I contribute to a defined benefit pension plan at work. How much will I get from the pension plan in retirement? That depends on when I retire or leave the plan. Hang on, we’re about to get math-y.

Normal retirement age is 65 and I joined the pension plan in 2009 at age 30. Retiring in 2044 (the year I turn 65) would give me 35 years of pensionable service.

The pension plan has a retirement calculator on its website. Curious about the amount of retirement income I’d receive at various ages, I took a look. The calculator just needed a couple of inputs: current salary, plus an assumption for future annual salary increases (I used 2 percent).

How Much Will I Get From My Defined Benefit Pension Plan?

How much will my defined benefit pension pay in retirement?

Retiring at age 65 would max-out my pensionable service and give me an annual retirement income of $46,000 in today’s dollars.

But what happens if I don’t make it until 65? Retiring five years earlier at age 60 changes the equation substantially.

Retiring at 60

The defined benefit pension plan pays a bridge benefit from age 60 to 65, which is designed to ‘bridge’ the gap between retiring early and collecting CPP at age 65.

In my case the bridge benefit would be $11,000 per year in today’s dollars, plus regular pension payments of $39,225 per year.

So from age 60 to 65 I’d receive $50,225 in today’s dollars. After my 65th birthday I’d receive $39,225 from my pension every year for the rest of my life. For those of you counting at home that’s $6,775 less per year than I’d get if I retire at 65.

Retiring at 55

Let’s try another date. How much will I get from my pension if I retire early at age 55?

Again, using today’s dollars, I’d receive a bridge benefit of $8,800 per year from age 55 until my 65th birthday, plus regular pension payments of $33,025 per year.

That gives me a total of $41,825 from age 55 to 65, and lifetime pension payments of $33,025 thereafter.

Retiring early at 55 reduces my annual pension by $6,200 compared to retiring at 60, and reduces it by $13,000 compared to retiring at 65.

What if I leave the pension plan even earlier?

Leaving the defined benefit pension plan before age 55 – say at age 50 – means that I’d be entitled to what’s called a deferred pension payable on any date on or after my 55th birthday.

In this case my estimated pension, payable starting at age 55, would be $22,700 per year in today’s dollars. In addition, I would still be entitled to a monthly bridge benefit payable until age 65, estimated to be $5,800 per year.

Saving outside the plan

Going through the pension calculations is useful in helping determine my retirement plan – including when to retire, and how much I’ll have to save outside of my defined benefit pension plan to meet my retirement income needs.

I’m aiming for financial freedom and the flexibility to leave full-time employment early to pursue other hobbies and passions. That’s why I’m building up multiple income streams by saving inside of my RRSP, TFSA, and working on my online business.

I don’t want to live on $25,000 to $30,000 a year, so my plan is to generate at least that much or more through several different income streams in retirement.

Final thoughts

Fewer than three in 10 Canadian workers now have access to a defined benefit pension plan. These plans are often called ‘gold-plated’, but that’s only if you stick around and max-out your years of pensionable service.

While I’m grateful to have a solid pension plan, I don’t want those golden handcuffs to keep me chained to my desk for 35 years.

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16 Comments

  1. Don on August 29, 2018 at 7:46 am

    Something to be mindful of. I’m 62 years old and have just retired from a company with a defined benefit plan. I had the option of taking a cash payment / transfer a lump sum to a locked-in RRSP. I chose to take the cash / lump sum transfer to eliminate the risk that the plan might not be sufficiently funded to pay the pension. This risk is one that many defined pension plan members may not consider. I also have control of the timing of receipt of retirement income
    Which allows me to reduce / minimize tax liabilities.

    • Robb Engen on August 29, 2018 at 12:19 pm

      Hi Don, that’s certainly an option and one that I’d consider in either of these two scenarios:

      1.) The defined benefit plan is through a corporation rather than the public sector (for the risk you mention)

      2.) If I had less than 10 years or so invested in the plan. DBPs are quite lucrative if you contribute throughout your entire career (30+ years) but not as valuable with just a short time vested in the plan.

  2. Linda Riopel on August 29, 2018 at 8:38 am

    I appreciate your comment “gold-plated’, but that’s only if you stick around and max-out your years of pensionable service” and wonder how to figure this out for me? I am 56 and have 1.5 years into a defined benefit pension (8% contributions by both employer/employee) where the employer is fighting to change this to a defined contribution pension. (This went to arbitration and the union lost to the employer -negotiation continues.) Thinking of your comments, and knowing that I will never have enough pensionable years how do I plan? (I believe I face a 15% reduction due to the lack of pensionable years.) How do I figure out if it is better to stay defined benefit or move all to the new defined contribution? Thoughts?

    • Robb Engen on August 29, 2018 at 12:24 pm

      Hi Linda, thanks for sharing. It’s tough to comment on your individual situation without knowing all the details. I will say that in my experience a defined benefit plan is better for employees than a defined contribution plan (hence why your employer wants to change it).

      As Don mentions (above) you can likely transfer the commuted value of your pension into a LIRA – locked-in retirement account – and invest it on your own.

      Yours is a complicated question and one you should definitely discuss with your pension and benefits team (if you have one).

  3. FullTimeFinance on August 29, 2018 at 8:39 am

    I have a defined benefit plan here in the US. Last year though the company cut off new contributions. I guess what I’m saying is future growth is no guarentee anyway.

    • Robb Engen on August 29, 2018 at 12:25 pm

      @FullTimeFinance – absolutely, and in the case of a corporate defined benefit plan I’d say there’s a definite risk of insolvency in many cases (see Sears, Nortel).

  4. Scott Kwasnecha on August 29, 2018 at 9:20 am

    These pension plans are extremely generous, even if you take the commuted value, it likely works out to a minimum of a 100% match of your 11-12% (or how much ever you put in), plus the growth of the plan.

    Often overlooked about pension plans is ZERO manangement of these investments, which may not mean a lot to someone that is a financial person, but sure means a lot to most people that are not financially savy.

    As for Don’s comment, the government DB plans have zero risk as they will always be bailed out by the tax payer, but you are right, a private DB plan definitely has this risk – think General Motors for example.

    • Robb Engen on August 29, 2018 at 12:30 pm

      Hi Scott, you’re right on all points. The plan is generous and the commuted value does tend to equal my contributions + 100% match. The trouble is the contribution rate keeps increasing (likely to pay existing beneficiaries who were able to retire at 55 and who’ll live til 95-100).

      Great point on the hands-off management. That’s big for a lot of people, say teachers, for example, who don’t have to worry about managing their own investments. I think the Saskatchewan Pension Plan is a good option for people who want access to a pension but who don’t work in the public sector.

    • Don on August 29, 2018 at 12:31 pm

      In reality, you have to examine your own situation to make the best decision. For me taking the cash was the best option…a bird in hand as they say and as a retirement investment advisor I can manage the money to earn a return at least equivalent to the pension plan manager. As well, if I took the pension, the income would be taxable – I have other investments so don’t need the income now. Not all of the pension was transferred to the locked in plan – a portion was taxable – but that was balanced against my ability to control when I recieve the income. I would also suggest that there is risk of non payment under both corporate and government plans….there have been many instances of reduced benefits in US based municipal plans …not sure that the average taxpayer is happy to see tax dollars going to fund rich Unaffordable public plans ….

      • TravellingFIRE on September 2, 2018 at 10:28 am

        You all bring up a good point about something I don’t think enough people take time to consider when deciding between deferred pension or taking the lump sum amount, which is around expected reliability/stability of pension plan (not relying on just past performance and taxation factors), whether corporate or public. In my case, it still makes the best sense to opt for deferred pension when it’s time to FIRE.
        Also, I agree with Robb and everyone else here, pensions can only be a golden handcuff if you let it. Depending on pension requirements, it can be a great opportunity to speed up FI and provide an adjusted target FIRE number (i.e. providing consistent base income to start calculations from).

  5. Scott Kwasnecha on August 29, 2018 at 1:10 pm

    Keep in mind Don that although the income isn’t taxable now since you aren’t drawing down on it, but it will be when you take income or if you pass away too soon before drawing it all the way down. Of course you have better control over the income stream (until it becomes a LIF), but it doesn’t mean it won’t be taxable.

    And I agree 100% on the taxpayers funding them, but don’t really see that as a big risk in Canada, but for sure a consideration.

  6. James on August 30, 2018 at 10:58 am

    I should dust off my old commuted value calculator for you. It was a pretty simple excel calculator that’s showed if you took the commuted value, what rate of return you’d need to match your pension at various ages. When interest rates were going down, commuted values were going up substantially and it was usually only 2-4% market return needed to replicate the pension with added flexibility of timing and leaving the residual to you’re family. I’m sure a savy investor such as yourself could manage that ;). Only catch is you need to quit the U before you turn 55 or it gets locked into the pension option.

    • Don on August 31, 2018 at 8:21 am

      Each plan is unique-I’m 61 and had the option of taking cash/lump sum transfer – as pension plans grapple with funding shortfalls, options under any plan can be changed at anytime !!

  7. Roger on September 2, 2018 at 11:11 am

    My DB pension was based on the best 3 years income. I’m not sure if other companies have this policy but it could be worth employees asking their HR department to offer this option. My company allowed annual bonus payments to be taken either December 15th or January 15th. Due to the potential pension amount, one year I took bonuses in January and December and then, of course, nothing the following year. I was “packaged” at 55 and the additional pension income over the last 20 years has been substantial. I never told anyone else in case management figured out what I was doing!

  8. Lefty on September 8, 2018 at 10:48 am

    Great post. I too joined the plan at 30 and am now 45. One additional factor in my ‘when to leave’ decision is the fact that after 50 you can no longer take the commuted value of your pension. I figured I’d be a pension lifer, but lately from an estate planning perspective taking the commuted value @49 is somewhat tempting..

  9. Gruff403 on October 22, 2018 at 8:23 am

    Just retired from full time teaching and decided to leave the money in the DB plan and take the pension. Looked VERY hard at pulling out the money early and investing it myself but decided against it for a variety of reasons.
    There would have been a big tax hit as I had to take hundreds of thousands of dollars in cash. The money is professionally managed and has being doing well and is arms length from Gov’t. Pension is guaranteed for my life and my spouses life. Pension is partially indexed to inflation which is better than the 2% raise I got over 6 years. If either of us live 25 years, we will collect 3.5 times more than we contributed representing a guaranteed annualized return around 6.25%.
    Consider leaving Gov’t DB pensions alone. If it is a corporate pension then I would take serious consideration of pulling it early. Think SEARS, Nortel, etc… I haven’t met to many DB pensioners who were willing to swap for a DC pension.
    Bottom line-learn how your pension works!

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