If you keep tabs on your retirement portfolio, you have probably noticed some wild swings caused by the market reaction to the coronavirus outbreak.
It’s the latest example of how Canadian retirement savings have become increasingly exposed to the whims of the broader markets. In fact, Canadian retirement nest eggs have gone through a dramatic risk download over the past four decades as more employer pension plans shift the burden of managing market risk to their employees.
Going back to the 1970s, employers have been replacing defined benefit pension plans (DB) where payouts are guaranteed, with defined contribution pensions (DC) where pension contributions are invested in the financial markets and left to the employees to worry about.
According to Statistics Canada, 48.4 per cent of employed men and 34.5 per cent of employed women were covered under a DB pension plan in 1977. At the time, DC pensions were virtually non-existent.
Today, the proportion of DB pensions has plunged to 21.4 per cent for men and 28.7 per cent for women. DC pensions and DB/DC hybrid pensions now apply to nearly 14 per cent of employed men and just over 10 per cent of working women.
The shift from DB to DC pensions accelerated in the wake of the 2008 global financial meltdown as big employers like General Motors Co. struggled to survive. The shift is expected to continue for the next generation of retirement savers.
Overall, workplace pension coverage has also declined over the years, leaving more Canadians having to supplement their retirement savings by further investing in often volatile financial markets through registered retirement savings plans (RRSP) and tax-free savings accounts (TFSA).
That’s fine for this generation of retirement savers who have only known markets that go up, but a prolonged market slump could be devastating for those who rely on income from their portfolios in their golden years.
The lesson for retirement savers: you’re on your own. Your fate is ultimately in your own hands. That could be a good thing for those who take the reins, learn how long-term investing works, and remain engaged.
That opportunity is available throughout February as BNN Bloomberg presents Your Money Month: a series of segments aimed at giving individual investors the tools to keep their finances on the right track.
Your Money Month gathers Canada’s top experts on everything from debt management, to investing for the long-term, to estate planning for the next generation.
It is timed with RRSP season to help Canadians get thinking about their contributions before the March 2 deadline. It explores options that include delaying contributions or foregoing them in favour of a TFSA contribution.
It also explores the tax advantages of investing in an RRSP, TFSA or an outside a registered account. Other topics include how to find a qualified financial advisor, what to expect from the one you have, and how to ensure excessive fees aren’t eating into your retirement savings.
The world is full of risk and no one knows what market-mover will come next. Having the right financial tools to deal with them will not only help produce better returns from your portfolio, but work toward keeping what you have. That’s what differentiates investing from wealth management.
Besides, no one really cares about your money more than you.
Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email firstname.lastname@example.org.