This election campaign plunges us into interesting reflections on personal finance.
The question of the day: How much is a defined benefit (DB) pension plan worth? She rallied in the wake of QS’s plan to tax the “big fortunes,” which would include workers’ pension plans.
Another question: how much should a person left to their own devices save in order to enjoy an equivalent retirement income? Just take a look.
There are more than 580,000 defined benefit plan members in Quebec, according to Retraite Quebec. millionaires? Allow me to doubt it, although it must be so. They have in common to pay an annuity for life. Performance is based on average salary and years of service.
Typically, someone who spends their career with the same employer receives the equivalent of 40% to 70% of their average salary upon retirement. The years used to calculate this average can make a big difference. For example, if you take the average of the five best salary years, the pension will be higher than if you keep the average salary of the last ten years. What makes these plans so valuable is the security they offer. Regardless of the storms that hit the financial markets, the annuitant will have peace of mind. A pensioner who depends solely on his savings runs the risk of seeing the end before he dies, with intermittent emotional phases.
So how much is it worth? Those involved have a good idea of this, since their statement usually shows the “actuarial value” of their share in the pension fund. Also called “transfer value”, it is this amount that QS wants to include in the calculation of “assets”. It is the sweetheart that a person would go with if they forfeited their pension when they left the employer.
The actuarial value depends on the years of service, the pension commitment, the fringe benefits (before the age of 65), the indexation rate granted and the spouse’s survivor’s pension. Another element that weighs very heavily: interest rates. The calculation of the future pension is based on bond interest rates. When interest rates are low, the actuarial value is higher because when yields are lower, more money is needed to earn the equivalent of the annuity. The opposite is also true.
Mélanie Beauvais, actuary and financial planner at Bachand Lafleur, did some calculations. We imagined a person who could be a nurse, with a good parting salary without being significant: $80,000 at the end of a 30-year career.
At age 65, this person would be entitled to a pension of $48,000 (we have not indexed it, for simplicity the RREGOP indexes it at 50% of the CPI). As of July 2022, the transfer value for that annuity would have been $685,000, according to the actuary.
I state “July 2022” because if we had performed the same calculation a year earlier when bond yields were much lower, the actuarial value would have been $850,000. (Add the mortgage-free home, our nurse would be one of the “great fortunes”!)
How much savings?
Back to the $685,000. That’s a lot of money. A woman (since we were talking about a nurse) accumulating that amount in an RRSP could withdraw $45,000 per year for 23 years with a 3.5% return. This corresponds to his life expectancy at the age of 65. After that it’s over, calculates Mélanie Beauvais.
What percentage of our salary should we put into an RRSP to receive a retirement income similar to that of a DB member? It depends on your risk tolerance, which is how you invest, but you already have a good idea of the answer: it’s 18% of your salary, the limit for RRSP contributions.
This cap was not set arbitrarily by an admirer of Serge Savard (who wore number 18). It was weighed, calculated. This is the savings rate required to ensure a retirement income that is approximately 70% of your income earned during your working life.