Help! I need to sort out my pensions

In my career, I have worked for different hedge funds, pension funds and other large financial institutions. Many of the career changes happened before I set my mind on long term financial planning.

You may have similar experiences thorough out your careers. The result is numerous fragmented pension packages. If you are wondering about how to sort out these pensions into a coherent plan and manage them effectively. Here are some suggestions.

What should you do with your pension once you have left an employer?

This is one of the most important financial decisions to make and generally there are two options available. You can either leave it where it is or consolidate the pension with the rest of your investments.

The first step is to understand what type of pension you have with your employer.

There are two main types of pensions:

Defined Benefit Plan: a DB plan offers a set amount of pension income in retirement based on a set formula and it is the employer that makes the investment decisions and bears the risk and reward of such decisions.

Defined Contribution Plan: a DC plan does not offer a set amount of pension income in retirement, instead the amount of pension income is determined by the amount of contributions and investment earnings. In this case, the employee makes the investment decisions and bears the risk and reward.

It is generally less costly and easier for an employer to maintain a DC plan than a DB plan which is why DC plans have gained in popularly in recent decades. This change has also shifted the onus on you to make informed decisions on your investments for retirement.

Should you consolidate your pension or leave them as is?

 I am a fan of letting the numbers do the talking when it comes to making personal financial decisions. If you do work with an investment advisor, there are resources available to you and your advisor can conduct a thorough analysis of the different options and offer advice base on the outcome. That said, I can sympathize the 10 page report filled with financial projections is not always easy to digest. Here are some important inputs to understand:

1.    Assumptions on your average and marginal tax in retirement and pre-retirement

2.    Investment rate of return assumptions

3.    Assumptions on time horizon for your investments

4.    Projections of guaranteed income in the case of a DB pension and inflation indexing if applicable

The projected net present value of the investment earnings and future income streams can often give you a clear idea of the best course of action.

Some other considerations:

1.   Are the investments being actively looked after?

2.    What is your overall asset allocation mix and do all the moving pieces fit in with the strategy?

3.    What investment selections do you have available to you and are you comfortable with navigating the selections yourself?

How should you go about optimizing your investment decisions?  

Increasingly people need to make investment decisions for themselves regarding their pensions. One of the drawbacks of the self-serve model is that there are limited investment selections available and limited information to make these selections.

Here are some considerations in helping you make investment decisions:

1.    Make investment decisions within the context of your overall financial objectives.

•   Will you be working pass age 65?
•   What does retirement mean to you?
•    What plans have you put in place to provide for yourself or your family in case of unexpected risks?

Quantify as much as possible and be practical. There is no one who understands you more than you, so really visualize the different scenarios for yourself and your family

2.    How do I maximize my investment returns? In today’s world and 24/7 news cycle, changes take place even faster and even professionals find it difficult to react. Not any person nor entity can control the overall growth of the economy. Markets naturally go through bear and bull market cycles. Therefore, a good advisor coaches clients to take on some risks if that is what is necessary to reach their goals and financial wellbeing and dissuades clients from buying into any market mania or adopting a more speculative mindset.

3.    Education is so important regardless if you are a seasoned investors or novice. Making better investment decisions is not about getting a hot tip on stocks but understanding the fundamentals, conducting due diligence and sticking to a disciplined approach. Given that finance is not the chosen field of many professionals, you can choose to work with a professional advisor and make informed decisions.

Ask me about available financial planning resources available to make more informed pension decisions. If you have a questions, feel free to post below or message me directly.

About the Author

Rita works with individuals, business owners and healthcare professionals to provide investment advice, risk management and financial planning. Rita is a Chartered Financial Analyst CFA? and holds her MBA from Richard Ivey School of Business.

Reach out regarding any questions about your overall portfolio positioning, strategies for downside protection or to implement a cohesive financial plan to ensure that you meet your goals.

Disclaimer

This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The strategies and advice in this report are provided for general guidance. Readers should consult their own Investment Advisor when planning to implement a strategy. Interest rates, market conditions, special offers, tax rulings, and other investment factors are subject to change. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ? / TM Trademark(s) of Royal Bank of Canada. Used under licence. ? 2021 RBC Dominion Securities Inc. All rights reserved.