Q: Does a pension from an employer reduce the size of retirement savings required to retire comfortably?
—Phil Bryant, Winnipeg
A: Absolutely, yes. If you had no pension at all you would have to save up enough to cover all of your expenses in retirement. Some of the retirement savings required would come in the form of income from your investments, and the rest would come from the gradual draw down of the nest egg principal.
Pension income from an employer and from our government will reduce the nest egg required, perhaps significantly. Say you were lucky enough to work for an employer that offered a defined benefit pension, and you stayed there for a really long time, you may be entitled to a pension that almost matches your income when you were working. That is the biggest pension payout there is, but this is becoming less and less common these days. What is much more common is a less-generous government pension. If you worked in Canada for most of your adult life, you’d be entitled to the full Canada Pension Plan (CPP) amount of about $1,100 per month, starting at age 65. And you may qualify for Old Age Security (OAS) on top of that.
You can use an online retirement savings calculator to come up with an estimate, or you could have a financial advisor do the math for you. Jason Heath, Certified Financial Planner with Toronto-based Objective Financial Partners, highlights the many variables that go into the calculation. “It depends on your age at retirement, your life expectancy, how much you spend, your investment return, if your employer pension is indexed, your tax rate in retirement, your spouse’s tax rate in retirement, any planned home downsize, any expected inheritance and so on.” I strongly recommend doing the math now. You’ll find out if you’ve got more saving to do, or if you can spend your free time attending timeshare presentations.
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