People usually don't want an "F" but here are some F's you can consider before your pension finals. Consider the impact here for yourself. How are you starting to consider the decisions you'll be making for your pension? What lifestyle choices will your pension support to let you enjoy the life you choose? And, who needs you to share this with them ...as your friends too are "cramming for their finals" as retirement draws near!
Flat-line: friend or foe?
Flat-line refers to the set-up of a pension plan that assures a fixed-income for the rest of your life. This has been the typical arrangement when people retire from big industry, universities, banking, government, etc. But as we all know by now, the guaranteed pension is becoming a thing of the past.
Industry and government cannot afford to guarantee rich pensions into the future. Many plans today are severely under-funded, meaning they already have too little money in order to make good on future promises.
If a pension plan is 6% to 10% under-funded, is this a worry? But the fact is, many plans are 20% to 50% short of capital -- or worse. So it's becoming clear, many pensions will reduce income payments to pensioners by 20% to 50% (or worse) in future. Is this the pension planning you want?
Pension trustees would love to find the magic solution to repair the hole in pension funding. Stock markets won't help much because pensions cannot take the high risk of just investing in the stock market. Bonds offer little hope because of low interest rates, and the fact that bonds lose capital value when interest rates rise.
Can the trustees just ask government or industry to make up the shortfall? ...it's happened before. But as baby boomers hit retirement like a tsunami, pension trustees have faint hope of ever filling the vault to sustain full pension benefits.
In short, a Flat-Line pension can suit if you want a fixed-income allowance for life -- even if it risks paying less than you had hoped. But it may be a foe if under-funding and other issues force trustees to significantly cut your future pension benefits.
Flexibility to live your retirement dream
Many have chosen to "commute" their pension, which we can describe very simply as arranging to remove the money from the pension plan (if it allows) so you invest the proceeds into a personalized pension arrangement. In this manner, you own the money directly, hold it in your own investment account(s), and are accountable for the risk and opportunities of this money.
Consider this in terms of Life Horizons, where I'm saying money needs to serve life -- the way you want to live it! So if you need a greater income to enjoy your bucket-list dreams in early retirement, then flexibility is valuable to you. If you'll compensate by spending less in your 80s, then you're starting to sketch out your life-and-financial plan. Remember to protect income for health expenses that eventually arise too. Pension planning must provide for all seasons of the future, perhaps even much longer than you expect. (Here you can find more on Life Horizons Analysis.)
Some want the flexibility to postpone drawing pension income. Consulting, teaching, many kinds of work may become an early-retirement career. You may want to avoid pension income and the tax payable on receiving it. Flexibility suggests you may reduce or avoid pension income until you want or need to draw on it.
Fortitude to sustain you always
By fortitude I mean you want to know that whatever choice you make with your pension, it must have the power to sustain you throughout the years ahead. Anything less, wouldn't properly be called pension planning.
In a fixed-income pension plan you'd research if the plan is well funded, and consider it's indexing for inflation ...and how that inflation will be measured. Some pension plans are extremely well managed and even have luxury-levels of inflation indexing. You'd want to know this, yes?
If you pull the money into a personalized arrangement, you still need to evaluate the risks. Having the money today is no guarantee of sustaining it (or it sustaining you) through the future. Are you carefully mitigating risk of fraud? Are you implementing Life Income Mandates as a foundation for your investment allocations to protect your values and life income? I address these issues in the learning modules on this website. Here you can find more on Life Income Mandates.
Nothing is risk free. No pension choice is free of future risks related to legislation, wider economy, inflation, misappropriation or fraud, high health costs, or needs of a spouse or family. Be sure you examine your choices carefully so your decision has the fortitude to guarantee a strong income through the years ahead.
Family: surviving spouse and family estate
You're not alone! Spouse and family deserve your consideration too! The typical pension plan will protect a portion of your income for surviving spouse, yet generally eliminates any estate value for surviving children or grandchildren.
What decision is best and most comfortable for your spouse? Will he or she be satisfied if you opt for a fixed-income that then reduces to 75%, or 60%, or 50% when she or he outlives you? This is vital to discuss together because your decision should be the one you can both live with happily and comfortably.
One couple foresees a fixed-income lifestyle and don't want to worry about investments or running out of money. They sign to remain in a pension plan, aware that a spouse outliving the pensioner would face a drop in income.
Another couple's lifestyle requires more flexibility to alter the timing or amount of income. Would they delay pension income due to other sources? Would they double-up their pension income to fund their bucket-list? Accordingly they'd choose to commute the pension as a personalized plan. And with a secure focus on life income mandates, death needn't force a drop in income to the surviving spouse.
Arranging to have family, even grandchildren, inherit your pension values is possible with your personalized pension planning. Marie (page 37 in A Lifetime Of Wealth) said no woman in her family had ever lived beyond age 63. She didn't want to leave her pension values to the trustees, just to bail out other people in the pension plan. She had worked hard, built years of service, and wanted the full value to own herself and to bequeath as a gift to her grandchildren when she dies.
Flexibility of income while living, and to ultimately offer remaining pension values to children or grandchildren, are among key considerations when making your pension choices.
PH is the next F here ....signifying how you can use your pension to fuel your charitable purposes.
In the typical fixed-income pension you won't have a residue from your pension for any estate gift to charity. In fact you might have to reduce charitable givings through the years due to inflexibility and potential cut-backs of pension income. If you can afford a charitable life insurance policy (especially effective as a joint-spouse estate policy) this can enrich your philanthropic purposes at death. ...with tax relief back to your estate, thus benefiting your family.
Richer philanthropy can arise with a commuted or personalized pension. If you preserve pension money through life income mandates, you should have money to spare when your days are done. Such would be taxable, but if you bequeath some or all of it to charity, you can greatly reduce taxes on your estate ....thus benefiting your heirs. In fact with foresight to anticipate this, you could own a joint-estate policy to multiply the benefits to both family and philanthropy. Here is more on philanthropic strategies.
Bonus "F" ....your Financial Team
OK I really want to share at least 5 F's here. Your pension planning will be safest in the context of a properly certified financial planning process. Who will you reach? What resources do you need? Who understands your dreams, the risks and stresses you want to avoid, the lifestyle you want to enjoy and preserve for yourself and your family? If you have such a team, my compliments to you! If you still lack this team, then make a point to immediately identify the resources and people who can help you. (See more on having a Stewardship team.)More in our learning modules at: guaranteedIncome4Life.ca Amazon or Kindle: "A Lifetime Of Wealth -- And How Not To Lose It." "Subscribe" -- see on this page -- to get upcoming insights and updates. Brian Weatherdon, MA CFP CLU CPCA MDRT