Another reason why you should opt for commuted value payment from Defined Benefit Pension plan

As I reiterated before, it is best to receive lump sum payment or commuted value (CV) from the defined benefit plan when you leave the company and invest in annuity. Note that there are some taxable events to consider. Sears Canada, which filed for bankruptcy protection, recently filed a motion with the courts to suspend certain monthly payments to its pension plan and post-retirement health and life insurance benefits, citing cash constraints. At stake is $3.7 million worth of cash payments to various DB plans, postretirement health and benefit plans.

Defined Contribution (DC) Pension Plan

For the unfortunate majority of workers who do not participate in company sponsored Defined Benefit (DB) pension plans, but instead contribute to DC plan instead, below are a couple of watch-outs. The typical DC plan includes a 50% matching contribution from the Employer up to 5% of salary (or 2.5% Employer + 5% Employee).  This is great because you get to double your money from get go.  However, unlike a traditional DB plan where future benefits are promised, you have to roll the dice with a DC Plan and select your own investments, ranging from targeted benefit investments to various equity and fixed income funds. And the biggest drawback is that future benefits are not certain despite the constant belief that the stock markets have always provided an average return of 10% or so. Tell that to the folks who suffered a 30% haircut in 2008 during the U.S. credit crisis when they were about to retire.

Pension and Insurance Revisited

For those lucky enough eligible to receive benefits from a Defined Benefit pension plan,  a decision will sometimes have to be made to either receive monthly pension payments or commuted value/lump sum payments (CV).

Let me summarize for you the pros and cons as I see it.

Minimum Wage in Ontario

While I appreciate the Ontario Liberal’s Party intention to increase the standard of living for lower income wage earners by increasing the minimum wage to $15 an hour effective January 1, 2019, I can’t help but wonder if the plan is going to succeed, never mind the hundreds of thousands of dollars wasted invested paying consultants to justify the idea in the first place.  

Don’t get me wrong. I am all for paying someone a decent wage, but this is the incorrect approach.

By increasing the minimum wage, you must also increase wages at all levels to keep pace. Otherwise, it creates a disincentive. Take for example, wages for a lifeguard. Depending on which city or private facility you work for, the current wage starts at $13 an hour. Do you know the amount of time and investment required to qualify as a lifeguard, and the requirement to maintaining your qualifications through continuing certifications?  I know that for a fact because both my daughters used to be lifeguards, but stopped as soon as they went to university and found better paying positions. This is also why there is a shortage of qualified lifeguards because of the disparity in pay to the minimum wage standards, which have risen considerably over the years, while the pay scale for lifeguards has stagnated.  

Who wants to spend all the money to be a lifeguard when you can make more money working at McDonald’s?  Guess what, you may not even get a minimum wage job at McDonald’s that easily. Just take a look at the number of self-ordering kiosks that have sprung up lately.  

In addition, small business owners and retailers suffer the most as they will not be able to pass on the increased cost of payroll to consumers easily. To make ends meet, they must reduce the number of hours or eliminate workers. The business owners are the true risk takers, and if Ontario wants to continue to encourage entrepreneurship, increasing minimum wage to such levels will be counter-intuitive.

The only way to increase one’s standard of living is not by waiting for handouts. One must upgrade one’s education, skills and be relevant in this changing world. The gap between the haves and have nots have widened.  But sadly, our government policies have not kept pace.  Life is tough, suck it up!  

Words of Wisdom from Warren Buffet

When I first began working in the financial reporting department of a publicly traded company in Minneapolis, U.S.A. many decades ago, my first assignment was to read the Plain English Handbook. It is a document published by the Securities Exchange Commission (SEC) on how to write annual reports and other financial information in plain (spoken) English.  

I still have many fond memories of reading it over and over again.  Warren Buffet, the second wealthiest person in the world, well-known investor and Oracle of Omaha is credited with helping SEC create this footprint for companies to write in simple and understandable English.

Things such as dangling modifiers, action verbs, run-on sentences are considered taboos by Buffet as he was amazed on how complicated, wordy, and utterly incomprehensible annual reports and disclosures were being written.  As a result, when I was first talked with writing the draft Management Discussion and  Analysis (MD&A) section of the annual report, I had to double and triple check my grammar. I have to always emphasize the use of personal pronoun such as “We” instead of using “The Company.”  Instead of constantly using commas to join three sentences into one, I had to try and create sentences with no commas, semi-colons, and etc where possible (lawyers, please take note!). 

Thirty years later, Warren Buffet, at the young age of 85, is still outsmarting everyone in the investment world.  What I admire his most however, is his act of generosity and his simple way of life. He had pledged to give more than 99% of his wealth to philanthropic foundations. He has donated billions of dollars to the Melinda and Bill Gates Foundation.

    

Below are some of his famous quotes that I like to share with you not only because it makes sense from a financial perspective, but it also teaches me to be a better person and to contribute to mankind.

·        Look for a job that you would take even if you did not need the money – His advice to the younger generation looking for advice on career.

·        Be fearful when everyone is greedy, and be greedy when everyone is fearful – Buffet’s investment philosophy

·        I will not bet against America - Spoken during the height of the U.S. credit market crisis in 2008.  

·        Rule number 1: never lose money, rule number 2: never forget rule number 1 – enough said!

·        It takes 20 years to build a reputation, and only 5 minutes to ruin it.  

·        Price is what you pay, and value is what you get – another investment philosophy

·        Only buy stocks that you would be perfectly happy to hold if the market shuts down for 10 years – Buy and hold strategy that almost always pays off. One exception may be IBM.

·        It is difficult to compete with companies using high leverage and low equity - spoken recently on why Berkshire Hathaway is holding on to so much cash when interest rates are at historic lows and valuations are sky high.

·        I buy expensive suits. They just look cheap on me –All his suits are made by a lady from China that he has known for many years.

·        Risk is part of God’s game, alike for men and nations – General Re, his main insurance company,  re-insures a lot of risky but carefully measured and calculated events.  

·        Diversification is only necessary if you don’t know what you are doing – The reason why the majority of portfolio managers never even beat the S&P 500 index.

·        If you get to my age in life and nobody thinks well of you, it does not matter how big your bank account is, your life is a disaster – Well said, money is not everything!