Question from a 26-year-old Brampton, Ont.-based reader of our Young Money Facebook group: “I work for government. I heard that we have some of the best pensions around. Should I bother with an RRSP?
Answer from Natasha Knox, a fee-only certified financial planner and founder of Vancouver-area based Pax Planning: If you work for the federal or provincial government, you most likely have a defined-benefit (DB) pension. This is the kind of pension where you and your employer contribute a set amount every paycheque, while you’re working, and once you have retired, it pays you a set amount that is guaranteed for life, and in many cases, is indexed to keep up with inflation.
Natasha Knox is a fee-only certified financial planner and founder of Vancouver-area based Alaphia Financial Wellness.Handout
DB pensions have become increasingly rare, so if you have one, you are very fortunate. It will form a key pillar of your retirement income. That said, it should not necessarily be the only pillar.
The question you need to ask is: Will my pension be sufficient for my retirement needs? The answer will depend partly on the size of your pension, the age at which you joined, whether you plan to keep working for the government and when you plan to retire, among other things.
To get a sense of how much you might need in retirement, this Globe and Mail tool will help you figure out what costs you will and won’t face once you stop working. You are young now, and your life will change, so refer back to it from time to time and update your plan as needed.
The other factor to consider is access. Additional savings will give you access to a pool of funds in retirement. Keep in mind that pension income is reliable but inflexible. In retirement, your financial needs won’t necessarily be even. There is often higher spending in the early years as people travel or take up hobbies, things they dreamed of during their working years.
Let’s say you want to take a once-in-a-lifetime trip, and you need $25,000 in one shot. You wouldn’t be able to get that from your pension, but you could get it from your own personal retirement savings.
If you don’t know how much your pension is worth, I encourage you to look at a pension projection and also attend a pension information session at your workplace. This will help you understand the ins and outs of how your particular pension works and how much you can expect in retirement. Even within government pensions, there is variation. For example, some are fully indexed to keep up with inflation, while others are partially indexed.
Generally speaking, if you can afford it, it’s a good idea to set aside additional savings of your own in addition to your pension. It will go a long way toward giving you flexibility and options later in life. Whether you use your tax-free savings account (TFSA) or registered retirement savings plan as your first choice of savings vehicle outside of your pension, will depend on the specifics of your personal situation.
RRSPs are one of the best tax-deferral strategies available to Canadians. What that means is that it for every dollar you contribute to your RRSP, you get to deduct one dollar from your taxable income. If you are in a fairly high tax bracket right now, using an RRSP to defer that taxable income until you retire, when you’ll presumably be in a lower tax bracket, still makes a lot of sense.
On the other hand, if you are in a fairly low tax bracket now and expect to be in a higher tax bracket in the future, you are probably better off focusing on your TFSA as your main savings vehicle in addition to your pension for now.
Before you contribute to your RRSP, however, be sure to double check your RRSP contribution room. Pension adjustments decrease your available RRSP contribution room, so make sure that you actually have the room available.
In addition to the tax-deferral advantages, RRSP savings can come in handy for other non-retirement life goals, such as saving for a first home via the Home Buyers’ Plan or replenishing your pension contributions after a parental leave.
A lot can change between now and retirement. If you are at the beginning of your career, it’s worth considering that you may change jobs and employers, in which case the amounts that you save in vehicles such as RRSPs now will go a long way toward helping your future retirement.
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