I personally don’t have a defined benefit pension, but in some regards I do understand the pension envy around defined benefit pension plans. You make you contributions, work your required period of time and as long as your employer doesn’t go bankrupt you get to collect a set amount of money per month for life. Talk about easy for the employee: no stress about investment decisions, no worry about running out of money in retirement, you just sit back and collect the checks after your done work.
So what is a person to do if they don’t have a defined benefit pension, but they would like some of those features in their own retirement plan? Simple, you buy your own mini defined benefit pension by purchasing an annuity. But aren’t annuities for old people? Typically yes, older people do have them, but in function they are very similar to a defined benefit pension plan as you pay the insurance company to accept all the investment risk for you in exchange for a set amount of payments.
Now obviously doing this sort of investment does have its price. You have to know that insurance companies don’t do this out of the goodness of their heart at a cost neutral basis, they expect to make a profit on it. So keep in mind you likely won’t get the same level of return if you had invested the money yourself. You also have consider what features you want in your contract with the insurance company. Do you want to have your spouse get a benefit when you die? If not, did you want a set amount of payments to go to your estate in the event you get hit by a bus the day after your annuity? Do you want to the payments to increase with inflation? The more features you add the lower your payment will become.
Overall I personally don’t have a problem with annuities if you have a very low risk tolerance and you only invest some of your nest egg to cover some of your basic expenses, the idea does make some sense. I have issue with people that go overkill and put all of their retirement savings into an annuity. If you choose this option you really need to shop around at different companies to get an idea of what they can do for you and get some quotes, for example check out Aviva which has some decent reference material (and then check our insurance companies in your home country). I personally won’t use an annuity for my early retirement period, but when I start getting older the idea does have some merit. After all, I’m not sure I want to be worrying about my investment portfolio so much when I turn 70.
So would you ever consider buying an annuity?
If I read just one more story about pension reform I might just have to scream. Why? Because the main reason they are looking at it is basically everyone collectively realized many of the boomers have failed to save for retirement. Yet ironically any of the proposals coming out to either expand the CPP or this new Pooled Registered Pension Plans fail to address the original reason.
Let’s for example look at expanding the CPP. If you did so, the system is based on a pay as you go model now. So even if you doubled the benefit (in some extreme proposals) the boomers would see almost no increase into their benefit since they will only pay in a for a few more years. Only kids just out of high school would ever see the full increase regardless of the increase of benefit chosen.
While I appreciate the idea behind the Pooled Registered Pension Plans (PRPP) and making people default to opt in with them I think the government is is needlessly complicating matters. Saskatchewan for example already has a low cost, pooled plan that happens to be voluntary and heck even available to non-Saskatchewan residents. All you would need to do is add on a default opt in for anyone who didn’t have a pension plan in the province and you would have created the same idea as the PRPP’s. Yet the same problem will occur with the boomers, they won’t put in enough to make any significant difference to their retirements.
Basically the boomers that didn’t save are already fucked. They will have to work to at least 70 in order to max out any CPP they get and save what ever they can for their last working years and hope to God that a future government doesn’t cut back OAS on them. It isn’t nice, but it is true: they won’t be saved by any pension reform. At best we can take the lesson to younger generations to get your act together or have the government force you to save at some point. Forced savings isn’t nice for those that do have their act together, but the option for governments is starting to look better and better to solve the issue. The carrot of RRSP’s has failed to partly do its job, now it will be the stick.
So are you sick of hearing about pension reform? Or have you heard any good ideas yet on what to change?
I was at a training seminar yesterday that brought up some interesting conclusions that was found by some behavioral scientists which consisted of the follow two statements:
- You don’t have to change an attitude to change a behaviour
- Or the reverse, changing an attitude doesn’t mean you will change a behaviour.
So how is the useful for you? You don’t have to change your attitude overnight to change what you are doing. The classic example would be a teenager and staying out late. They may not agree with being home by midnight (attitude), but if you put in a strong enough deterrent they will come home by midnight anyway (behaviour).
So you may not agree with how much you need to save for retirement, but that doesn’t stop you from saving more for retirement now. Or you may not agree with how to invest your money in index funds for you to try it anyways. Or you don’t have to agree a budget will work in order to try it. Agreement doesn’t preclude action, so you can stop using that as an excuse for not getting your financial situation in order.
So you can start:
- using cash for spending money (so you can see you are broke and stop overspending)
- stop paying fees on your bank account (find a no fee account or product rebate to get around it)
- if you are not at your maximum contribution at work for matching pension money fill out the paper work today to get it (don’t let free money pass you by).
The other interesting fact I learned was we primarily make decisions by just assessing the situation and then deciding. We often don’t consciously compare our options in a methodical method all that much (except perhaps engineers and personal finance geeks – damn I’m screwed). So you don’t worry about how you get yourself to do a good behaviour, just find out what works for you and use it. If it means putting a pink ribbon or kitty stickers on your credit card so you are embarrassed to take it out and use it, then go ahead and glue it on. Nothing is silly if it works.
So don’t you feel better now realizing you likely aren’t rational or logical in most of your decisions and no wonder your life was/is a mess at one point or another? I know I’m likely going to approach problems a little differently now that I know how my mind works.