Should you switch some of your savings into guaranteed income for life plans if you don’t have a defined benefit plan?

As the Canadian postal workers union (CUPE) continues to negotiate with Canada Post over their contract and in particular the issue of phasing out of Defined Benefit (DB) plans in favour of Defined Contribution (DC) plans as was recently discussed on the CBC, I’ve been wondering why we’re not hearing  more about guaranteed retirement income solutions that are already a huge market for many  Canadians across the country who don’t have access to DB pensions.

In our practice we speak with many Canadians who have saved and/or are saving for retirement and find that most people have the common desire to have at minimum, a rock solid core retirement income that’s guaranteed to keep them in the lifestyle they prefer, for life. I would suspect that the postal workers union and their members probably have the same goals in mind.

From the outside looking in, the main problem for the corporation in this dispute appears to be that the  financial risks of DB plans are too much to take on and would make them uncompetitive with other delivery firms. So the compromise on offer is a simple DC plan that offers similar corporate financial support for workers but eliminates the corporate capital requirements required by existing pension regulations, plus it moves the all of the future retirement income risks away from the corporation and onto the employees.

Guaranteed income for life solutions that combine some of the DC plan attributes with some of the DB plan attributes such as these are often a good compromise that suits a majority of retirement income needs.

A few of the key differences between DB plans and some of the available guaranteed income plans such as with variable annuity plans also known as GMWBs are:

a) savers maintain access to their savings in the event they need the money.

b) plans can be portable when people change jobs.

c) some plans offer lifetime income that is based on deposits plus 4-5% during your savings years (or market value which ever is higher).

d) lifetime retirement income might not be indexed to inflation.

e) savers can choose from a wide variety of investments.

It’s also been our experience that clients who integrate guaranteed income solutions into their financial plans tend to do so for a variety of common reasons. These often include such things as:

a) peace of mind that comes from having a core part of retirement income guaranteed for life that’s above and beyond meagre CPP and Old Age Security (OAS) payments.

b) to create a passive and guaranteed supplemental income in addition to small or insufficient existing DB plans in order to ensure that anticipated lifetime income needs are met.

c) create a DB plan equivalent with savings found in RRSPs, RRIFs and DC plans to eliminate or reduce the need of taking on additional investment risks during savings years, years that savings are being drawn down for income and most importantly, during retirement risk zone years.

d) smooth out or eliminate years where personal retirement incomes are reduced by volatile markets and also eliminate the possibility of running out of money during retirement.

It’s also important to note that guaranteed for life income solutions are implemented on a case by case basis that depend on the specific needs and circumstances of groups, couples and individuals.

For more on this topic please contact Jack Bergmans CFP at Bequest Insurance.

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