When it comes to retirement planning, it’s a far different world than the one your grandparents or even your parents faced.
“The whole framework of retirement has really shifted over the last 100 years,” says Adam McInroy CFP, CLU, Executive Financial Consultant with Bobcaygeon-based McInroy and Associates Private Wealth Management.
“In the early 1900s, the average life expectancy was just 47 years old,” Adam notes. “If you worked until age 65, you were very fortunate to be in good health. Most people didn’t live that long, and if you did retire, you would be lucky to have a few years of lifespan left.”
“Our longevity has shifted, and it became standard that part of an employee’s compensation package encompassed a pension plan, with the idea being ‘I’ve given my life and sacrificed for this company. The company will take care of me, both while I’m working with them and when I leave.”
There has also been another big shift — this one on the part of employees — those factors into the current retirement picture.
“Employees generally don’t stay with the same company their entire career,'” says Adam. “People are more apt to move around. It’s not uncommon that we see employees work for multiple employers year over year. By the time they retire, it’s not abnormal to have had five or six or 10 different employers.”
“With each employer, you’re probably not getting the retirement savings options. As a result, it’s really becoming more and more important for the employee to know what they have as far as their employers providing for them, and what that means to them in the bigger picture.”
As an initial step of retirement planning, Adam and his team at McInroy and Associates Private Wealth Management strive to help clients identify what he describes as “puzzle pieces” — the different components of a client’s employment history that fit together to create their retirement picture.
“If you’re leaving pieces of your retirement behind and you have no idea what it all means, you will retire at age 60 or 65 with these pieces scattered throughout your career, and you’ll be trying to figure out ‘What do I have here? What does this all mean?’ It’s very easy and common to become overwhelmed.”
“For example, if you left an employer 20 years ago, you need to know what’s happened with that piece of your retirement picture — whether it’s a group registered retirement savings plan, a deferred profit-sharing plan, a defined contribution pension plan, or a defined benefit pension plan. Unless you’ve stayed on top of it, you probably don’t know.”
Adam notes employees who are members of a defined benefit pension plan have a huge decision to make when leaving their employer, usually with three available options.
One option is to take the defined benefit pension and commence payments on a date allowed by the plan, usually somewhere between ages 55 and 65.
If the employer’s plan permits it, a second option is to transfer the pension’s commuted value to another registered pension plan.
And a third option is to transfer the pension’s commuted value to a locked-in account, where the commuted value of a defined benefit pension plan represents the present value of the lifetime pension payments as calculated under the plan’s benefit formula.
The commuted value typically comprises an amount that can be transferred to a locked-in account on a tax-deferred basis, with an excess amount that is subject to immediate taxation.
“Every pension plan is different but, generally speaking, those are the three options that most employees would have when leaving an employer,” Adam explains.
“It all depends on what age they’re leaving, what their tenure with the employer is, and how much investment has been made in that pension plan. There are a lot of different factors that are going to result in what options you have if you’re leaving an employer with a pension plan.”
“Every year, an employer’s pension plan is required to give employees an estimate of what that pension plan looks like at a normal retirement date and at an early retirement date,” Adam adds. “We can plug that into their retirement plan so they can see what happens if they retire at 55 or what happens if they retire later. If we don’t factor that into their plan, we’re missing a massive piece.”
All three options, say Adam, have benefits and risks.
“With the commuted value to a locked-in account option, you have flexibility of income, you have the choice of investments, and you certainly have control,” he notes. “However, you need to recognize you are taking on the investment risk. You are taking on a longevity risk. And you’re taking on the behaviour risk that you’ll see the money invested and begin overspending.”
“Everything we do, before we even present to a client, is to run through compliance who validates assumptions are realistic, that they are conservative, and that the information being laid out. Is this truly in the best interest of the client? Generally, there’s a series of two to three meetings before we get to that conclusion, because we want to make sure we’re taking our time and asking the right questions. The more dialogue that’s happening, the better we can plan for the life financial journey event that’s about to take place.”
Adam says the income tax impact of each choice is an important factor that must be considered, asking “How much tax are you going to pay because of the choices you’re making or not making?”
He also points out that, if a client has opted to commute the value of their pension plan to a locked-in account, “there’s no turning back.”
“It’s a massive decision. It’s potentially determining a significant portion of your retirement income for the next 20 to 40 years. That’s not a decision you want to rush into.”
“What works for one person may not work for someone else, simply because they may have a need for a different income level, have a different family situation or have desires for retirement that are unique. Their comfort with market volatility may be completely different. They may have children they want to leave assets to. There are so many different factors in determining whether or not it is the right choice.”
When meeting with a client for the first time, Adam asks one simple but important question: “Describe to me what your retirement looks like to you?”
“The guarantee of a pension plan that helps to replace your paycheque with can be very attractive as it provides some level of confidence that you’re going to have an income stream for life.”
“But there’s not a one-size-fits-all solution that works for everybody. You really need to understand what’s already in place and how you can complement that. It might be by investing in RRSPs, or it might be by setting up a tax-free savings account. Let’s ask some questions and then figure out what makes the most sense for the client. It all starts with a conversation.”
McInroy & Associates Private Wealth Management is located at 21 King Street West in Bobcaygeon. You can email Adam at adam.mcinroy@igpwm.ca or call 705-748-1950. For more information about McInroy & Associates Private Wealth Management, visit www.mcinroypwm.com.
Investors Group Financial Services Inc.
This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Adam McInroy is solely responsible for its content. For more information on this topic or any other financial matter, please contact McInroy & Associates Private Wealth Management.
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