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Pensions

Contributing extra to your retirement savings: Lenny and Lucy's story Add to ...

Lenny and Lucy both started working for the same company at age 30.

They both:

  • Make $48,000 a year (or $4,000 a month)
  • Have a defined contribution plan.
  • Their company saves 4% of their yearly wages for them.

They could make extra voluntary contributions, but Lenny decided not to. Lucy chose to save an extra 2.5% of her pay (or $100 every month). On top of that, her employer matches her contributions 50% (for an extra $50 a month). That adds up to an extra $150 saved each month.

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How will this change Lucy’s pension savings when she retires? Let’s say their money grows 6% a year. Here’s how much Lenny and Lucy will have saved by age 65:

Lenny's retirement savings growth: $226,792

Lucy's retirement savings growth: $439,410

Note: The examples are for simple illustration only. They do not reflect any tax savings or the impact of inflation or salary increases on contributions. Actual investment earnings may be more or less than the rates shown here.

The results: With just his base pension, Lenny has $226,792 in his account when he retires. His monthly pension before taxes would be about $1,295 until his 100th birthday ($15,500 per year).

By contributing extra, plus having company matching contributions, Lucy almost doubles her pension savings ($439,410). Her monthly pension before taxes: about $2,500 until her 100th birthday ($30,000 per year).

Lessons learned: Saving even a little extra each year adds up over time. And if your company matches your contributions, it can really boost your savings when you retire.

Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca

Follow us on Twitter: @GlobeInvestor

 

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