Pension + RRSP?
Posted by Gail | Filed under Retirement Planning
The RRSP was created in 1957 to help those Canadians who did not belong to company pension plans to save for their future. It was meant to even the playing field between employees who had company pension plans and the self-employed or those who worked for organizations too small to offer a company pension plan. Over time, the importance of the RRSP grew as pension plans evaporated.
There are folks lucky enough to have a pension plan at work who sometimes wonder, “Should I also be contributing to an RRSP?” Well, like most things to do with money, it depends.
The first thing you have to figure out is how good your company pension plan is. You can’t take for granted that a pension plan is completely safe… there are systems in place, but like everything else there’s always a way around a system.
Is your plan well funded? Is it well protected? And will it provide what you’ll need to retire comfortably? If you’re a teacher you’re probably fine . If you have a government pension (if you’re a civil servant, a policeman, a fireman or a nurse, for example) and plan to work until you qualify for full benefits, then you’ll probably be A-OK. If you work for a private corporation, it all depends on how sturdy you think your company is.
When will you retire? Most pension plans penalize you heavily for drawing benefits before the normal retirement age. If you think you may want to drop out early, then having some money in an RRSP might be a good idea. Sweating it to the very end? Consider maximizing your TFSA every year before looking at an RRSP.
If you decide you do want to contribute to an RRSP even though you belong to a pension plan, the calculation is slightly different for you since the contribution to the pension plan affects how much you can put in an RRSP.
A pension adjustment (PA) is calculated, which reduces the RRSP deduction. If you’re in a wonderful plan, the PA leaves very little RRSP deduction room remaining, so contributions to an RRSP are moot.
If the pension + RRSP question is top-of-mind for you, ask yourself these questions:
- Am I so sure that I’ll have this job forever and that I am well set for retirement?
- Will my pension be enough, or do I need to have a pool of money for things above and beyond what my pension will cover?
- Will using a non-RRSP investment portfolio work better for me than investing inside an RRSP?
- What else could I be using this money for to bring value to my life? Does a TFSA make more sense? Should I be saving for my kids’ post-secondary schooling? Do I have a sound emergency fund?
February 18, 2013 at 10:12 am
Word of caution: you may be sure you will have that job/be with the company forever, but an “organizational restructure” can blow that right out of the water…
Had that happen to me last year and I’m super-glad that I didn’t solely rely on a company for my retirement savings (contributed to an RRSP despite having a DB pension plan).
At the end of the day, the company’s main concern is their bottom line, not maintaining their loyalty to you – plan accordingly.
February 18, 2013 at 11:37 am
If I had a good pension plan at work I wouldn’t sweat trying to find extra money to put in an RRSP until all other saving goals (RESP, etc.) have been taken care of. Still I would put a bit of money aside for it just in case. I had ultimate job security and a beautiful pension plan courtesy of the government. Then life happened and I got a medical release. (How does that old saying go? “Nothing’s sure except death ,taxes and the occasional suprise?”)
February 18, 2013 at 12:02 pm
I’d been waiting for this post, thanks Gail! Can you write about survivor benefits too? If one person has a great pension plan and the other a RRSP, what happens if one of them croaks?
I think you should plan on your company pension being a bonus to your retirement, unless you’re a civil servant in which case your pension is guaranteed, because you just never know when the company’s pension plan will mysteriously disappear. If an employee steals from a company they get pursued to the full extent of the law but if a company steals the pension money, it’s “oh well, they’re in bankruptcy protection, too bad”.
February 18, 2013 at 12:10 pm
I am one of the lucky ones working for a large corporation with a decent DB pension plan. However, I am still reasonably young with about 25 more working years. As much as I love my job and love the company I work for, and wish to remain here until retirement, I hold no illusions that will actually be the case. Life has a funny way of changing the best laid plans. I maximize what I can contribute to my company pension (both mandatory and maximal optional contributions) plus I contribute a small amount to a separate RRSP. This ensures that if I remain at this company until retirement (which I plan to do), it will be well funded. If I do not, I have started my RRSP contributions so they have time to grow. I am also using my TFSA for my emergency fund. Once that is at 6 months worth, I will then begin investing additional contributions in safer investments within my TFSA as my long term savings approach.
Plan like a pessimist, dream like an optimist, live like a realist.
February 18, 2013 at 12:15 pm
Even though I have contributed to a government pension plan since I started working many years ago, I have always put additional savings in a RRSP. My pension is certainly enough to live well on but I wanted the option of more savings for extras like travel and redecorating or renovating.
February 18, 2013 at 12:57 pm
Thank you Gail for answering this question, it’s something I often asked myself.
But, as @Periwinkle cautionned, if you have a pension plan, be sure you have that job forever. I thought I had my job forever: gouvernment employee, great evaluations all the time, a steady demand for our sector. After an organizational restructure, I lost my job of 18 years. I never thought that halfway through my career, I would have to worry about that. I’m glad I did the same as Periwinkle.
February 18, 2013 at 1:51 pm
I’m fortunate to have a pension promised to me in the future. However, I too am erring on the side of caution and fully funding my RRSPs every single year.
“What you do for yourself is cake; what others do for you is icing.”
I’ve tried to live by this quote in my financial decision making. If the promised pension is still provided to me in the future, then I will be a very happy lady. If it disappears somehow, I’m planning to still be A-okay without it. Depending on someone else to take care of ensuring that I’m able to retire when I’m old necessitates a level of risk that simply doesn’t sit well with me.
February 19, 2013 at 1:35 am
I’m turning 40 this year. I have not much aside for retirement for the simple reason that I have grown to believe (since my mid 20’s in fact) that this marketed version of perpetual vacations was a sham to begin with. And sure enough to prove me right, the age of CPP is being pushed back. Briefly, I am of those who believed I would simply work til I die. And honestly, no suicidal ideology here, I am fine with the idea of dying someday. Whenever life will see it fit I guess, though I might consider giving it a push if health doesn’t keep up.
But more so, I have grown very weary of Government and institutions such as Bank and the financial system. I do not trust them. So for the money I do have aside, I am in favor of the stack in the mattress. Simply because it is ready and available if needed. It doesn’t grow, yet it doesn’t lose either.
I have followed and still am following lots of your advice. I have a small company on the side that provides very little, but make up for it in tax deduction I can have. I am close to zero debts ($3500) in total which will vanish through the rest of the year. In the meanwhile, my emergency fund grows, my mattress thickens and all is good. Even though I believe you are very thorough in your calculations, the big fat numbers you entice the couples you help in your shows still remains in the realm of speculation to me.
Not a pessimist here, but History has enough teachings about period of wealth and thriving civilizations that went bust for me not to take this incredible period we are in for granted and remain cautious enough. Maybe it’s a survival mode I got from my parents… But your advice are indeed very useful anyhow. Thanks for your blog.
February 19, 2013 at 3:40 am
Marc Eric, quite honestly – I call BS.
My step father had a similar view that he could minimize his retirement savings as he did not expect to or desire ever retiring. The reality is that he could never delay gratification. For him, Savin for the future was never as fun as buying a car or taking a holiday.
Now he’s close to retirement age and he’s stuck. I don’t doubt that he still enjoys working. However in part, given his advancing age and a whole host of other factors he can no longer get the job he wants. He has had to move twice now to secure appropiate employment. He will have even bigger problems if his health doesn’t hold up.
He would be much better off if he were only working because he chose to – rather than forced to as he ages. He sees that now too, and e wishes he had pursued a job that had a good pension. I am hoping for the best, but I fear it will not end well.
February 19, 2013 at 10:07 am
And, Marc Eric, that is not counting other events that life could bring: your house, and thus your mattress, could burn down or you could be the victim of a robbery… Sorry! While I agree that banks are not always your friend, even not often, at least they provide some protection!
February 19, 2013 at 11:42 am
I feel like I am piling on here, but Marc Eric, you may not be able to work until you die if your health doesn’t hold up. You could face a decade or more of poor health where you are not able to work. Imagine how much worse that experience would be if you had no savings. You don’t need to plan to retire at 55 and travel the world but you should set some money aside so that you don’t become a burden for your family.
February 20, 2013 at 3:15 am
I can say, after watching older sibling approach retirement with a misjudged sense of confidence that CPP and OAS would be enough along with 50K in RRSPs, that things do not always work out the way you hoped. I won’t say planned because there was never any real planning involved. They had to retire a year early because of their health and EI only covered a few months of sick time. They currently are moaning and blaming the world because they were not able to work long enough to replace all the savings they blew buying the last few things they had to have before they retired, like a new TV and furniture. I am lucky in that I have a federal pension but it is not as much as I hoped due to having to retire early because of health reasons. Even with a guaranteed pension I still put money into RRSPs and now into a TSFA until my spouse stops working. I agree that planning like a pessimist has its advantages. If all hell does not break loose we will retire comfortably and if it does then we will still have enough to feed ourselves, the furry companions and keep the lights on.
February 20, 2013 at 6:12 am
I agree that folks should have money set aside in addition to a defined benefit plan in case that plan collapses or they lose their job or have to leave worklife early for medical reasons. But an RRSP is not the right vehicle if the plan comes tbrough because you will be in a higher tax bracket due to pension pay outs and will lose a bigger portion to taxes.
Build an emergency and retirement fund while you pay off your debt and house. If you have enough at the end of the month you should put money away for your kid’s education but not at the risk of your retirement. Im sick of seeing friends and colleagues working longer than planned because they put their kids through school. Scholarships are available for good students but not retirement.
February 20, 2013 at 4:57 pm
People also need to consider if their employer will match pension contributions (up to a certain amount). If an employer doesn’t co contribute to an RRSP but do offer to match employee pension contributions, then contributing more to your pension might be a better idea.
February 21, 2013 at 12:07 am
This has been an interesting read for me. I have a company-funded pension. It’s not huge; I look at it as what a great deal for me when I retire if it’s still here! If not, while I would be disappointed, I would not be devastated.
I contribute to my employer’s 403(b) Plan. Every single paycheck. I have (fortunately) been able to up the % over the past 3 years and as soon as I finish paying off my all-too-exorbitant dental work I will be able to raise my contribution a bit higher. Because my employer matches up to 3% of my contribution I will always take the free money and keep working on my 403(b). Like my pension, it’s not huge but it’s growing steadily and I feel safer to some extent with this plan in place.
I would like to think my pension and 403(b) will be around when it’s time to retire. I try very hard to be an optimist, really I do! I also think I’ll work til I’m 70-good Lord willing. Taking my situation into account, looking at what I’ve accomplished so far, and my goals, I feel guardedly content. I cannot predict the future, I cannot control the % I earn on my 403(b), and I cannot force my company to contribute a larger sum to my pension plan. I can, however, keep growing my own savings and being as positive as I can about my retirement plans. In the long run, it does me no good to worry today about what I cannot control in the future. I can, however, learn from Gail’s blog and take her advice to heart.
I have plenty of time to learn. And even more time to put the best plan of action in place that I can. Thanks Gail for a timely post. I really liked this one today! (even though I read it a few days late)
February 22, 2013 at 8:01 am
Sorry If I misled you folks with the idea that I am not saving for retirement. I am. I do indeed believe I will work til I bust. Yet I do save. I have an ongoing TFSA I try to max, but I am not fond of RRSP whatsoever, even though the tax credit shows some sparkling benefits, I do feel that money should be availabe at the ready if caca hits the fan.
That’s what I meant by the mattress, nothing literal here. Just making sure the money is available if necessary and not entangled in some financial vehicle that will require me losing a bunch of it or paying taxes unnecessarily. I meant, not gambling it in the stock market. I meant accepting the low growth factor and working with what I have and what I can save instead of dreaming at the idea of potential high returns.
I just believe it is a viable way to go as well.
So yes, I save for the future, I just make sure it is also ready and available shall