Last year, private pensions made headlines across Canada, and employees were left wondering whether their future funds were safe. Here's what you need to know, plus how you can mitigate retirement risk.
"Will my pension be there when I retire?" This is top of mind for many, especially after Sears Canada's 2017 announcement that it was closing its doors. The move revealed that pensions everywhere could be at risk, either because an employer has become insolvent (as in the case of Sears) or a plan's funds were not properly managed. First and foremost, relax. Most pension funds are safe, as defined-benefit plans (where benefit payments are calculated based on years of service and preretirement earnings) depend on both the viability of your employer and the market, which is quite stable here in Canada. In other words, if your company is doing well, your pension is likely fine. But you can and should lower your risk of not having sufficient funds in retirement—here's how.
1. Determine your retirement lifestyle.
You should set yourself up for a retirement income—from your registered retirement savings plan (RRSP), Canada Pension Plan, Old Age Security and private pension—of at least 50 percent of your preretirement income. Any debt (mortgage, vehicle loan and credit cards) should be paid off before you stop working. Try living off of your retirement income for a year or two (and save the difference!) prior to retirement. Start good habits that will allow you to retire with peace of mind.
2. Be informed.
You have a right to know where your pension stands, and fund administrators are obligated to tell you. Ask about your plan's transfer ratio to find out if it's fully funded; a rate of 100 percent means that the plan's assets will cover pension obligations, meaning employees have little to worry about. Also ask about the average rate of return on pension assets over the past five to 10 years. Consider the portion of the pension assets invested in fixed income securities (bonds, corporate bonds and guaranteed investment certificates) versus equities (stocks, mutual funds and exchange-traded funds). The former typically provide lower rates of return but have less risk, while the latter usually generate higher rates of return but can also drastically drop in value. Questions? Seek a second opinion from a fee-based financial adviser.
3. Don't put all of your retirement eggs in one basket.
In addition to your company's defined-benefit pension plan, you should be contributing to an RRSP, where you'll be able to control the risk. For most, a balanced investment (one with moderate risk and an average annual rate of return) is the smartest approach over the long term. Also set money aside in a tax-free savings account (TFSA), which can serve as a safety net for managing unexpected big-ticket expenses, like home repairs, so you won't have to make premature or lump-sum withdrawals from your pension or RRSP. Even better? When you take funds out of a TFSA, neither the principal nor its growth will be taxed.