I don't expect to retire - I'm going to work until I die

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.

Re: I don't expect to retire - I'm going to work until I die

Postby brucecohen » 29 Apr 2012 12:37

In reply to northbeach's question, all members -- active and retired -- take a hit if a DB pension plan has to be wound up.

I too have no DB plan and am retired comfortably on my own investments, and have yet to even touch my RRSP. But I wouldn't cite that as a model for most of today's workers because I benefited greatly from a risky decision to go very long on fixed income back when interest rates were double-digit and I benefited from the most powerful bull market in the history of North America, if not the world.

Despite George$'s ongoing hand-wringing, very few large Canadian DB plans have gone bust or even failed to pay the benefits promised.* That's largely because, as Greg Hurst pointed out years ago, DB plan deficits and surpluses are both ephemeral and driven largely by the average yield on long Canadas at the time of valuation. If we see a sharp rise in interest rates -- as so many have been predicting for, what, 3 years now? -- we will suddenly see a large number of DB plans flip from deficits to surpluses. Even without a run-up in interest rates, the typical private sector DB plan is now 63% funded, according to the Mercer Pension Health Index.** We have no way of knowing where the typical DC or RRSP account stands, but I suspect it's well below 63%.

Given my belief that we're in a low-return era that will run for years, I suspect we're in for a repeat of the early '70s when DC plans -- then called "money purchase" plans -- fell out of favour because sponsoring employers were stuck with too many aged workers who could not afford to retire. To clear the deadwood, employers began adding guarantees and ultimately wound up replacing those hybrid arrangements with full DB plans. If Canadian companies face the labour shortage demographers predict for 2020 or so, I think we'll see most large companies offer new hires a DC structure with a DB floor -- say a 1% career average plan. This, of course, assumes that companies will want long-service employees, a sea change that might occur if labour is indeed in short supply. Or, we might see companies actually campaign for a huge expansion of CPP to replace all corporate pension plans. If the 50-50 employer-employee contribution rate is kept at 9.9%, most large companies would save money by outsourcing their pension programs to CPP, (though they'd also lose ability to play games with their earnings.)

Also, if we enter a prolonged period of high interest rates, we'll see corporations rushing to revive/create DB plans. That's because high rates substantially reduce the present value of liabilities and create tons of surplus. Until 2000 (or was it 2002?) a whole generation of chief financial officers thought pensions were "free." As George$ noted, the 1980s and '90s produced so much surplus that it was common for employers to take contribution holidays and for unions to win sizeable benefit upgrades. (Part of this rush to spend was due to poorly conceived tax legislation that does not allow DB plans to hold surplus equal to more than 10% of liabilities.) By contrast, DC imposes an ongoing -- albeit predictable -- cost.

RE: Public service pensions. Govt employees have traditionally had better pension plans than those in the private sector. Before they were allowed to strike, the balancing mechanism was that they also traditionally had lower salaries. Now it's not uncommon for both public sector salaries and pensions to beat those in the private sector, along with greater job security. Somehow we have to get back to a total compensation approach that better balances govt remuneration with that of large private sector employers.

*OTPP -- which is jointly sponsored by Ontario govt and the teachers union -- did alter its promise two or three years ago when it replaced automatic indexing with conditional indexing. That, however, only affects credits for new service. I would not be surprised to see legislative change allowing the adoption of conditional indexing for current retirees. That would, of course, break a promise but their conditional indexing would still be more favourable than a DC structure which offers no indexing at all.
** Note: The Mercer index tracks a hypothetical plan whose features are common for private sector plans. It does not track a survey of actual plans.
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Re: I don't expect to retire - I'm going to work until I die

Postby Bylo Selhi » 29 Apr 2012 13:20

brucecohen wrote:But I wouldn't cite that as a model for most of today's workers because I benefited greatly from a risky decision to go very long on fixed income back when interest rates were double-digit and I benefited from the most powerful bull market in the history of North America, if not the world.
While I held shorter term fixed income, I agree that we were lucky to live during a period where one could get decent returns from fixed income in a tax-deferred account. As for the most powerful bull market I've thought about that as well. Market history suggests that secular swings happen every 15 or 20 years, more or less. Prior to the bull of 198x/9x there was the bear of 196x/197x. (Before that the post-war boom, the great depression, the swinging '20s...) If the cycle holds then the current bear will run through 200x/201x followed by another bull. No guarantees, of course, and even if it happens chances are it won't be as big and as powerful. Still, given the choice I'd rather invest in a bear and retire in a bull than the other way around.

RE: Public service pensions. Govt employees have traditionally had better pension plans than those in the private sector. Before they were allowed to strike, the balancing mechanism was that they also traditionally had lower salaries. Now it's not uncommon for both public sector salaries and pensions to beat those in the private sector, along with greater job security. Somehow we have to get back to a total compensation approach that better balances govt remuneration with that of large private sector employers.
:thumbsup:

In addition ISTM that politicians have realized that voters usually pay a lot more attention to public service wage increases, especially if the percentage increase is greater than what those in the private sector are getting, than to other improvements in the total benefits package. As a result they've tended to agree to novel non-wage remuneration, e.g. sick day banking by teachers, retention bonuses by cops and firefighters, job security by municipal workers, etc. The public doesn't generally see these as significant when they're negotiated. It's only years later, when they've been accruing for a while, that their enormity becomes apparent. (Few cared about sick-day banking when it was introduced. It became contentious when retiring teachers started getting 6 months salary in lieu, etc. Toronto police retention bonuses sounded legitimate initially. Then things got out of hand as smaller police forces started offering them in order to compete with TPS and then firefighters, et al started negotiating these bonuses as well...)

I don't blame the public service for this. Indeed their negotiators are to be commended for thinking outside the box. I condemn the politicians who took the expedient, politically-safe way out of a possible public sector strike by agreeing to stuff that they new (or ought to have known) would fail the smell test years after they were gone.
Sedulously eschew obfuscatory hyperverbosity and prolixity.
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Re: I don't expect to retire - I'm going to work until I die

Postby izzy » 12 May 2012 17:16

When considering this topic you may want to bear this in mind:-
http://thesynapse.net/index.php?option= ... Itemid=500
"I disagree strongly with what you say, but I will defend to the death your right to say it."
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Re: I don't expect to retire - I'm going to work until I die

Postby Shakespeare » 25 Jul 2012 18:12

Our Ridiculous Approach to Retirement - NYTimes.com

Basing a system on people’s voluntarily saving for 40 years and evaluating the relevant information for sound investment choices is like asking the family pet to dance on two legs.

Not yet convinced that failure is baked into the voluntary, self-directed, commercially run retirement plans system? Consider what would have to happen for it to work for you. First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7 percent of every dollar you earn. (Didn’t start doing that when you were 25 and you are 55 now? Just save 30 percent of every dollar.) Fourth, earn at least 3 percent above inflation on your investments, every year. (Easy. Just find the best funds for the lowest price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college. Sixth, time your retirement account withdrawals so the last cent is spent the day you die.
“Never appeal to a man's better nature. He may not have one. Invoking his self-interest gives you more leverage.” -- R.A. Heinlein, Time Enough for Love.
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