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).
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 plan even earlier?
Leaving the 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.
Less 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.