Pension choices for Life - Jan2012

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What factors should we consider before deciding to commute a pension plan to take the lump sum, instead of remaining as a member of the pension plan and getting a fixed income?

What factors should we consider before deciding to commute a pension plan to take the lump sum, instead of remaining as a member of the pension plan and getting a fixed income?

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  • 1. PENSION CHOICES FOR LIFE AND BEYOND
    • __________________
    • Brian Weatherdon, MA, CFP, CLU
    • [email_address]
    • 1 877 937-3500 x 223
  • 2. How to use this seminar . . .
    • This seminar used to be a public presentation of 45-60 minutes plus questions & answers. With media clippings and some humour it was rather bulky at 60 megabytes of memory.
    • Time is precious for you. This personalized format now let’s you breeze through or pause, as often as you wish. I hope you find these pages speak on their own. They will welcome your return whenever you need clarification. Also, you can reach me directly.
    • After you have reviewed these slides, let’s find a convenient time to discuss your questions and thoughts about this. Then there are two ways to move forward. ( 1 ) I can give you a free report to help support your choice to stay within the typical pension plan. Or ( 2 ) in seminar #2 I’ll show how we move forward into a personalized pension plan to secure the freedom and life-choices you want to enjoy.
    • My role is not to propose one choice over the other. I clarify matters and counsel with you so you can choose the approach best fitting your needs, feelings, family, and lifestyle.
  • 3. WELCOME TO SEMINAR #1 PENSION CHOICES FOR LIFE As you near retirement you have the choice to receive a steady income from a traditional pension plan, or to “commute” and take a lump sum to create your own personalized pension plan. This is a vital decision – one of life’s largest – and will greatly shape how your pension resources will support how you choose to enjoy life, as well as the estate you eventually wish to leave for loved ones. In short, this is all about LIFE. Each choice here has risks and opportunities. As you review this seminar – I urge you to have an open mind and fully consider both sides. The traditional approach was to draw the pension. More people now are commuting. Getting the results you want depends on how you make the choice, and how the plan is designed to support your financial needs throughout early-, middle, and later retirement. So enjoy this “window” into the choices before you. I welcome hearing from you: is this seminar helpful? …how can we improve it? …what further questions come to mind?
  • 4. Most common values people share for Retirement:
    • To have “enough”. Avoid running out of money
    • Provide for future health costs: desire for higher income when needed.
    • Avoid sacrificing the lifestyle of your dreams; live the life you choose.
    • Enjoy your home, traveling, active lifestyle wherever & however you choose
    • Explore how a “surplus” can further your goals & new opportunities
    • Enjoy family, consider philanthropy and new ways to learn and share.
    • Family, community, old and new friendships
    • Freedom to travel, explore world & cultures
    • Giving, helping, learning, sharing
    • Maintaining independence
    • Preserving an Estate
    • More: _________
  • 5. Retire and enjoy life on your own terms! Credit to Zoomer Magazine Retirement
  • 6. Avoid having to worry about falling short… Credit to Zoomer Magazine
  • 7. Widespread concerns over falling short Advisor.ca 3/3/10
    • Nanos Research, “An overwhelming majority of Canadians polled believe the future of private pension plans is at risk.”
    • 69.6% believe private pension plans will have to reduce payments to pensioners in the future. (Others discovering this is true, and isn’t new.)
    • “… dark cloud on the horizon is their worry … public and private pension plans will have to reduce payments to pensioners in the future in order to remain solvent."
    • Securing the value in existing pension plans, & our personal retirement choices, are the greatest issues aside from healthcare, for our generation.
  • 8. Stories can help unveil our inner feelings and clarify valuable choices. Which of these comes closest to you?
    • 1. GILBERT’S CHOICE … to draw fixed-income pension
    • Gilbert considered his pension options. He had always valued guarantees. Investing in his home, GIC and term deposits, he is comfortable knowing his money is safe.
    • Gilbert has each year’s pension statements. They show the pension income he expects in retirement (plus some inflation protection). While some pensions have had cut-backs; he knows the pension trustees will do their best to preserve value.
    • Gilbert waived other opportunities (in next screens) and chose a fixed-income. With savings he and his wife built up over the years, they expect to be secure. Staying with traditional pension plan seems a good fit with this family’s needs and comfort.
  • 9. Stories can help unveil our inner feelings and clarify valuable choices. Which of these comes closest to you?
    • 2. MARY’S CHOICE … for her family estate
    • Mary’s biggest concern when she retired was that she might not live long. Women in her family had never lived past 63 years of age. She wanted a way to protect the value of her pension, 100% to her husband and then all remaining value for her family.
    • If Mary drew the pension in a traditional way, her pension would reduce to 60% for her surviving husband, and offer nothing to their children.
    • Commuting her pension gave Mary control to draw a higher income in the early years, and leave 100% of that for her husband. When he passes someday, the remaining value will benefit their children and grandchildren.
  • 10. Stories can help unveil our inner feelings and clarify valuable choices. Which of these comes closest to you?
    • 3. JOHN’S EXPERIENCE … with under-funded pension plan
    • John’s pension obligated him to stay in the pension plan. Here’s his experience.
    • Before he retired, John’s pension statements showed an expected income near $5100 per month. Two years into retirement he showed me the deposits at $3137 into his bank account. More recently it has fallen to $1961/month. Cutbacks like this occur when pension plans are under-funded, experience poor investment returns, and have ongoing obligations to their retired members. John’s loss has been quite severe.
    • John and his wife have part-time jobs. They travel less than they wish. They worry about expenses because John’s family lives into their 90s. His father’s health costs already show that John doesn’t have enough money to grow old safely. He can consider increasing future resources with long term care insurance – but how to pay for it !
  • 11. Stories can help unveil our inner feelings and clarify valuable choices. Which of these comes closest to you?
    • 4. ERIC’S CHOICE … gaining a highly flexible income
    • Eric retired knowing he would continue a private consulting career for five years or more. Expecting $10,000 a month from consulting, he wanted to delay drawing his pension (thus reduce tax) and let the pension asset keep growing until he really retired.
    • We found Eric would have four life stages after leaving work. ( i ) ongoing consulting for private companies. ( ii ) active retirement lifestyle age 70+ in which he can enjoy high spending. ( iii ) Some years of lesser spending while still in good health. ( iv ) Late senior years when Eric would likely require costly personal assistance. Eric’s personalized pension plan will adapt to the changing needs of all four periods.
    • A bonus for Eric, being single, was knowing that if anything should happen to him his pension can be paid directly to his estate or to a Family Trust for his grandchildren. *
    • * (minus taxes, unless otherwise funded)
  • 12. Stories can help unveil our inner feelings and clarify valuable choices. Which of these comes closest to you?
    • 5. PAT’S CHOICE … having Seed Capital for new business
    • Pat was eager to retire because her research was preparing her for a new business opportunity. All she needed was Seed Capital for the first few years. Borrowing from a bank would be difficult and expensive.
    • Pat’s pension became the Seed Capital she needed. Her commuted pension was split in two, giving her a Life Income Fund starting from 6%/year and a RRIF from which she drew higher amounts supporting her business. As business increased, Pat reduced her LIF & RRIF income to minimum, and lives primarily on salary & dividends.
    • Pat will sell her company in 3-5 years for much more than the original seed capital. Her financial means, and the joy of her achievement are proud rewards.
  • 13. TEN POINTS OF COMPARISON
    • Standard Pension :
    • Trustees’ obligations
    • Nature of advice
    • Safety
    • Health coverage
    • Inflation, cost of living, capped?
    • Under-funding
    • Value to surviving spouse 60%?
    • No value to children, estate
    • Tax strategies
    • Service
    • Personal Pension
    • Eases duty on Trustees
    • Requires Certified Advisor
    • Safety
    • Health coverage
    • Inflation protection
    • Investment plan security
    • Value to spouse 100% or +
    • Value to children & estate
    • Tax strategies
    • Service
  • 14. Pension Trustees’ viewpoint…
    • Standard Pension :
    • Some trustees prefer keeping assets in the plan; others see commuting as reducing the plan’s future liabilities
    • Longevity risk  as retirees live longer
    • Worsening under-funding as govt regulations inhibit surpluses; rising interest rates cause capital-losses to bonds; payments to retirees inhibit recovery even during good “markets”
    • Personal Pension
    • One pay-out in full
    • Reduced risks & liabilities
    • Reduced administration
    • Reduced future costs
    • Reduce demographic risks
  • 15. Advisor needed for . . .
    • Standard Pension :
    • Advisor can manage “other” savings (not pension)
    • Optional certification
    • “ Any advisor could . . .”
    • Not integrated w pension
    • Smaller accounts
    • Personal Pension
    • Highly certified qualifications
    • Listens & communicates well
    • 30 year commitment to plan
    • Continues service globally
    • Advice, recommendations, results
    • Sustains & adapts future income
  • 16. Health insurances . . .
    • Standard Pension :
    • May include some health benefits
    • May require premiums
    • May exclude dental
    • May exclude “out-of-country”
    • No future guarantees. Extra costs for excluded coverages, and for loss of independence, long term care.
    • Personal Pension
    • Choice to insure at competitive cost
    • Choice to insure through spouse or through eg. retired teachers plan
    • Option to combine health & dental, plus “out-of-country” coverage
    • Can include “loss of independence”, illness, long term care coverage.
  • 17. Fixed or variable income . . .
    • Standard Pension :
    • Fixed income
    • Retirement seen as a straight line of lifestyle and expenses until death
    • Results vary greatly due to funding, markets, economy, regulation, and effective caps on surplus
    • Personal Pension
    • Life need not be a “straight line”.
    • Fixed income if you choose: eg term deposits combined with life annuity and life-income guarantees
    • Variable and higher income when your needs or dreams require more; less as needs reduce; and more again when health requires. Live and spend as you choose.
    • At least “3 horizons” in retirement
  • 18. Safety . . .
    • Standard Pension :
    • This was usually safe with a growing economy, higher interest rates, fewer retirees and a younger population of workers.
    • May assume 5 to 5½% returns. Some pensions manage well. Many will long continue struggling over shortfalls experienced with investment losses from 2000-2008.
    • Personal Pension
    • Seminar #2, Pension Platforms, explains in depth how we create ongoing “safety” for life-income .
    • Mutual funds alone may not suffice since investments can fall for a year or longer, while income is needed, thus depleting account value.
    • Combination of funds and guaranteed life-income strategies to perpetuate income
  • 19. Inflation / Cost of Living . . .
    • Standard Pension :
    • Many pensions are indexed only to 3% and the retiree loses purchasing power when inflation rises beyond that.
    • Inflation in health is near 8%;; dental is near 7%; drugs are >12%, and personal care costs will keep rising.
    • Some rare pensions cover inflation even up to 7 or 8%: people would usually stay in that kind of pension if it has funding to keep its promises.
    • Personal Pension
    • Historically the strongest protection against inflation has been dividend-paying equities. Pensions whether large or small require inflation-fighting capacity of dividends & equities.
    • Life Annuities (LA) and ladders (LADs) also allow rising payments, as do Lifetime Income Benefits (LIB).
    • Seminar #2, Pension Platforms, will show how these in combination support future purchasing power
  • 20. Under-funding . . .
    • Standard Pension :
    • Inflation indexing must falter if pension remains under-funded .
    • Pensions are widely under-funded by 20-40% coast-to-coast.
    • As under-funding continues, pension incomes are reduced. Cost-of-living is credited only on the lower base.
    • Personal Pension
    • The commuted pension is already fully funded. Trustees cannot take it back.
    • Protect this value with strong allocation and diversification of assets, products, management, & guarantees.
    • Rising dividend yield, commercial property income, equity growth, and insured guarantees all contribute to your income in retirement. It’s your own pension plan – you /your family are the only owners.
  • 21. Value for Spouse / Estate at death
    • Standard Pension :
    • Choice of reduction to 75%, 60%, or 50% for surviving spouse. When retiree passes on, only the agreed % will continue to surviving spouse.
    • 0% for estate when retiree & spouse have died. Value stays in the pension plan to support members still living.
    • Personal Pension
    • Personal pension gets a tax-free spousal rollover of the entire account.
    • Spouse can continue receiving 100% or even more, for life & health care.
    • Full value * at the death of surviving spouse goes to estate, or can by-pass probate & go immediately to family or a Trust for family or other philanthropy.
          • * after tax
  • 22. Philanthropic opportunity . . .
    • Standard Pension :
    • As no value remains after death of the retiree and spouse, there is no way to make a final gift of this amount for your charitable desires.
    • Value remains with the Pension Trust and current / future members.
    • No tax credit; no tax relief for estate
    • Personal Pension
    • Survivor can bequeath value to:
      • family / friends
      • favourite charities *
      • University or specific program *
      • Community Foundation *
      • Human relief abroad *
      • Your choice! *
    • * Your Estate gets tax relief !
  • 23. Tax Strategies . . .
    • Standard Pension
    • $2000 split to lower-income spouse
    • Up to ½ income-split to spouse while CRA allows
    • Personal Pension
    • $2000 split to lower-income “.
    • Up to ½ income-split to spouse
    • Working: LIF draw  spousal RRSP
    • Meltdown to lower lifetime tax load & clawbacks
    • Other LIF yearly-meltdown strategies
    • Insured Estate Maximizer
    • Philanthropy from Estate ( see slide 36 ) can reduce tax on other family assets.
  • 24. Service standards . . .
    • Standard Pension :
    • Call /admin centre
    • No additional financial or estate services; no counsel on strategies
    • for future health and estate needs
    • Advisory fee hidden in plan admin
    • Personal Pension
    • Personalized service daily
    • Integrated with Certified Life and Financial Plan , and Estate Plan included freely at no further cost .
    • Advisory fee is transparent and fully available.
  • 25. Can we see an example . . . ?
  • 26. A sample to open discussion . . .
    • For discussion only, not for DIY. Starting with a full-bodied review of your lifestyle desires, your intended activities in retirement, and personal values, we develop a personalized plan for financial-, tax- and estate-planning. This sample is not an offer of any financial contract . We also happily review design and key aspects of plan with your accountant & tax advisors.
    • 2000 to 2010 was troubled with meltdowns in technology and resources, also the world financial collapse, plus ongoing war on terrorism. Described as the worst decade since 1929 or 1820 all pensions and investment firms struggled.
    • Yet surprisingly (next screen) a simple portfolio (30% Income and 70% dividend) averaged compound growth 6.9% * . Other decades have done more or less. This and more advanced models prove a vigorous base to sustain lifelong income combined with income guarantees detailed further in Seminar #2.
      • * Retail model gave 6.3%. Discounts for Personal Pension Platforms yielded 6.9 %
  • 27. A historically difficult decade yielding 6.9%/year. Combined with insured income guarantees &/or life annuities this can support lifelong security. See Seminar #2 NB: Past returns are no indication of the future.
  • 28. How do you rate each of these in personal importance? Let’s discuss together
    • Will your future hold 3 or more distinct periods: eg. early, mid, later years?
    • Do you want flexible income for an active and independent lifestyle?
    • Do you wish to reduce risks: which ones, and how?
    • How important is a guaranteed income? Starting when?
    • Should we aim to outpace inflation and reduce taxes/clawbacks?
    • Is gifting important to you ….to protect estate value for family &/or charity?
    • We’ll also talk about privacy and independence (you & your estate).
  • 29. Next step: call me. We’ll discuss and create a free report to support your pension choice. Then if you like we can offer you the 2 nd seminar: PENSION PLATFORMS FOR LIFE AND BEYOND
  • 30. Choice is yours. . We’re here to help you as a . resource, whatever you decide.
  • 31. News clippings and sources available on request . . .
  • 32. Appendix #1: Quick slide on Estate Flow. We use both sides of this chart for your benefit. Beneficiaries Home Investments Bank Broker Investments at Life Insurance Co. Life Insurance Probate Fees Legal Fees Exec Fees Time Delay EXTRA
  • 33. Appendix #2: Controlling Assets after death
      • Direct beneficiary status
      • Family Trusts*
      • Insurance Trust*
      • Testamentary Trust*
      • Hensen Trust*
      • Family Asset Transfer
      • Estate Freeze
      • Two Wills (eg. for Business/other assets)
    • * There are inexpensive ways to set up
    • trusts without paying huge trustee fees.
    EXTRA
  • 34. Appendix #3: common hazards of joint ownership, including pension values left to heirs
    • Joint ownership is often set up poorly, yet one can easily learn what is needed from “google” or a certified advisor. Esp: “Four Certainties.”
      • “ Four certainties” of law for joint trusts
      • Fails if not created in same time & place, & contract…..
      • All owners have equal ownership of the whole property
      • Asset at risk from joint tenant’s creditors
      • Asset has in-law risk under “Family Law Act”
      • Other properties:
      • Tax risk: taxable disposition on transfer to joint tenancy
      • Tax risk: losing full “principle residence” exemption
    EXTRA
  • 35. Appendix #4: glimpse at life insurance and long term care insurance . . .
    • Many at 60 or 70+ have mortgage debt or other reasons to own life insurance… & may be paying 2x to 3x too much
    • We may reduce costs, or find new value for you in existing life policies.
    • Life insurance may fit your long term estate planning, as a place to hold value tax-free for the next generation or to multiply your philanthropy.
    • Long Term Care insurance, at $1/month now, can create $5 to $10 /month later for costs of personal care, privacy, dignity in your home or elsewhere. LTCI reduces the impact of health inflation for those who will live long!
        • Caution: is it “reimbursement-only” or a true “income” plan? You want to know…
    EXTRA
  • 36. Appendix #5: consider how philanthropy can reduce taxes that hit your estate EXTRA
  • 37. Ask a Professional
    • Reach me at your convenience…
    • Brian Weatherdon, MA, CFP, CLU.
    • [email_address]
    • 1 877 937-3500 x 223
    • Sovereign Wealth Management
    • We are an advisory firm specializing to protect the resources
    • you have built , and ensure your financial capacity to enjoy life
    • as you choose … while also reducing taxes and streamlining
    • your estate for those dearest to you .
    • Graphic Clippings from Zoomer Magazine, published by CARP. Membership is inexpensive and fun, and hosts local action groups to address legislative and other issues. Also consider Silver and Gold Magazine, www.SNGmagazine.com for content, deals, and great ideas.