I would appreciate some insight into what your clients are seeking for their retirement income to feel ‘comfortable’. I’ve tried to anticipate what my wife and I will need and it will be around $36k/year after tax in today’s dollars. I’m crunching numbers assuming $42k/year after tax to be safe.

It wouldn’t be fair in my case to compare it to current income since we have aggressive mortgage payments, maximum RRSP contributions, maximum RESP payments, paying for two braces and a large child support payment. Thus, we are not going to need the oft-quoted 70% of our current income on retirement in nspite of retiring early (without the cushion of CPP and OAS payments initially).

I would imagine your clients tend to the higher income requirements only because I think that people who have financial planners have significant assets, and are used to a higher standard of living and the costs associated with that.

A full DB Pension occurs after 35 years in the work force, granting 70% of the plan member’s then current income. Teachers may exit the workforce earlier, on average. This is a 16% increase in pension over claiming after 30 years.

We currently live on about half our income, due to my aggressive payment of our mortgage, and other debt, and I am sure others are in the same financial position. The challenge, as you stated in an earlier post, is to avoid becoming comfortable with the increased disposable income that is available upon final payment of the mortgage, then to find you have a considerably reduced income after retirement.

One of the points I was trying to make above, was not to simply be satisfied with a DBP, but to decide how to manage the additional options available to you with the remaining contribution room in your RRSP, or other investments. The DBP should provide for a basic retirement income, so you should plan for the other pre- and post-retirement goals you may have, to ensure you have a satisfying retirement.

DAvid

P.S. The article I referred was from this blog on August 5.

Interesting article. To answer your title question, for most people, a full DB pension is not enough to retire comfortably – even after 30 years. The payout on a government pension plus CPP is about half of what the employee earned just before retiring. This is 30 years x 2% x the salary from the 3rd last year, less the spousal benefit cost. This amount includes the CPP payout.

Even with no mortgage or kids’ costs, could you live the comfortable retirement you want on half of your current income?

If only one member of a couple has a DB pension, then it really would be too little. A couple would probably need both to have full pensions.

We have quite a few teachers as clients that retired on a full pension and then went back to work because the pension was too little and would be a big cutback in their lifestyle.

You are right that those that have them rarely understand how much they are worth. I was unable to find the article you referred to, but it would surprise me if 50% of younger workers have a pension plan. Even if that is true, less than half are DB pension. Employers have been moving more and more towards defined contribution plans. Outside of government, crown corporations and teachers, there are hardly any very generous DB pensions available.

Since people with DB plans usualy get hardly any RRSP room, they are prime candidates for the tax deductions from the Smith Manoeuvre, in order to top up their pension income in retirement.

Ed

The table is adjusted for inflation, before and after retirement. If recalculated based on your suggested income, would need a $1,040,000 annuity for a 40 year old retiring at 55.

DAvid

I think $75,000 is probably a reasonable assumption for a worker approaching retirement in a job that provides a DBP.

I’m surprised that 50% of younger workers have pension plans, although my experience has been that more and more younger employees are looking for such benefits. A solid DFB pension plan was one of the major factors in my recent decision to change employers.

The true value of a pension becomes painfully apparent in divorce proceedings where one party has a pension entitlement that isn’t divisible. The cost of paying out half the value of such a plan can be astronomical.

With a base salary of $50,000, a 70% pension is of $35000 per year, which drops the “annuity-equivalent” value to a little over $600,000 (note that I’m using today’s dollars and ignoring inflation here). Still nothing to laugh at, but definitely not in the 1.5 million range.