Ep # 76 - Calculating Your Retirement Number: Factoring In Your Pension
This week we answer a listener question about defined benefit pension plans: I know not a lot of people have defined benefit plans, but everyone keeps talking about needing $1M-$2M at retirement. How would a defined benefit pension get valued, and does the amount needed at retirement include government programs?
We break down the components of retirement income, including government programs like the Canada Pension Plan and Old Age Security, guiding listeners on how to assess their unique financial situation to arrive at an ideal portfolio value for a comfortable retirement. We encourage you to shift your focus from generic averages to a personalized approach in determining retirement needs.
What You’ll Learn in Today’s Episode
Challenge the Norms: The common target for a retirement portfolio for many is $1 million to $2 million. However, we emphasize the need for a more personalized assessment.
Defined Benefit Pension Plans: We explain their actuarial valuation and the potential to extract a commuted value. We emphasize the importance of understanding and incorporating pension benefits into retirement planning.
Government Income Streams: We explore government programs like the Canada Pension Plan and Old Age Security, breaking down their contribution calculations and demonstrating how they supplement retirement income. Delaying these benefits can lead to increased income, providing a strategic advantage.
Applying the 4% Rule: We examine the 4% rule for retirement income, showing how it can be used as a starting point to estimate the portfolio value needed to generate desired income during retirement.
Individualized Retirement Planning: We believe in a personalized approach to retirement planning. Evaluate your specific income needs, existing retirement streams, and potential income gaps.
Ideas Worth Sharing
· “Does that just mean that we should have a portfolio that's that big, even if we have a pension and we have these other government programs, how does it all fit together?"
· "If you have a defined benefit pension plan, it makes sense. You're asking the question, do I need as much as the typical Canadian? Because there's probably a lot of value in having that pension."
· "We can put a value on these different income streams that we have. And if we have multiple income streams, including that defined benefit pension, we probably don't need to have as much in our portfolio when we're trying to look at what is the typical amount required for a retirement portfolio."
· "So then we're solving for, okay, how much do we need in our portfolio to create the $50,000 to fill the gap that our guaranteed income sources are not taken into account or not covering?"
"The key action item coming out of this episode, I would say, is going through that exercise of understanding what your income needs are, what are your income sources, and what's the gap."
Resources in Today’s Episode
Why Most Retirees Will Never Draw Down Their Retirement Portfolio by Michael Kitces
Ep # 4 – Pension Income Splitting: How It Works
Ep # 6 – Retirement Risk # 1 – Sequence of Returns and Why the Game Changes in Retirement
Ep # 7 – Retirement Risk # 2 – Longevity – Your Retirement Planning Simplified
Ep # 8 – Retirement Risk # 3 – The Risk of Being Too Conservative
Ep # 9 – Retirement Risk # 4 – Inflation Risk
Ep # 10 – Retirement Risk # 5 – Healthcare Expenses
Ep # 12 – Retirement Income Strategies Overview
Ep # 13 – Safe Withdrawal Rates and Traditional Retirement Projections
Ep # 14 – Dynamic Withdrawal Strategies
Ep # 18 – Canada Pension Plan and Old Age Security Timing
Ep # 43 – Maximizing Your Retirement: Understanding Safe Withdrawal Rates
Retirement Planning Simplified
Beyond the Retirement Rules of Thumb: Your Personalized Number
It's not just about saving up $1-$2 million for retirement. Learn more about what to do when you have a defined benefit pension plan in retirement.
In this episode, you will be able to:
Maximize your retirement savings with effective planning strategies.
Understand the benefits of defined pension plans for your retirement security.
Learn to accurately assess the value of pensions in your retirement planning.
Explore the various government programs designed to support retirees in their golden years.
Discover the power of personalized retirement income planning tailored to your unique needs.
Assessing Income Streams
For a successful voyage into retirement, take a good look at your income streams. This includes everything from pensions, benefits, and potentially investment income. Understanding your income streams can help set a clear picture for your retirement.
Clear financial roadmap for retirement planning
We emphasize creating a road map well in advance of retirement. The sooner you do, the clearer your route becomes.
The resources mentioned in this episode are:
You’ll get more in-depth information on different types of pensions and retirement planning strategies mentioned in the episode.
Contact your employer to get an estimate of your defined benefit pension at age 65 and inquire about any early retirement options or bridge benefits available.
Start working through the exercise of understanding your income needs, income sources, and identifying the potential gap in your retirement planning if you are a couple of years out from retirement.
Explore the resources in the show notes for more detailed information on the 4% rule for retirement income and how to calculate your ideal portfolio value.
Consider going through the exercise of understanding your income needs, income sources, and identifying the potential gap in your retirement planning to start planning for your retirement or assess your current retirement readiness.
Timestamped summary of this episode:
00:00:00 - Introduction and Exciting Plans
Joe and Lindsay discuss their upcoming plans and excitement, including Joe's snowboarding trip and Lindsay's busy schedule preparing for client reviews.
00:01:14 - Retirement Savings and Pension Plans
Joe breaks down the common retirement savings target of 1-2 million and discusses the value of defined benefit pension plans, as well as how they are typically valued.
00:04:01 - Understanding Defined Benefit Pension Plans
The hosts explain what defined benefit pension plans are and how they work, emphasizing the security and reliability of these plans for retirees.
00:09:14 - Government Programs for Retirees
The conversation shifts to government programs like the Canada Pension Plan and old age security, detailing how they supplement retirement income and can be factored into retirement planning.
00:11:45 - Determining Ideal Portfolio Value
Joe provides recommendations for listeners on how to determine their ideal portfolio value, focusing on understanding retirement goals, income needs, and existing retirement streams.
00:13:19 - Assessing Income Streams
Understanding different income streams such as CPP, OAS, and pension to determine income needs and sources.
00:13:38 - Calculating Income Gap
Determining the amount of income needed to fill the gap after accounting for guaranteed income sources.
00:14:05 - Portfolio Planning
Planning for the portfolio needed to create the additional income required to cover the gap in guaranteed income.
00:14:25 - Time to Take Action
The importance of working through the exercise to understand income needs, sources, and the income gap, especially for those a couple of years out from retirement.