Retirement Savings Planning

by David Cork

How should public service managers properly manage their retirement savings plans?

Anyone in Canada fortunate enough to participate in a pension plan not only benefits from an enormous retirement cash flow advantage, they also have the answer to investing their capital outside their pension. Whether you have limited or considerable sums in separate retirement plans, the advice is simple: use the same investment principles in your RSPs as are used in institutional pension management. The challenge is to access this approach.

In Bulls, Bears and Pigs, I devoted a chapter to the guiding principles institutions should use for asset management within a pension. Entitled ‘Future Funding Liabilities’, it delved into the process of proper money management and why pensions manage assets so well.

What is a future funding liability? For pensions, it is the longer-term requirement for cash flow needed to make payments to retired workers. Pensions work with actuaries to calculate what future cash flow is needed and what longer-term rates of return are required.

For individuals, future funding liabilities are much more personal. They tend to be family needs such as children's university education, paying off a mortgage, perhaps saving for a cottage, and securing retirement income.

In recent years, given the increased accessibility of financial markets and the tremendous break-through in technology, most financial institutions now have programs that mirror the process used in pension management. What are the key aspects of pensions?

·     A written investment policy statement: write down all specific aspects to the investment plan:
1.     Asset mix
2.     Risk tolerance
3.     Manager criteria
4.     Rebalance schedule
5.     Target returns.

§     Concentration on future funding requirements: as Steven Covey says, start with the end in mind. Don’t invest money without a very specific outcome in mind.

§     Put pension, RSP and other significant financial aspects into a financial planning process.

§     Maintain a review schedule to plot progress and future courses of action.

§     Use a multi-manager investment approach to track the returns of the markets and reduce risk and volatility.

Too many Canadians take a very casual approach to investing their retirement money. They are often motivated by a tax break, and deposit funds in the last week of February and then chase after the flavour of the month. The advantage of participating in a pension is its mandatory nature and the regimented approach of asset management. Planning for retirement is serious business and it should involve a well thought out plan.

An event a number of years back demonstrates the problem with many Canadians' mindset: As a guest on Pamela Wallin Live, I received a call from a teacher who was seriously considering transferring her pension into a locked-in RSP and managing it herself. I inquired if she had any experience in the financial markets and she responded that she hadn’t. She did feel it would be exciting to be able to invest her money and manage her own future. This was just as the tech stock bubble was starting to develop. I hope she stayed put.

In the end, having a well thought out plan is the key to a successful outcome. Pensions are successful because of their process, all too often overlooked by average investors. It is my experience that retirees who are doing well and have created sufficient wealth have four common traits:
§     They are debt free
§     They live within their means
§     Whether created on their own or through the assistance of an advisor, they have a financial plan to govern cash flow and management issues
§     They have a pension, either through their employer or self-created or a combination of both (RSP).

I believe this is what true financial security looks like.

<1>David Cork is a director at ScotiaMcLeod and author of the best-selling The Pig and the Python.