I can’t even begin to count how many clients have told me “when I retire, I’m going to get $X per month from my work pension, guaranteed!” However, when we review their statements together, they’re quite surprised to find out the income figure in their minds IS NOT guaranteed at all. What gives? Why so much confusion about the benefits an employee will receive?
Many statements include illustrations, not guarantees. There’s a big difference between an income guarantee and an illustration. A guaranteed income means that your employer, or an insurance company, is vouching that your income stream will be paid and maintained. An illustration is a hypothetical scenario based on a broad set of assumptions. The two can look eerily similar at first glance, making it difficult to tell them apart.
If your statement shows an income amount, followed by fine print about how that result can be achieved if you maintain the same contribution rate for X number of years and earn Y% per year, that’s an illustration. Illustrations are great for a quick assessment; but the number of variables in play means your end results might vary wildly.
We’re conditioned to think of Defined Benefit pensions. Defined Benefit pensions are an employer-sponsored pension plan that guarantees a retirement payout based on a formula. That formula is most often driven by career earnings and the number of years with that employer. This pension type tends to be the kind most Manitobans think of when we hear the word “pension” and we naturally associate it with guaranteed income for life. But Defined Benefit pensions aren’t the only option out there and they’re quickly disappearing in popularity.
According to CNN Money research, 60% of employees in the private sector had Defined Benefit pensions in the early 1980s in the US. Nowadays, that number is only 4%! That’s a dramatic drop-off in Defined Benefit pensions among private sector workers. Defined Benefit pensions are often being phased out and replaced with Defined Contribution pensions and Group RRSPs. These retirement plans have set contribution schedules, with retirement income dependent on investment performance, rather than guaranteed by the employer’s pocketbook. The end result is many Manitobans know they have a retirement plan from their employer but they have yet to be educated on how it works or why it’s different from the “pension” they’ve been conditioned to think of.
How to tell what you own. If your retirement plan statement shows you a monthly income at “early retirement age” and “normal retirement age,” you likely have a Defined Benefit plan. If your retirement plan statement highlights investment growth/loss or names the underlying holdings, you likely own a Defined Contribution plan or RRSP. If you can’t make heads or tails of what your statement reads, you likely need to consult with a professional Financial Advisor!
Retirement plan statements can appear very complex, because they are! There are tons of rules around contributions, reporting, taxation, and redemptions. Understanding what your employer provides, what’s guaranteed, and how it fits into your retirement vision is paramount to your long-term financial success.
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