How safe are your retirement savings?

How safe are your retirement savings?

As we watch the global financial meltdown and the wild daily gyrations of the stock market, a common question is “what will the effect on pension plans and other retirement savings?”.

If I am in a pension plan, will the stock market decline affect my pension? What is happening to the money in my RRSP, or other savings? Should I be moving my money? Will it affect my retirement?

The safety of your retirement income depends a lot on where you are expecting it to come from.

The safest source of retirement income are public benefits – the Old Age Security, which pays around $500 a month to virtually every Canadian 65 and over, the Canada and Quebec Pension Plans (C/QPP), payable from age 60 with benefits based on employment contributions, and the Guaranteed Income Supplement for low income seniors.

In spite of all the slagging that public plans get from right-wing privatizers, the current crisis shows that public benefits are the most dependable source of retirement income. Even the largest private financial institutions in the world are dependent on governments for support and bail-outs. While the CPP and QPP are partially invested in the stock market, they are set up to ride out market storms without major damage.

The next safest place for your retirement savings are government-protected vehicles.

If your savings (in or out of RRSPs) are in accounts or guaranteed certificates with chartered Canadian Banks and other institutions insured by Canadian Deposit Insurance Corporation, up to $100,000 in each institution is fully insured by the federal government. These generally don’t provide great returns on your investment, but they are safe.

If you are a member of a Defined Benefit (DB) pension plan (in Canada, that’s mostly union members), those plans are generally invested in stock and bond markets, and are vulnerable to changes in those markets.

DB plans do offer some protection, by sharing risks, with plan sponsors, and among plan members. Poor investment returns may require higher contributions (by the employer, or both the employer and plan members, depending on the plan), but promised benefits will generally be maintained. DB plans can more easily ride out poor markets than individual investors. Their size also generally allows them to diversify for better returns, with less risk and lower costs than individual investors.

The most vulnerable are people investing directly in the markets, in RRSPs, mutual funds, and in Defined Contribution (DC) pension plans, if they have invested in non-insured vehicles to get higher rates of return. In that case, they personally carry all of the risks. In periods of market instability, they have to make hard choices about whether to sell, buy or pray.

Another downside of being a small investor is that Canadian mutual fund fees for individuals are the highest in the western world. When you are paying 2%+ in fees every year (good or bad), it can take a third or more off your pension in the long run. Pension funds generally pay much lower fees (usually under 1?4%, depending on their size).

We need better rules and more transparency on investment fees in this country. As we come up to end-of-the-year RRSP-selling season, make sure you know what the fees and risks are before you do anything.

As for DB pension plans, there are things that should be done to make them even safer. All jurisdictions should require employers to cover unfunded benefits when plans terminate (as some, including Ontario and Quebec, already do). Only Ontario has a Pension Benefit Guarantee Fund to support pensions if an employer goes bankrupt. This needs to be extended across Canada.

We need tighter regulation of financial institutions, in Canada and internationally, to cut out the cowboy capitalism that got us into this financial mess. We need to return to a closer regulation of pension fund investment to insure that our pension money is not sucked into arcane and opaque high-risk instruments.

There are lots of things to worry about in this tough economic climate – your job, maybe the value of your house. How worried you are about your retirement will depend on where your savings are.

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