Where The Work Plan Fits In
By: Kevin Cork
Where once a typical retirement took place at age 65 and the retiree lived another six or seven years, extended lifestyles, changes in careers, and failed marriages have put new demands on retirement planning. Kevin Cork, of FundTrade Financial Corp., looks at how financial planners are now advising their clients.
As a certified financial planner (CFP), one of the most common questions I get asked when sitting down with retiring clients is what, if anything, they should do about their work pension.
Things have changed for many people over the last 10 to 20 years. Traditionally, an employee remained with one or maybe two employers over the course of their careers. Their typical retirement path was to retire at age 65, collect a gold watch, and go home to putter around, annoying their spouse for the next five to seven years, and then, conveniently, taking themselves out of the pension plan’s liabilities by shuffling off this mortal coil.
Extended lifespans, early retirement, increased flexibility demands, and potentially several different careers and, possibly, spouses have created extra work for pension plan administrators. Responding to the demands for flexibility from its staff, companies have forced their pension plan people to provide ‘options.’ While appealing on a surface level, this has created increased complexity – and danger – for current and future retirees.
Many retirees will now seek out independent advice from a CFP or accountant or banker when trying to make a decision about what will be, for many, their last big financial decision.
I want to outline some of the things financial planners hear when sitting down with clients facing this decision. I also want to generalize about some of the presumptions we make in our Retirement Income Projections (this now carries the rather morbid acronym of RIP) when helping clients make that decision.
When faced with this situation, we sit down with clients and, using their current financial information, the pension income projection (or estimation) provided by the pension plan, and their own immediate and longer term plans, attempt to hack out a strategy that will maximize their benefits, maximize their security, or maximize their flexibility. No one strategy can do all three.
For most people who are close to retirement when they need to decide about their company pension plan assets, we make the presumption that the retiree will keep their pension plan intact and use it as the base, secure income from which we then use RRSPs and supplementary savings to provide additional assets as needed.
Our clients, however, are now asking us:
Which is my best pension income option?
Assuming a pensioner is relatively close in age to his/her spouse, thus ensuring that the drop in the current income for survivor benefit is not very high, we usually suggest they take the option that allows for some minimally reduced income to the spouse.
Spousal support is more important, as a general rule, than any sort of guaranteed period given that the core reason the pension exists is to provide income, not to generate an inheritance.
If passing on an inheritance is very important to the client, then we usually suggest some bare bones joint last-to-die life insurance because of its more efficient, tax-free status.
Will my pension income keep up with my increasing costs?
This is obviously less of a concern when inflation is two per cent, than when it is 12 per cent. However, it concerns me a little that some cost-of-living riders are in place by convention rather than by guarantee. When we see that inflation protection is not a ‘fixed’ feature, we try and allow for this in our retirement income projections by assuming that their pension income will only rise by 50 to 75 per cent of the inflation rate.
I am considering transferring my pensions to a LIRA. Good Idea? Bad Idea?
LIRAs are excellent tools to handle a variety of complex and individual circumstances that arise from the twisted convolutions of many of today’s career paths. Used correctly and invested properly, a LIRA’s primary advantage over the group pension is that the investments can be tailored precisely to the worker’s specific needs, goals, and situation. A 45-yearold’s LIRA, 20 years from retirement, would be structured completely different from a 69-year-old’s.
Further, when plugged into the RIP, it can be triggered at the most tax efficient moment to provide for unique needs.
The downside of LIRAs are essentially the same as their upside – the flexibility of both the investment options and the triggering of the flip to a LRIF.
The primary appeals of the LIRA, from the point of view of the CFP working with the individual client, can also sound the death knell of any sort of secure retirement income. Because the individual can invest his/her LIRA almost any way they wish, they certainly have the ability to completely torpedo and implode their LIRA assets with imprudent investments.
Incompetent, short-sighted, or just plain stupid investment choices are the number one danger facing those who chose to convert their pension assets to a LIRA. This is especially a danger when the stock markets are booming. Recognizing that their pensions are likely to earn ‘only’ six to seven per cent, many are wooed away to a LIRA by the 20 per cent plus compound average of the TSX over the last three years.
As jaded as I am, I wonder if we will see an increase in the use of LIRA/LRIFs when it comes to handling pension assets. On the one hand, we have corporations and pension administrators growing more concerned about future pension liability as their retirees continue to ‘linger’ collecting income long past the point when they were actuarially supposed to be gone.
On the other, we have stock brokers, insurance agents, personal bankers, and commission-based financial planners (myself included) only too happy to harvest the ripe bounty of pre-grown pension assets.
After 16 years reviewing the investment choices people make, I am no longer convinced that individual flexibility and expanded investment options are a good idea for 90 per cent of investors out there.
Being an Albertan and an exploitive, money-hugging, free-booting capitalist, I am even hesitant to suggest this, but perhaps a solution to consider would be to impose some sort of structure or restriction on the investment of LIRA assets over a certain size.
A financial planner’s role is to assume the best and plan for the worst. Group pensions should, for many retirees, form their secure core retirement income. However, if their age, wealth, or personal situation warrants it, it makes sense to consider converting the pension to a LIRA, but this should be effected only after some in-depth work has been to done to make sure the employee fully understands the upside and downside of using a LIRA versus the existing pension.
As companies strive to provide flexibility, both in terms of investment options for their DC pension plan members and in terms of their retirement options for the retirees, they should also recognize the corresponding need to provide access to increased financial planning education/expertise. This may not be practical, given staff size or resources. My anecdotal experience is that the majority of employees do not want to make investment/asset allocation decisions. It makes them too nervous as they do not feel qualified.
A successful retirement plan – including the pension – is not about having retirement assets provide the maximum return for the next year. It is about creating a large enough, stable enough, pot of gold so that the retiree can use it long-term to create an emotionally rewarding and financially worry-free lifestyle. It is about the life that is created, not the return that is generated.
Kevin Cork is a certified financial planner, a journalist, and a representative for FundTrade Financial Corp..
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