Q&A: Can’t figure out pension
Question: I have a simple question that I just can’t seem to find an answer
to. I will be retiring in October 2007 (at 55). I have been paying into a company
pension plan for 16 years. It’s a defined contribution plan with a current value
of around $100,000.
Given projected growth until I retire, along with continued contributions from
both myself and the employer, is there any formula or calculation that can be
done to figure out how much I’ll be getting from this pension each month? –
M H., Aurora, ON
Gordon Pape answers: Actually, it is not a simple question
at all and no, there is no formula. This is the problem with defined contribution
plans, which are becoming much more common in Canada because they cost employers
less money. With a defined benefits plan, a pension is determined by a combination
of years of service and income. In the case of a defined contribution plan,
everything depends on how well the invested money performs. As we saw during
the bear market that can change dramatically from one year to the next depending
on what investments are in the plan.
You can, however, arrivat a rough estimate of how much your pension will
be. First, do a projection (or have the plan administrator do one) of how much
money you will have in the plan when you retire in 2007. Let’s assume
that it’s around $110,000.
Now calculate the average return over the past five years that you’ve
earned from the investments in the plan. This is a long enough period to allow
for a reasonable idea since it includes the worst years of the bear market and
the bull market run from 2003 to now. If the average gain is 6 per cent, it
tells you to expect to receive about $6,600 a year in cash flow from your pension
plan, assuming you stay with the current investment mix. If you take more, you’ll
be dipping into capital and that may not be allowed.
If you want a more precise figure and an income guarantee, ask the plan administrator
about purchasing an annuity at retirement and get an estimate of how much income
that would generate.
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