I have commented at length in other articles, in my new book to be released soon and other media about how few of us Canadians are fortunate enough to have a public or private pension plan. The majority of us have no pension plan at all. However, those who do are still faced with great uncertainty. Firstly, pension plans are not always guaranteed – witness what recently happened to Sears and their employees’ pension plan. Poof! Secondly, not all pension plans are created equal.
Defined Benefit versus Defined Contribution
With a defined benefit pension plan, the employee knows what sort of cashflow they can expect at retirement. It is stated, calculable and can be relied upon when planning for the day that you have no more employment income. A defined contribution pension plan has no such certainty. All we know as employees is what we are putting into it each pay period – the amount that gets contributed is defined. What we do not know is how much we will get from it in retirement.
The shift away from certainty
A recent Globe and Mail article explained with more concrete evidence what we have known for years – we are losing our defined benefit pension plans in Canada. Why? Because the risk is too great for the employer. If an employer has the added burden of making sure the pension program can afford to pay out the defined benefit on top of the responsibility and cost of administrating or managing the pension program, the employer is going to try to minimize their risk. And shifting their pension programs away from defined benefit is a very effective way to do this.
So what does this mean for me?
If you currently are enrolled in a defined benefit pension program, the odds of this being taken away from you and switched to a defined contribution pension program are increasing. They have been for a while. And with most things, the more and longer a specific systemic change takes place, the faster it picks up pace. The fact that you have a pension plan at all makes you one of the fortunate few in Canada but that does not diminish the fact that change may take place which makes you a little less fortunate than before. So you need to take control, because there are precious few out there who have your and your family’s best interest at heart. You need to have a back-up plan which means setting up your own personal pension plan. Start investing into your own plan for your retirement now, when you are as young as you are ever going to be and have the longest amount of time to enjoy the magic of compound growth.
If you own a house and have a mortgage, you’re lucky!
Regardless of your current situation, in order to start your own personal pension plan, you need to see an investment advisor, look at your household budget, pay yourself first and read lots of financial books. But if you have a mortgage, you have one more option available to you. That mortgage can actually be your pension plan. Not the house – the mortgage. With a simple restructuring of your finances to enable The Smith Manoeuvre, you may find that you have another $1,000, $1,500 or more available to put away each month for the day you stop heading in to work and instead head to the golf course or the beach.