Retirement and You

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Pensions and You Article Summary

Pensions and You

Did you know that there are 3 legs to the stool that is your retirement income?

Leg #1: Universal Seniors Benefits

1) Old Age Security (OAS):
Paid after reaching 67 years of age, $540 per month.

2) Guaranteed Income Supplement (GIS):
If you make up to $21 648 annually outside of the Universal Seniors Benefits, you get nothing, if you make less, it scales up to a maximum of $485 if you have no other income!

3) Spouses Allowance (SPA):
This is income only if your spouse retires and they need to bridge their income until they reach 67 and can collect OAS. Like the GIS it scales depending on income from $0 benefit received if you make over $39 264 per year, to $1025 per month only if you have a spouse and no other income!

So excluding your spouse and having no other sources of income you would receive a maximum of $540 + $485 = $1025 per month at age 67.

Is $12 308 per year enough to live on?
Is $5 827 per year enough if you’re under 67 years old?
We had better find another leg to put under this retirement stool.

Leg #2: Canada Pension Plan (CPP)

CPP is a mandated retirement savings plan that both employers and employees pay into by mandatory payroll deductions. In 2012 the maximum you could contribute was $2306 if you made over $50 100 in the year. This is why your paycheques magically get bigger towards the later half in the year, you max out and the contributions are no longer being taken off your paycheque.

You can start to collect your CPP anywhere between 60 to 70 years of age. If you retire before 65, you receive a penalty of 0.6% per month early; while alternatively you gain 0.7% per month worked after 65 up to 70 years of age (the longer after 65 you work the more you make).

Confused yet? Here's how it works if you contribute the full amount each year:
1) Retirement at 60 you receive $708 monthly or $8496 annually
2) Retirement at 65 you receive $1012 monthly or $12 144 annually
3) Retirement at 70 you receive $1316 monthly or $15 792 annually

In the last issue we learned that leg one of the stool provides a maximum of $5827 annually if you are under 67 and $12 308 annually if you are over 67, both if your single and have absolutely no other external income, these amounts will drop if you have any other income.

So what do the two legs look like if you combine them? (Leg #1 + Leg #2)
If you retire at 60: $5827 + $8496 = $14 323 (too low to deduct income tax)
If you retire at 65: $5827 + $12 144 = $17 971 - $136 (income tax)= $17 835
If you retire at 70: $12 308 + $15 792 = $28 100 - $2300 (income tax)= $25 800

The Low Income Cut Off or Poverty Line is $21 359.
You cannot retire at 65 and live above the poverty line until your 67.
Unless watching TV and eating cheap dollar store cat food are your plans, we’re going to need a 3rd leg to that retirement income stool.

Leg #3: Pensions + Savings

In this issue we discuss the different ways to save for retirement, ranging from the old lunch kit stuffed full of cash buried in the back yard, to Pension Plans and draw comparisons. In our last issue we learned that unless you wait until age 67, you will be living under the poverty line without a retirement plan.

The whole purpose of a retirement plan is to ensure retirement income, make more interest than fees, and supplement your government income at retirement (possibly even allow you the freedom of retiring earlier than you planned!)

Lets do some basic math, we’ll say you’re putting $250 away monthly, or $3000 annually. Now lets start this at 25 years old, and you work until you’re 65 years old (making contributions for 40 years).

We will assume a realistic investment return rate of 5%.
We will assume management fees will average 0.6%
We are going to assume you want to live 20 years after retiring.

Remember your final Income will be all 3 legs of the retirement stool:
Universal Seniors Benefits + CPP + Pension or Savings - Income Tax!

No Retirement Plan:
This is just Leg #1 and Leg #2 of the retitrement stool minus taxes.
Total income at 65: $5827 + $12 144 - $136 = $17 835 Annually
Total income at 70: $12 308 + $15 792 - $2300 = $25 800 Annually

Lunch Box:
This is where you squander away money somewhere without earning any interest but paying income tax at a higher bracket as you make the initial money.
Contribution: $3000 X 40 years = $120 000
Income Tax: $3000 + 32% tax = $960 per year X 40 years = $38 400
Interest: $120 000 * 0% interest = $0
Fees / Deductions: $120 000 - $38 400 in taxes = $81 600
Total for Retirement: $81 600
Dollars per Year: $81 600 / 20 years = $ 4080 per year
Total income at 65: $5827 + $12 144 + $ 4080 - $ 136 = $21 915 Annually
Total income at 70: $12 308 + $15 792 + $4080 - $2300 = $29 880 Annually

Pension Plan:
Taxes: Tax free up to $23 820 in contributions per year.
Contribution: $3000 X 40 years = $120 000
Interest Only: $3000 X 5% annual return compounded = $242 400
Fees / Deductions: $3000 X 0.6% annual compounded fee = $15 169
Total for Retirement: $120 000 + $242 400 - $15 169 = $347 231
Dollars per year: $347 231 / 20 years = $17 362
Total income at 65: $5827 + $12 144 + $17 362 - $3727 = $31 606 Annually
Total income at 70: $12 308 + $15 792 + $17 362 - $6914 = $38 548 Annually

Defined Contribution Pension Plans

Most companies today have what is referred to as a “Defined Contribution Pension Plan” or DC Plan. It is exactly what it says, your contribution to the plan is defined, but not what you get at the end.

Typically, in collective bargaining agreements, the employers will make a mandatory contribution to the plan, and you the member will have the option to contribute more of your income up to a maximum percentage negotiated in your collective agreement.

What you receive will be determined by the amount of money you and your employer contribute, minus handling fees by the brokerage or financial group handling the money, plus any interest you may earn along the way depending on the individual investment plans you have chosen in your portfolio. Unfortunately the burden falls on you to make the investment decisions and I can safely say that there’s no stock trading course taught in any of our apprenticeships!

What can you do to help yourself before you retire? If you’re fortunate enough to have a plan then you need to look at your statements, research online about how much your fees are, who’s charging what, are your plans getting the interest they should be? Do they have a mobile app for your smartphone? Information is key! Contribute as much as you can, keep on top of your plans, make informed choices, and speak up about fees and plan performance, talk to your negotiations committee members, talk to your fellow members.

Now what if there was a better plan? One that guaranteed how much you get in retirement? Next week, Defined Benefit Pension Plans, are they any better and why?

Leavitt: Article 17 in your agreement
Finning: Article 17 in your agreement
Kal-Tire: NO Traditional Pension Plan in your agreement!
Stampede: NO Pension Plan in your agreement!

DB vs. DC What’s the Difference?

Why would my Union care about pension plans and which one I have? I can manage my own retirement, they already take my dues every month! Why should they care about my pension?

No, we care because as we’ve covered in our previous issues so far this year, without a retirement plan, cat food and Kraft Dinner become staple food groups. Since one of the main purposes of a Union is to negotiate on the members behalf, it’s only natural to try and cover all aspects that will make life better for the members including while they are working and into retirement.

With all of our groups under the Local 99 banner, we have Defined Contribution Pension Plans. What would the difference be if they were Defined Benefit Plans?

DC vs. DB Pension Plan
Defined Contribution (DCPP) Defined Benefit (DBPP)
You are responsible for choosing from a list of funds and managing your investment choices. Good, poor, or otherwise. WHO LOOKS AFTER IT? An Administrator group depending on the plan, be it a sole employer (EG: Air Canada), multi-employer (EG: Machinists Plan), or a government body, they are charged and accountable by law, for maintaining a plan.
You get your contribution, plus your employers contribution, plus compounded interest or losses depending on the fund performance you chose, minus handing fees, minus administration fees. No one really knows until you retire... WHAT DO I GET AT THE END OF IT ALL? You get the guaranteed amount of income that you chose (or was offered) when you enrolled and both you and your employer contributed towards. This also increases depending on cost of living through your working career. You will know from day one what you will get.
You do, you get whatever the returns are on your choices minus handling fees for each individual fund. If your choices perform poorly and you don’t make corrections you could watch your pension disappear by the 10’s or even 100’s of thousands overnight. WHO TAKES THE RISKS? Whomever administers the plan, be it the employer, multi-employer, or even government, the body administering it is responsible to ensure the plan is solvent and sound. Bottom line it’s not you! Administrators want you, the retiree, to bear the risk inside your portfolio, hence the DCPP.
DCPP are better than nothing due to the employer making contributions in addition to yours. This increases the amount you put away each month and that is always a benefit. However if your fund that you chose crashes (see: 2008) you can lose most everything, interest, contributions, everything. Remember “how much” you and the Employer contribute each month is guaranteed, not what you get at retirement. HOW IS THIS BETTER THAN SAVING IN A LUNCH BOX BURIED IN THE BACK YARD? Regardless of the stock markets performance (think 2008) your amount of retirement income is guaranteed. Your employer would be bound to provide your income and this forces them to save and act accordingly. You are no longer responsible for making those decisions, and regardless of the market, you will have a secure retirement income. Remember pensions are your income in retirement, not just a nice addition.