Should I invest if I have a pension?
THE STACK #22If you're one of the lucky few with a pension, you might wonder if it's worth it to make additional contributions.
Perhaps you want to know how much you'll need to top up the income from your pension.
If this is you, keep reading.
THE STACK
Step 1: Determine how much your expenses will be at retirement
It’s almost impossible to know how much things will cost in 20 years.
Experts say you should plan for 70% of your current income at retirement.
Start by creating a plan for how your ideal retirement would look like:
Will your mortgage be paid off?
Will you downsize?
What city do you plan to live in?
Do you plan to travel? How often?
Will you need long-term care?
Will you be supporting your kids or their kids?
Answering these questions will give you an overview of your living expenses at retirement.
Retirement planning is a journey. Although you often start with a destination in mind, you will have to make a few stops to fill up gas, and sometimes you might make a detour.
Start with a plan and adjust it every 3-5 years.
Step 2: Determine how much income you will receive at retirement
You should receive a yearly statement from your pension plan that estimates your projected income at retirement.
If you’ve never received this document, ask for one.
Calculate income from other sources, such as CPP or OAS.
Step 3: Calculate the difference between your income and expenses
Let’s say:
Your annual expenses at retirement = $50,000
Your projected income from your pension = $10,000
CPP = $8,000*
OAS = $7,000*
Total income = $25,000
You will need an extra income of $25,000 ($50,000 - $25,000)
*based on the current average CPP and OAS payments received. Numbers were rounded down.
Step 4: Determine how much should be in your nest egg
Assuming a 4% annual withdrawal rate at retirement.
You will need:
($25,000 / 4%) = $625,000 in your retirement accounts
Step 5: How much will you need to set aside each month to grow your nest egg
If you had to save every month, assuming you’re 30 years from retirement, you would need to save
($625,000 / 360) = $1,736/month
But if you invest, you will only need to invest $478/month*
*Assuming an 8% rate of return.
Step 6: Invest in a low-cost Index fund/ETF
From the example above, you can see that investing beats saving by a whopping $478,000!
Investing in low-cost index funds and ETFs will help you reach your goals faster.
THE TOOL
THE STACK MY DIME GAME PLAN
The stack my dime game plan helps calculate how much you need to invest each month to achieve your retirement goals.
It accounts for all sources of income, such as a pension, CPP, OAS
It is only available through my signature course: THE STACK MY DIME BLUEPRINT.
THE ACCOUNTABILITY
Check your last pension statement to see your projected income at retirement.
If your employer has a pension plan, but you've never received one, ask your employer how you can enrol to receive statements.
THE COURAGE
THE KNOWLEDGE
DEFINED BENEFIT PENSION PLAN (DBPP)
The DBPP is a pension plan where only the employer makes contributions.
The employee will not access these funds until 65 (55 for early retirement).
If the employee leaves the company, the contribution stops. The funds can stay in the plan to be paid out at retirement, or the employee can move the funds to a Locked-In Retirement Account.
DEFINED CONTRIBUTION PLAN (DCP)
The DCP is a pension plan where both the employer and employee contribute to the plan.
Like the DBPP, you will not have access to the funds in the account until retirement.
That's it for this week's STACK!
Talk to you next week,
But until then...Keep Stacking!
about the newsletterEvery Saturday, subscribers will receive one money tip, one tool, one actionable step, one word of courage and learn a new finance term to help you gain control of your finances in less than five minutes.
Free resourcesKeep reading the latest NEWSLETTERS