase pension enhancements upon retirement. But it is not taxed upfront, and does not add to your PA and does NOT take away from your RRSP room either.


----------



## ian (Jun 18, 2016)

I had to move my group RRSP out of the company plan within a year or so after I took my DB pension in 2013.

At that time the MER on the RRSP funds varied from .56 percent to 1 percent. I would have preferred to remain in the plan but could not.

I read an article a while ago to the effect that some employers (very few) were selecting investment vehicles for their captive DC plan members that had high MERS. 2-3 percent when similar products in the open competitive market had lower MERs. WHY? Apparently a portion of those excess MERS were being channeled to reduce some of the company paid expenses of administering their DC plans. Not good....really a way of cheating your employees. This practice was coming to an end as a result of successful lawsuits brought against employers by members of DC plans.

There is at least one well known employer in the IT industry that does not match DC funds on a monthly basis. They do it once a year for those employees as at Dec. 31. This company has been downsizing for years. It is their way of cheating released employees in that year out of partial year DC matching contributions. Amazing to see how some firms are willing to treat employees. In this instance the firm has a well deserved poor reputation as an employer in the IT sector for this and for other reasons.


----------

