Defining Benefit Pension Plans

One question that I’ve been getting asked a lot, both from listeners of the podcast, as well as those in my investing course, is how to deal with and optimize any sort of investments through your work. 

Typically, in Canada, when you work for a mid-size or large organization, you’ll either be part of a defined contribution pension plan, or a defined benefit pension plan. 

We’re going to cover both types of pensions in this interview, and specifically, some of the things we’ll cover are:

1. How should a pension factor into how you view your finances/investments? (And again, this is all going to be for both types of pensions, no matter which one you have).
2. What should your portfolio look like with a pension (i.e. more equity than bonds?), especially depending on the type of pension that you have.
3. How to factor a pension into an early retirement.
4. The tax implications of potentially taking a buyout for early retirement (if that's an option)

We cover all that, and much more in the interview (scroll down for the full list of questions). 

To help me with this, I have Robb Engen on the show, who is one of the most reputable fee-for-service financial planners that I know of in Canada. 

He also runs one of the largest and most reputable personal finance blogs in Canada called boomerandecho.com. 

He’s regularly quoted or featured in financial media such as the Globe & Mail, MoneySense, the Financial Post, CBC, and Global News. He used to actually work for a university here in Canada, where he had one of those nice gold-plated pensions, but ended up transitioning from that to becoming self-employed, so he had to go through this pension analysis himself first-hand on what to do when you have a pension, and then no longer wish to stay with that employer. 

Because of his background, first-hand experience with pensions, and fantastic reputation in this space here in Canada, I thought he’d be a great fit for this episode, as he’s gone through these options and this analysis himself, so it’s not just some theory that we’re going to be talking about here.

Robb's Site:

BoomerAndEcho.com

Robb's Fee-for-Service Financial Planning Page:

https://boomerandecho.com/fee-only-advice/

You can get your free Passiv account here:

BuildWealthCanada.ca/free

My guide on how to redeem your free premium account upgrade in Passiv is here:

BuildWealthCanada.ca/passiv

You can view the stock/equity side of my portfolio (what I invest in and how much of each ETF type I buy) here:

BuildWealthCanada.ca/portfolio

The account that I use for the safe part of my portfolio is here (I use the high-interest savings account, but they also do GICs if you are willing to lock in the money for a bit to get a higher rate):

BuildWealthCanada.ca/safe

1. To start things off, can you take us through what the main pension types are for Canadians, and what are the key differences between them?
2. How should the 2 different pension types factor into how you view your finances and investments?
3. What should your investment portfolio look like, depending on the type of pension that you have? (ie. more equity than bonds if you have a defined benefit pension?)
4. How do you factor in a pension into an early retirement? (for both pension types)
5. What are the tax implications of potentially taking a pension buyout for early retirement? (if that's an option)
6. Robb, you had a defined benefit pension when you worked at the university before becoming self-employed as a fee-for-service financial planner. Can you take us through how you decided between keeping the pension vs receiving the buyout? What are the pros and cons of each approach?
7. When you have a defined benefit pension plan, your RRSP contribution room gets reduced. This begs the question of whether employees with good defined benefit pension plans should even bother with RRSPs. Let’s also tackle this question for those with a defined contribution pension too.
8. Let’s talk about our investment options with the two different pension types. For people with defined benefit pensions, do they have any options in terms of how much to contribute, and what that money goes into? (ex. Something environmentally or socially conscious (ESG), something more aggressive, more conservative, etc?)
9. For defined contribution pensions, you definitely have to pick what the money goes into but it can be overwhelming analyzing and choosing from the different investment options offered by the company that your employer has selected. When you speak to a client that is struggling with this, is there a certain process or approach that you suggest to them to help them decide on what investments to pick? I’ve gotten asked this a lot by students of my investing course so I came up with a process that I thought I’d share. Robb, feel free to jump in if you have anything to add or if you disagree on anything and that way listeners have a nice step-by-step process from both of us that they can use.
10. Can you take us through some common mistakes that you see people do with the two different pension types?
11. Thanks so much for coming on again Robb. We look forward to seeing you at the Canadian Financial Summit again this year as one of the speakers. Tell us again where we can see more of your, content, research, and learn more about your practice?