Can we retire without defined benefit pensions?

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Are we going to be OK in retirement without healthy defined benefit employer pensions? This is the question Anthony, 54, and Deirdre, 53, are trying to answer.

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“The only reason my parents were able to retire is because they both had defined benefit pensions that pay them a good regular income,” said Anthony.

“My wife has worked part time most of her adult life to better care for and raise our children. Her salary over the last 20 years has never surpassed $15,000. I work in the hospitality industry and about three years ago took on a five-year contract position that pays $125,000 a year before tax and does have a defined benefit plan that will pay two per cent for every year worked. Throughout our working lives we have been diligent about saving and investing. We are funding our retirement and we don’t know if what we’ve saved is going to be enough.”

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The concern has taken on added urgency because they would like to retire within the next two years, when Anthony’s employment contract ends. “We have two adult children and aging parents. We want to travel, catch up on projects and do things we want to do before other responsibilities take over, such as helping our elderly parents,” said Anthony.

He and Deirdre have saved $840,000 in registered retirement savings plans (RRSPs), $380,000 in tax-free savings accounts (their TFSAs are invested 100 per cent in stocks, with dividends reinvested each year to maximize contributions), $810,000 in locked-in retirement accounts (LIRAs) and $400,000 in non-registered accounts. With the exception of their TFSAs, their portfolio is 80 per cent stocks and 20 per cent bonds or bond equivalents.

They own a home in Quebec valued at $950,000 with a $450,000 mortgage at 2.19 per cent ($2,000 per month). They are currently planning to pay off the mortgage when it matures in September 2025 but wonder if that is their best course of action. While this is not their forever home, if they sell, they would likely end up buying something of equal value. Current expenses match income and they would like to generate about $135,000 before tax in income once they retire to maintain their current lifestyle and fund more travel.

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Beyond their savings and house, Anthony wonders how much he and Deirdre can expect to receive from the Quebec Pension Plan (QPP) and Old Age Security (OAS) and when they should apply for these benefits. “Will we have enough to live as we are currently living if we retire in two years?

What the expert says

“Anthony and Deidre are not alone,” said Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management, “as most Canadians are asking the same question: Will they be OK in retirement with current investments and no large defined benefit plans?”

“Since retirement is about creating cash flow to meet income needs, it doesn’t matter if you have assets that create cash flow or a defined benefit pension creating the cash flow. What matters is understanding what is reasonably possible over the rest of your lifetime and being comfortable with the results and assumptions driving the outcome.”

While Anthony and Deirdre envy a defined benefit plan’s embedded guarantees or indexing, Einarson points out defined benefit pensions have their own drawbacks. “Often those with large pensions envy those with more flexible assets, for income flexibility or survivor and estate planning goals.

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“There is a lot of self-awareness that should be brought into retirement planning. The perceived security of fixed income streams tends to give people a licence to spend versus having the assets that can comfortably create that same income. What is important is gaining an understanding and comfort with your own situation, assumptions, trade-offs, and possibilities; then decisions made in that context will bring confidence,” he said.

For this reason, Einarson suggests Anthony may want to consider the purchase of an annuity with some of his assets to give him the income security he seems to crave. Various scenarios can be run and pros and cons discussed with a retirement planner, who can help provide confidence knowing their entire situation, the challenges they face – such as the responsibilities of being in the sandwich generation – and personal goals.

The good news is Anthony and Deirdre have more than $2.4 million dollars, a reasonable asset allocation with a strong focus on dividend paying investments, which is a great foundation for their future income needs, Einarson said.

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“A preliminary running of Anthony and Deirdre’s numbers shows that they can comfortably meet their income needs throughout retirement, even with an average three per cent net of inflation return on investments. In fact, they are in a position to be able to replace all current income with all their registered accounts, Anthony’s modest pension and future government benefits, while simultaneously creating significant capital by preserving and adding annually to the TFSAs. The TFSA investment accounts will become a significant tax-friendly estate asset for them and many other Canadians over time.”

Paying off the mortgage when it matures could also help with cash flow. “If they use the non-registered money to pay off their mortgage they can go into retirement needing 25 per cent less after-tax income,” Einarson said. “Being debt-free not only reduces income needs, but this also reduces overall risk. For them to replace current income of about $8,000 a month, after taxes and deductions, with the house paid off would now mean an extra $2,000 a month to allocate towards the travel they want, without having to tap into the TFSA accounts or home equity.”

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He suggests a part of the retirement plan can be to estimate benefits and run the scenario of taking QPP and OAS at different ages. To be accurate they can get an estimate of future benefits from the Canada Revenue Agency.

“Generally, for those who are healthy and have a history of family longevity, they should wait at least until age 65 to receive the full government benefits and future indexing on that sum for life,” said Einarson.

“Anthony and Deidre are in a great financial position and can retire in two years, but confidence will only come from engaging in the retirement planning process. The key will be to run all the numbers in a comprehensive retirement income plan. The value of planning and visually seeing your future retirement income from all sources cannot be overstated.”

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out and wondering how to build wealth or get into the real estate market, or maybe plotting a career change? Are you wondering how to make ends meet? Drop us a line at cvarga@postmedia.com with your contact info and the general gist of your problem and we’ll try to find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).

* Names have been changed to protect privacy.

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