|
Everybody wants financial security when they retire. Many of us are
counting on employer pension plans to provide that security. But there's a
growing possibility that your pension may not provide the retirement income
you need.
A trend toward "defined-contribution" pension plans-those where
employee and employer contributions are specified, but not the amount the
employee will receive at retirement-means many workers don't know in advance
how much their pensions will provide. Payouts from these plans are based on
the returns earned by investments, with the level of income known only when
it's time to retire. If investments perform well, you could have more income
than you expect; if they underperform you could be left short.
Defined-contribution plans are different from "defined-benefit"
plans, which spell out in advance how much pensioners will receive, based on
salary and length of service with an employer. Defined-benefit plans were
once the norm in Canada, but they're being rapidly replaced by defined-contribution
plans. Most new pension plans are of the defined-contribution type, and many
existing defined-benefit plans are being converted.
Companies like defined-contribution plans because responsibility is
shifted from the business to its employees. Employers don't have to come up
with money to pay fixed benefits when investments perform poorly, as is the
case with defined-benefit plans. Instead, their major responsibility is
meeting contribution obligations.
That doesn't mean that members of defined-contribution plans have no
control over their future. They can usually choose how money contributed to
the plan will be invested. Participants are provided with tax-sheltered
investment options, ranging from conservative to higher growth. Their
contributions are pooled with those of other plan members and invested by
professionals.
But with higher expectations comes higher risk. For example, those who
choose a growth option that invests largely in equities could suffer if the
stock market has a few down years immediately before retirement.
Even defined-benefit plans have risks. Today, many of these plans are
underfunded and could fail to meet obligations to employees. This can be
because of poor investment returns or a company's inability to make
contributions.
How can you protect yourself from the possibility of less pension income
than you'll need? The best strategy is to have other sources of retirement
income.
The logical choice for generating increased income is a Registered
Retirement Savings Plan (RRSP). If you belong to a pension plan, your yearly
RRSP contribution room will be reduced by a "pension adjustment,"
but you may still be able to build considerable wealth before retirement.
That wealth will provide additional income.
If you don't have RRSP room, invest outside a retirement plan. Although
you have to pay tax on income earned from non-registered investments, with
investments such as stocks eligible for capital gains and dividend tax breaks
you still have the potential to boost savings. Meet with a financial advisor
to see what options best fit your needs and goals.
Member CIPF
|
