By Julie Langevin, CPA, CA
With the Federal government tabling their 2016 budget recently, we should all be aware of the challenges facing Canada’s pension system. The fact that Justin Trudeau’s Liberal government reduced the age of eligibility for Old Age Security (OAS) from 67 to 65 does not mean that the system is fully funded – far from it.
It’s becoming increasingly difficult to ignore the fact that many pension plans, both public and private sector, are underfunded or that many individuals are ill-prepared for retirement. This news understandably breeds anxiety amongst the baby-boomer generation now approaching retirement. Setting aside the more existential questions of how we went from Woodstock to “bonds ‘n stock”, we should be asking ourselves whether or not this fear is justified. In short, should we be worried?
As a Money Coach, a big part of what I do is help clients “take the worry out of money.” For many of our clients, success comes with a deeper understanding of where they stand with money, emotionally and financially, developing concise and attainable goals, getting organized and implementing a manageable plan to move forward. Measuring progress, and staying committed moves clients towards a much healthier relationship with money.
When it comes to pensions and retirement, the biggest risk for most people comes from not understanding what kind of pension they have, and what it will provide during retirement. When it comes to retirement planning, we generally spend most of our time worrying about the uncontrollable – the world economy, market returns, and the survival of company or government pensions. Sure these are real concerns and you may have some impact on the outcome through information and advocacy, but there is a limited amount that any one person can do to change those bigger realities. Right now, it’s far more important for you to understand exactly what you need to retire securely.
Here are a few questions to get your started thinking constructively about pensions and your retirement:
- What kind of pension do I have now and what will it realistically provide?
- What will my lifestyle needs be in retirement and will the pension and other investments be sufficient for my needs?
- Will I still need to continue making payments on mortgages or loans when I retire?
- What do I need to put in place now to become financial secure by retirement?
A Defined Benefit Plan, which is held by approximately 16% of private sector workers and 78% of public service workers, is one where the employer makes the investment decisions and the employee gets a guaranteed pension amount based on income and years of service. A Defined Contribution Plan is one where the employer, and sometimes employee, contributes to the plan, but the employee makes the investment decisions and the pension value at retirement depends on investment performance.
Until recently, it was assumed that the much coveted Defined Benefit Pensions were the “safe” ones because the employee was guaranteed a fixed monthly payment at retirement. Now we learn that they are under scrutiny because of chronic underfunding.
The big question, if you have a defined benefit plan, is whether or not your employer will be able to meet its obligations to you throughout your retirement. The biggest risk is if the pension has a shortfall and the company goes bankrupt. If this happens, you could lose part of your pension, but not likely all of it. Pension assets are held in trust, so a company can’t use it for its operations to keep afloat. Operating companies who have a shortfall generally have time to make up the shortfall so you may never be affected. These days some companies, like Bombardier, are negotiating longer time frames to make up the shortfall.
In my experience people worry most when they don’t have enough information and they feel out of control. Focus on what you can control – creating a plan, paying down debt, monitoring your spending, getting educated and informed. Nothing in life is 100% guaranteed so find out what’s happening with your pension, have a plan and expect the best, but be prepared for the worse – then, let it go.
Based in Timmins, Ontario, Julie Langevin is part of the Money Coaches Canada national network of Money Coaches. A Money Coach is a financial professional that helps clients develop a clear understanding of their current financial situation and create a plan that helps them reach their goals. Money Coaches Canada is the nation’s leading, independent provider of advice-only financial planning. Money Coaches do not sell investment or financial products.
