Before you retire
Almost two thirds of Canadians don’t belong to a workplace pension plan, so if you’re part of the fortunate minority who do, be sure you’re making the most of it.
This means that if you have a defined contribution pension plan – where your employer matches your contributions to a certain point – you should do your best to maximize this. Don’t leave this “free money” on the table.
As you near retirement, you should also be thinking about how your pension income will work with your other sources of income – like government benefits and personal savings – and working with an advisor to create a sustainable plan for making these resources last.
Timing when you start drawing your pension
While the standard retirement age is 65, most pensions give you the opportunity to retire earlier. This may mean you’ll receive a smaller cheque each month – but you’ll have more time to pursue your retirement dreams when you’re younger.
On the flip side, delaying your retirement may allow you to continue working for longer, building up your savings further. Delaying taking your pension to 69, for example, could mean you’ll receive more each month than someone who takes it at 60. The con, however, is that the future is uncertain, and you may not live long enough (or be in good enough health) to enjoy the retirement you’ve been putting off.
Defined benefit versus defined contribution pension
How your pension works in retirement also depends on the type of pension your company offers. While there are some hybrids, they usually fall into 2 kinds:
- Defined benefit — Your employer promises to pay you a specific amount - usually tied to your salary and the number of years you worked there - each month for life. You contirbute to the pension plan based on a formula.
- Defined contribution — You contribute to pooled investments, similar to mutual funds, and your employer may match it up to a certain point. The pension you receive is tied to how well those investments do, and how much you contributed.
Two people who work for the same company for the same amount of time and salary changes can experience widely different incomes at retirement. This is because the choice of what the employee invested in their pension contributions over time is typically the decision of the employee. Employees need to look at the range of investment options in their pension plan and understand which investments typically provide better growth over the long term.
Pension income and taxes
Your pension is fully taxable as income when you receive it, so factor that into your budgeting.
If you don’t have a pension
...don’t panic! While a workplace pension is great asset if you have one, it’s still possible to have a sustainable plan for your retirement income without one. Work with your advisor to make sure you’re making the most of the resources you do have, like your personal savings and investments, or government retirement income.