If you have a workplace retirement plan or pension, get to know it!
When it comes to work plans, there are basically two types of pensions: defined benefit and defined contribution.
With a defined benefit pension – common for teachers, hospital workers, government employees and some (rare) company employees – the plan promises to pay a specified retirement benefit until death. Most DB plans have a retirement benefit based on ‘best 5 years earnings’, or career average earnings and grow with the years of service, or a flat amount per month of service.
These plans may be contributory or non-contributory (meaning the employee may be paying into them as well, or not) and may or may not be indexed to inflation (meaning the payout changes each year according to an inflation factor).
There may also be a payout (perhaps 67% of the pension) to the survivor if the employee predeceases them. Some pensions even give you the option of what this survivor pension looks like (a smaller amount throughout retirement with 100% going to the survivor – or a larger amount in retirement with only 60% going to the survivor).
A defined contribution plan is a pension plan under which both the employer and employee contributions are fixed and the resulting pension is based on these contributions and their respective investment return. The employer has no responsibility for the retirement income that results, and the employee is 100% responsible for funding their retirement with the proceeds and other sources of income they may qualify for.
While the value of a DB pension is typically more impressive than the DC pension, you don’t usually get the choice. Whatever is being offered by your employer, make sure you are participating fully, as soon as you are permitted to join. The value can add up to hundreds of thousands of dollars, and can mean the difference between a penny-pinching retirement and a few trips a year.
Of course, regardless of the pension you have, there are two other sources of income you should also be aware of.
The Canada Pension Plan is one we are all paying into, and the amount you will receive is based on the amount you contributed over your lifetime. Service Canada keeps track of your contributions, and you can contact them at any time to request an estimate of what you will receive as early as 60 and as late as 70. The maximum a 65-year old can receive is $1092 a month.
Old Age Security is a gift we receive in retirement. While we aren’t paying into this one, every government since 1927 has granted it, and payments have grown from $20 a month for 70-year olds in 1927, to a maximum of $571 a month for 65-year olds today. And the Liberal government has proposed to leave it at age 65 (vs. moving it to age 67 as some countries have done, and as the Conservative government was preparing us for).
So, put a few minutes into thinking about the sources of income in retirement. And if you have a workplace plan of any kind, take advantage of it.