Pensions: Surprise millionaires

How much is a good pension worth? More than you’d think. Middle class civil servants John and Susan have never made more than $100,000 each, yet their combined pensions will be worth more than $3 million.

by

From the magazine.

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You’ve likely heard a lot about our pension system troubles, and you may be wondering what all the fuss is about. After all, we still have our RRSPs, right? That’s true, but an RRSP is no replacement for a good pension. You’ll see what I mean once you meet Susan and John Peterson. They’re a typical upper middle class couple working in the civil service­—and their combined pensions are worth a staggering $3 million.

The Petersons have done a lot of smart things to prepare for retirement, but their biggest financial advantage is the fact that they are both long-term public employees. That means they’re both entitled to exceptionally generous employer pensions, fully indexed for inflation, even if they retire in their mid-50s.

Related article: Pensions: A broken promise

John is about to retire at 56, after 31 years in the federal public service. Susan, now 53, is planning to retire in about two years, at which time she will have spent 34 years in the federal public service (we’ve changed both their names to protect their privacy). Both earn between $90,000 and $100,000 a year. They are entitled to retire early with no pension reduction because they will have both reached age 55 with at least 30 years of service. The result? They expect their employer pensions to pay them a combined $120,000 a year by the time Susan retires. And that doesn’t include Old Age Security (which isn’t paid until they’re 65) or income from their investments.

You will doubtless recognize that’s a lot of money. In last issue’s column, I mentioned that the median retired couple in Canada spends about $40,000 a year. We picked $100,000 as the annual amount you would need for a “deluxe” retirement. That means that the Petersons will enjoy a super-deluxe retirement, with three times the median amount to spend.

To fully appreciate the value of their $120,000 annual pension income, consider how much money you would need to save to match that without an employer pension. Assuming that you and your spouse are entitled to about $30,000 a year from the Canada Pension Plan (CPP) and Old Age Security (OAS) at age 65, that means that you would need another $90,000 in retirement income to recreate the Petersons’ employer pensions. Research shows that if you retire at 65 (not 55 or 56 like the Petersons) you would need a nest egg that’s 25 times the annual amount you plan to withdraw to ensure little risk of ever running out of money. In that case you would need to save up a whopping $2,250,000 to fund your retirement. But if you wanted to retire early like the Petersons will, research suggests that you should multiply your cash flow needs by about 33. That means you would have to save up more than $3 million. And if you did, you still wouldn’t be making quite as much as the Petersons, because they have other investment income and eventually they’ll collect OAS as well.

Related article: The top 22 pensions in danger

Now it should be said that the pensions the Petersons are getting are the crème de la crème. Not only are they defined benefit (DB) pensions, meaning that their retirement income is based on their years of service and salary, not on how their pension fund investments actually perform, but both pensions are indexed for inflation too. Outside of the CEO suite, only the government is handing out pensions like that these days. But it’s still an eye-opening example of just what is being lost as defined benefit pensions become more and more scarce.

Related article: Find out how you can create your own pension.

The surprise value of Petersons’ pensions is also a good example of how misleading appearances can be when it comes to wealth. Susan and John have always been quite well off, but in retirement, they’re going to live like multi-millionaires, all because they opted for government jobs.

“All these years I’ve had friends in the private sector say ‘you’d be making so much more money outside the government,’” says Susan, whose friends include high-flying private sector professionals. But in retirement, the tables will be turned. “They draw very good salaries. But I’d be willing to bet the more cautious route [of working for the government] will win out in the end.”

102 comments on “Pensions: Surprise millionaires

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  2. How long before the revolutions begins?

    Reply

    • this article makes it sounds a lot better than the reality—first of all you pay into the fund- about 50% of the total cost. Also, unlike your own RRSP once you and spouse die, your contributions and investment return stays with the fund. If both the people in the example fairly soon after their retirement they would have collected a lot less they paid in and there would be nothing for their children. Private plans esp where the employer gives you some money to put into a your own RRSP are a better deal esp if you don't have good genes and are wanting to leave something for your kids

      Reply

  3. The Petersons have done a lot of smart things to prepare for retirement, but their biggest financial advantage is the fact that they are both long-term public employees.
    They work for the' gov't. 64,000 in Ontario civil services make more than 100,000.
    This can't last. There is no way it can continue. The private sector pension plans are dead but all taxpayers contribute to fat cat civil servants pension plan. Yea, servants.
    Che! Che! Che!

    Reply

  4. Exactly……….this is all a ticking time bomb. Sociailism doesnt work, and it never has. Dont people realize socialism is really just a power grab? It has nothing to do with real social justice. You see this whole socialistic trend sweeping across the globe now cloaked as the 'new capitalism', but its not. Its an agenda being orchestrated by the upper crust, designed on the backs of mankind in the name of social justice, and preying on peoples choice of no responsibility attitudes. Because afterall, if our votes really do count, the only ones who can be blamed for this and what is to come, is us.

    Reply

  5. I am not a 'snivel servant' however, I can appreciate that these two individuals must have had to jump through a few hoops to get and hold onto these jobs then stick with them through not a few downsizing senarios. I really have no context of what their lives consisted nor where their lives were lived; nor under what conditions they had to do their work/perform their tasks. Does the government just hand out money willy nilly or did these people have to pay into their pension plans; at what rate? and invested in what? I would think that over the 30 some years they were employed the equity markets would have paid out substantial sums building that pension fund and those contributions. Take for example the Ontario Teachers Federation Fund. Very well invested; well capitalized and what do you know: returning to their members pensions that make the ones stated here look like a Piker's Pitance.Would it be possible for the author of the article to provide contextual information on the story so we can know whether there is reason for concern here (Gold Plated pension) or whether a reasonable person would be able to determine that the pensions were paid into, well earned, well invested and therefore appropriate?

    Reply

  6. Thank you for letting me know how miserable I made out being a homemaker for 30 years, raising my children and then being divorced. Raising children doesn't count for much in this country and my ex is living the high life with his new career woman. I gave up my own career gladly to raise the boys upon being promised that I would be taken care of in return. I now make a measly 1200 per month while he rakes in about $150000 per year and his new partner another 70,000 per year. I have a disability which makes it impossible for me to fight him in court for more. There are countless more in the same situation, while the fat cat civil servants get their pensions from our taxes. Something wrong with the picture I would say!

    Reply

    • I am sorry that this happened to you Sabina – I really am. I too have had a family and also worked full-time for the Government since I was 19. It is essential that we all work today to ensure a financial future for ourselves down the road. The days where my Mom stayed home to raise us is long over. Life is just too expensive.

      Reply

  7. Don't get all uptight about this pension no need for a revolution. 30 to 40% will be taxed back to the government. Also at 65 when CPP kicks in I believe it will be reduced. I know my federal government pension of $475.00 a month will be cut in half when I reach 65.

    Reply

    • Marlene, Joejoe and Dale have it right. In spite of your comment that there is no problem because of taxing back and pension reduction, due to the oncoming gold plated indexed government pension payouts plus the looming health care expenses the Medicare system faces, we are heading in the same direction as the Greeks. eek!!

      What is needed is a plan to switch the DB pensions to a DC type plan plus medicare premiums. Otherwise even Canada will be facing fiscal mess and then everybody will really suffer. Better to tighten the belts now then end up like the Greeks who lived beyond their means for too long.

      Reply

    • The facts are skewed to make a good story. First, most government workers don't make $100,000 a year. Second, most don't put in the required 35 years to get the maximum payout from the pension plan. This is pure cherry picking. Running the numbers to get a story. Last, as was stated, all the plans are reduced at 65. When you combine this with lower years worked, lower average pay, the taxation of pensions, and a more moderate lifespan the amount the government pays out is not as extreme as the article implies.

      Reply

    • Yes that is correct. Their defined pension will be reduced the same amount as their cpp distribution.

      Reply

  8. no amount of money could compensate for working 31 years in the Government

    Reply

  9. With the Harper govt spending like mad, when will we begin doing what Euro zone did to their govt pensions? I expect things to change as the shock of recession kicks in here. German govt has been severely rolling back govt pensions since early 1990s. I would suggest that the Petersons save some of their windfall in anticipation of political and economic changes. Remember the pendulum.

    Reply

  10. Another great example of the huge Excesses in our governement system. Politicians get full pensions after 2 terms (8 years), employees get more money than any other normal working person in the real world.
    I agree with the other commenters… When will the revolution begin and we stop this government excess.
    I just wish I had the right contacts to get a govenment job when I was younger.

    Reply

  11. An annuity of 120,000$ gives a present value of about 1,8 millon…It is not that far…

    Reply

  12. Where calculations & statistics often induce presentations into error. 95 years of living is just as much in the top ten as our Canada's top ten fortune-bearers. Things always look better in the long perfect run …… health..risk-free investments…financial support to others… theft ….other variable losses…..if taken into consideration would ultimately reduce by far the pension's net worth ……etc

    eg; 90 day suspension of your drivers license and $1000 fine for drinking 4 beers at your daughter's wedding…
    for starters, calculating costs for this unforseen mishap over 35 years would chatter a $3 million result.

    Reply

  13. I once worked within the government. it is mind numbing but mind you I wished I had stuck out for the 35 years now. And based on the number of gaffes from all levels lately, that sector really shouldn't be paid what the real world receives. So yes I am jealous that my taxes are funding their lifestyle improvement and general work ethic.

    Having said that and after reading what is really required for retirement I feel a lot better about our situation. We have no pensions, are self employed and our RRSPs got killed twice – tech crash and the general collapse in the last decade but based on the related articles we will be OK, just not rich.

    The real issue going forward needs to be management fees and capabilities for RRSPs. If we had access to the management capability and costs of a plan like the CPP or a company plan we too would have a goldplated retirement. The loss of compounding and growth due to those costs is unbelievable. This is the pension reform needed – make that available to one and all. The financial industry will moan and gripe but really what have they done for us – apart from one little recession?

    Reply

  14. "their combined pensions will be worth more than $3 million"

    I doubt about the $3 million number here. It is misleading to use sum of monthly payments. $100 in year 2030 will be very different as now due to inflation.
    http://www.PensionWiseConsulting.com has actuarial software to help retiree to maximize their pension. Evan with the best effort, a person would be lucky to have a $500,000 pension.

    Reply

  15. I can't believe my tax dollars is wasted like this. Now when I see so many business owners cheat the HST, not pay income taxes, I fully understand why.

    Reply

  16. Civil servants unions are sucking the blod from the rest of us. We continue paying for their wealth. How many readers know that in Ontaio about 17% of the population is a civl servant and thah this 17% has more money accumulated in their pension funds than the rest of us (83%) combined?

    Reply

    • Government jobs are available to everyone that is a Canadian Citizen. I have a difficult time with people who decide to work for higher wages in the Private Sector and then complain because they have no beneficial pension plan. If you want a Government Job – apply and compete for one!!! Planning is everything and makes the difference between struggling or enjoying retirement. And NO, very few people make even close to 100K – most make around 40K.

      Reply

  17. Hey guys! You should have done what I did, starting working for government as a teenager in 1974, went thru I guess 5-6 Prime Ministers(maybe more), many downsizings, pain-in-the-butt bosses but still did the job requested of me. Now I just retired at 53 with 36.5 years of service (do the math) and will be penalized because of my age. So what if I get a nice pension (not fat but enough to keep me going) I worked for it and like Cynthia said: Apply and after all these years of service I made around 50K and all because of the pay equity. And if you think that trying to get a promotion was easy think again…. These days they request a University degree and think again young people!!! You will not be making 100K from the start,,,,, Good Luck from a young retiree!!!

    Reply

  18. My wife and I are in this same boat with the federal government except rewind the age & years of service to: 30 years old, 8 years of service each making 75k a year. Given this "gold plated" pension incoming what advice do you have for us to save for retirement? Do we need to even contribute to an RRSP? Do we need to even look at TFSA? What about being a landlord? Is it worthwhile at our age? Or should we just live the life?

    Reply

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