Nova Scotia retiree going broke warns about DIY investing
HRM pension plan changing rules to stop retirees from leaving with their pension funds
A former Halifax firefighter is warning retirees about the dangers of do-it-yourself investing after his decision to leave the city pension plan left him in financial ruin.
The option to exit the Halifax Regional Municipality's pension plan will no longer be available as of this September — a change that's too late for Charlie Ballard of Dayspring, N.S.
In June 2009, Ballard hung up his firefighter's helmet after 33 years and took the value of his $720,000 pension with him. It was supposed to be Freedom 59 when he retired.
'Burning in hell'
He's now 66 and working 34 hours a week to fend off bankruptcy. Only seven years into his retirement, he's already lost two-thirds of his funds.
"Not gaining, not gaining a bit. I'm just controlling what's there," said Ballard, losing the battle to get his financial house in order. "I'm burning in hell."
Ballard's story highlights the risks of taking your financial future into your own hands — and of leaving the relative safety of a pension plan for the uncertain world of self-directed investing.
Where the money went
When Ballard opted to leave the HRM pension plan, he says it seemed like a good idea at the time. He attended an information session about taking his pension's "commuted value" — a $720,000 lump sum. That worked out to $260,000 cash, plus $460,000 to be invested. He bought a Life Income Fund (LIF) from the bank.
But that session wasn't official financial advice. There were no experts, only other firefighters.
"Nobody really sat down and talked to you other than amongst ourselves," he said.
Ballard had big plans to set himself up for a smooth retirement. He renovated his century-old home on the south shore. He bought himself and his wife new vehicles.
And he bought the fixer-upper next door for his son, Josh, who was serving time in prison. Josh, who lived with Tourette syndrome and mental health problems, needed help getting his life on track.
Josh died in the fall of 2011 after an accidental drug overdose. The partially finished house, which Ballard invested more than $50,000 in, sits empty.
"Would I do it all again? Oh, in a minute. It's what had to be done," Ballard said. "You gotta be where you were to be where you are."
Ballard's personal tragedy was compounded by some ill-advised financial decisions.
Taking a big chunk in cash from the pension meant a hefty income tax bill. He took out a $49,000 line of credit to pay the tax man. Seven years later, the balance owed has budged only $155, though he's never missed a payment.
There's also a second line of credit and half a dozen credit cards.
"They were my spending choices," he said. "Some of them were pretty dumb."
They add up to nearly $100,000 in debt — a financial spiral he can't escape because he can only make minimum payments.
"I don't want to [debt] consolidate," said Ballard, who found the process too costly. "I don't want to go bankrupt. I wanted to keep my name where it's still good."
Ballard thought he had a solution: withdraw all the money from his Life Income Fund, which is invested in a Guaranteed Investment Certificate. The LIF value started off at $460,000 but has dwindled to about $260,000 thanks to withdrawals and penalties.
His monthly LIF cheque has dropped steadily from $2,000 to about $1,600. Using the LIF money to wipe out his debt would put him ahead, he figured, because he'd no longer be paying interest rates ranging from six to 19 per cent.
But he discovered the money, which returns a modest interest rate and incurs management fees, is locked in. "That just frosts me to no end," he said.
'Better off if I was dead'
There are "financial hardship" scenarios in Nova Scotia that allow special withdrawals from a LIF, but a debt spiral isn't one of them.
According to Peter Freeman, a certified financial planner at Investors Group in Halifax, the LIF can be tapped into if you're late on mortgage payments or rent and face eviction, uncovered medical or dental expenses can be paid with the funds, or if you fall into the low-income category. If the retiree's total annual income is expected to be less than $36,000, up to $27,450 can be unlocked. (This category doesn't apply to federal employees.)
If there's a terminal-illness diagnosis, a retiree can cash out the LIF. And at death, the locked-in money goes to the beneficiary.
'Better off I was dead'
"Right after the young fella died that I actually thought, 'You know, the whole family would be a lot better off if I was dead. That's a hell of a thought to have at any time," he said.
"It's not a thought that I carried forever, but it's a thought that was there once, and once is a little scary when it comes."
He's appealing to the Nova Scotia government to change the rules to allow him to get at his money.
"They give me my money, I'd have my fire put out in two days," he said.
It's all left Ballard full of regret. He wishes he'd stayed in the defined benefit pension plan with its predictable monthly payment, so that he might not be in the mess he's in now.
Freeman says the trouble with some LIFs is that they incur hidden management fees which are higher than interest rate paid out. He calls them an "installment plan to run out of money."
HRM changes coming
He says LIFs are a particular challenge for DIY investors.
"You have to make high returns to keep up with a pension plan's performance and that's hard to do, if not impossible, without taking more risk," said Freeman.
If Ballard was retiring this fall, he might not be in financial quicksand right now. As of Sept. 1, retirees are no longer allowed to leave the HRM pension plan and transfer out the "commuted value" of the pension.
HRM pension plan CEO Terri Troy says that from January 2011 to May 2016 there were 41 retirees who exited the plan. They represent 3.6 per cent of retirees, and took amounts ranging from $36,000 to $1.7 million, for a combined $20 million.
A notice from the HRM Pension Plan says it's removing the option in order to protect the plan, which has approximately 10,000 members. With low interest rates being paid out currently, "Commuted Values [tend] to be larger than they would be under historical interest rate conditions," said the letter.
In other words, it's more expensive for the plan to pay out a lump sum than to pay a monthly pension.
Troy says the risk to the plan increases if a lot of people leave when markets are crashing. "It would be a "significant hit to the plan," said Troy.
As for people like Ballard running into difficulty investing, she says she's concerned "philosophically" because pension plans exist to pay steady retirement income cheques. "Pension plans aren't really set up to pay one lump sum for somebody retiring."
'I would just like to relax'
Freeman says there might be another option for people in Ballard's situation. Freeman says LIF owners can buy a life annuity, which are sold by insurance companies and some financial planners. Freeman says "it freezes the damage" by allowing the investor to lock into a guaranteed payment for life, similar to a pension.
For Ballard, he's considering hiring a lawyer to sort out his retirement income. He'd rather not be working nearly full-time hours so that he can spend time with his wife and his horses.
But he says he's feeling better and that things could be worse.
"I would just like to relax," he said.