Planning for the future

Stanley Oliver
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Stan's Stance

Stanley Oliver

Reaching middle age brings all kinds of new concerns that we must consider. Never thought I would say that but as I approach 50, I now find myself thinking about things that I never really thought about or actually cared about before (meaning before the age of 30).

Middle age brings a variety of changes for many of us, including less bladder capacity in the nighttime. But seriously, retirement becomes and should be an important and significant topic for all of us as we get older. More particularly, retirement as it relates to personal finances and planning for the future, in my view, the earlier you can plan for those golden years the better.

So hopefully you can lead a comfortable life during those years. The challenge for young people is to see the trees beyond the forest, and know the difference between Defined Benefit Pension Plans (DBPP) and Defined Contribution Pension Plans (DCPP). However, generally speaking, new employees don't always have a choice as to which pension plan to enroll in.

This decision can be and is usually driven by the employer and or company. Nevertheless, Defined Contribution Pension Plans seem to be more popular because they offer less risk to the employer and the employee. Some with much more finance expertise then me will obliviously argue the details of that.

A Defined Benefit Pension Plan (DBPP) is sometimes referred by employers as the golden plated plan. So just as it sounds, it's meant to be defined-guaranteed-your final pension payout is based on a fixed formula. This formula is typically a combination of years of service multiplied by a percentage of one's average salary over the span of the last several years of your working career.

The advantages of a DBPP is that retirement income is separate/independent of market performance; usually adjusted for inflation; can be as high as 70 per cent for retirement income of the amount of the employee can make and the higher the income during the years prior to retirement works in favour of the employee.

The disadvantage and downside of a DBPP is that they are extremely expensive for employers to implement and maintain because the biggest risk with it is, that there always remains the possibility of the pension not being funded properly.

Compared to DBPP, a Defined Contribution Pension Plan (DCPP), your benefits are not necessarily fixed but rather are based on a percentage of the employee's salary (usually matched by the employer). The benefit is then dependent on how your portfolio performs with no guarantees as to how much income you'll receive during retirement.

Which allows you, as the investor, to choose from various funds within your plan thus having some control over your plan and investment. The advantages of a DCPP are that it allows you to watch your money grow within the plan and you have more control over your plan.

The disadvantages are your investments are entirely dependent on how the markets you invest in perform and for those who may not be familiar with investments/finances it's very difficult to understand, thus people lose interest.

So folks, I encourage people to start as soon as possible in planning for the future. Talk to a financial advisor or an accountant to see what options best fit your situation.

It may be a Defined Contribution Pension Plan or a Defined Benefit Pension Plan, or it may be something like an RRSP, whatever you choose, it's always good to put a little away for a rainy day.

There are many things that are out of our control when it comes to household expenses, such as electricity bills, food, gas, unforeseen medical bills (especially as we get older) and of course municipal taxes. The more we prepare, the less the burden will be and hopefully the more comfortable living you can enjoy.

Stan Oliver writes from Happy Valley-Goose Bay. He can be reached by email at the following:

Geographic location: Happy Valley, Goose Bay

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