Pension Plan Conundrum

A recent article in the Globe and Mail: What should you do with your Pension Plan, originally published February 11, 2011 states:

The great pension debate that is gaining momentum in Canada is focusing attention on the issue and bringing to light some of the stark realities of the retirement preparedness of Canadians.

For example, it now is estimated that fewer than 40 per cent of Canadians are covered by a registered pension plan.

A recent report by the Certified General Accountants Association of Canada (CGAAG) concludes that “the ability of Canadians to maintain a financially-comfortable and healthy lifestyle after retirement has become one of the nation’s most vexing challenges.”

Canadian workers will at some point in time in their careers have to make a choice about their pensions – whether they keep it with their employer or whether they take their contributions in a lump sum cash payment.

“What’s the best choice to make?” asks Scott Gerlitz, a financial adviser with Edward Jones in Calgary. “It’s a big question. Unfortunately, many people don’t know all their options and all the factors they should consider.”

Mr. Gerlitz says there are some critical factors that should go into making that decision.

The first is longevity. How long do you expect to live? Although no one can answer that question, statistics show that Canadians are living longer. And the longer you live the greater the chance you could outlive your money.

“If you have a family history of people dying early, and you don’t expect to live long yourself, it may make sense to have the cash now,” Gerlitz says. “Some folks may want to spend money on travel and other things while they are still healthy enough to enjoy them.”

This is the most ludicrous advice I've ever heard. First of all we're living in a day and age when medical advances are creating longevity we've never seen before. Secondly, to state that they may want to spend money on travel while they are still healthy enough, insinuates that they would then have money left over for long term care or to live on should they not die early as their family history would suggest they MIGHT. While Family history is something to take into account, it isn't a guarantee of early death or long term illness.

The article then goes on to say:

Then there’s the issue of inflation.

Many pensions don’t have inflation protection. Inflation can erode your retirement income over the years. Most Canadians can expect to live in retirement for 30 to 35 years. An annual inflation rate of three per cent a year over 30 years can significantly reduce the buying power of a fixed pension at the end of that 30-year period.

Some options include taking your lump sum and rolling it into a personal RRSP or Locked-in Retirement Account (LIRA) and investing it in income generating investments such as GICs, bonds or blue chip dividend-yielding equities, which can grow over the years and provide some protection against inflation.

What is ridiculous about this information is that the average GIC earns 4% or less. If you don't factor in food or fuel, and the basic necessities of life, inflation has historically been around 4%. And RRSP's as well as LIRA's are heavily taxed often leaving those depending on them for their retirement income coming up short and having to find ways to supplement income, in what was anticipated as being their retirement. We've all met them, they're the ones who are once again in the work force using the phrase "I was bored in retirement so...." often and liberally.

To read the whole article go to: http://www.theglobeandmail.com/globe-investor/personal-finance/rrsp/what-should-you-do-with-your-pension-plan/article1903575/