If you don’t participate in a workplace pension plan, you can contribute up to 18 per cent of your employment earnings to an RRSP annually. If you contribute less, the unused portion can be carried forward to a future year. If you participate in a defined benefit (DB) pension plan, CRA allows you to tax-shelter considerably more than that.
Consider someone (we’ll call him Jeff) who was earning $33,000 in 1994 at age 30 and whose earnings rose to $107,000 by age 60, thanks to promotions, seniority and inflation. That is a little more than the average Canadian middle-income earner but lower than the average federal civil servant with equal seniority.
If Jeff participated in the federal government’s public sector pension plan, the value of his DB pension at 60 would be about $1,140,000, of which about 30 per cent would have been funded by Jeff’s contributions. In addition, Jeff could make contributions to an RRSP that would have accumulated to $208,000 after 30 years. (This assumes the RRSP is invested 60 per cent in stocks and 40 per cent in long-term government bonds with investment fees of 1 per cent a year.) Hence the total value of his pension and savings adds up to $1,348,000.
If Jeff saved solely in an RRSP over the entire period, the maximum he could accumulate by age 60 is $883,000 (assuming he also invested in a 60/40 asset mix), which is $465,000 less than his counterpart in the public sector.
But how much would Jeff actually need if he wanted to enough savings to maintain his standard of living after retirement and for the rest of his life? It depends on his situation but if Jeff was a homeowner with a paid-off mortgage, calculations with PERC indicate he would need to save 16 per cent a year instead of 18 per cent. His optimal amount of savings at age 60 would be about $780,000. If he retired at a later age the amount needed would be less.
Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca)
Frederick Vettese