Savings + Pension

[speedyforme]

When people calculate a percentage of their income and the amount saved, how does tihs work for pensions?

Let's say I contribute about 3.5-4% of my annual gross salary to my pension plan and when I retire, for every year of service and paid pension, I earn 2% of my highest 5-year average income. So say I work for 30 years, I get 60% of my highest 5-year average salary.

So if I were to give a percentage of how much I am saving per year, do I use my 3.5-4% or do I use my 2% I earn each year?

Thanks.

[Bullseye]

What people use when they say what percentage they save is likely always open to interpretation, so probably doesn't matter.

For myself, I would say use the 3.5-4%.

When I work out what my savings rate is, I add my pension contributions, my employers contributions, my RRSP contributions, and also my extra mortgage payments I make, since this is the same as 'saving'.

[speedyforme]

What people use when they say what percentage they save is likely always open to interpretation, so probably doesn't matter.

For myself, I would say use the 3.5-4%.

When I work out what my savings rate is, I add my pension contributions, my employers contributions, my RRSP contributions, and also my extra mortgage payments I make, since this is the same as 'saving'.

If I take all of my expenses (money going out) from my NET INCOME, I come to about 24% savings left over annually, add in my pension contribution (4%) = 28%. Seems kind of high isn't it?

[ray420]

If I take all of my expenses (money going out) from my NET INCOME, I come to about 24% savings left over annually, add in my pension contribution (4%) = 28%. Seems kind of high isn't it?

It's high but its good! the higher your savings rate the better. Ideally people should try to save about 20% of their income, but people rarely do. If you doing 24% good for you! maybe aim to reach 30% savings rate.

[speedyforme]

It's high but its good! the higher your savings rate the better. Ideally people should try to save about 20% of their income, but people rarely do. If you doing 24% good for you! maybe aim to reach 30% savings rate.

I problably won't see much of it since I plan to use that to pay down the mortgage, hopefully going from $274k down to $200k when renewal comes up.

[ray420]

I problably won't see much of it since I plan to use that to pay down the mortgage, hopefully going from $274k down to $200k when renewal comes up.

paying down mortgage is just as good as saving both increase your networth!

[speedyforme]

paying down mortgage is just as good as saving both increase your networth!

so do people count their principle paid towards their home as savings? since I hear the term "buying a home is forced savings..."?

[ShopperfiendTO]

so do people count their principle paid towards their home as savings? since I hear the term "buying a home is forced savings..."?

No. The "forced saving" is just a nice way of putting it because you're reducing the debt you have (paying off mortgage) and converting it into equity, which increases your net worth but isn't actually "savings".

Also, I don't think you should be using the 3.5-4% number at all because you have a defined benefit pension. If it's a defined benefit pension, generally that amount should be ignored because what you put in there doesn't impact on how much you'll have (unlike RRSPs and DC pensions). That is, in one year, your rate might be 3.5-4% (which BTW is a really low rate for getting 2%/year) and two years from now it may drop or increase but the "payout" is still the same.

In other words, it would be clearest if you say what you save "plus my DB pension," so I save 24% of net income plus my DB pension contributions (i.e., no "total is 28%").

[speedyforme]

No. The "forced saving" is just a nice way of putting it because you're reducing the debt you have (paying off mortgage) and converting it into equity, which increases your net worth but isn't actually "savings".

Also, I don't think you should be using the 3.5-4% number at all because you have a defined benefit pension. If it's a defined benefit pension, generally that amount should be ignored because what you put in there doesn't impact on how much you'll have (unlike RRSPs and DC pensions). That is, in one year, your rate might be 3.5-4% (which BTW is a really low rate for getting 2%/year) and two years from now it may drop or increase but the "payout" is still the same.

In other words, it would be clearest if you say what you save "plus my DB pension," so I save 24% of net income plus my DB pension contributions (i.e., no "total is 28%").

I just took the amount I contribute to the pension plan and divide it by my gross income which came to about 3.7%. I think my pension plan says that my contribution is basically 4-6% of my annual salary but so far I have yet to see that amount being taken away. The assumption is that if I do this for say 30 years, I can roughly contribute $150k for example over the life of 30 years. Then I get 60% of my highest 5 year average income which by then can easily be over $120k per year until I die...

[randomthoughts]

I'm not sure about your math?

If you were getting 60% of your highest 5 years averaged, at $120k/year, that means that you were making an average of $200k per year in your highest years! I'm not aware of any positions (even directors) in your field (which I think I can tell by your posts :) ) that make that much!

That being said, if that's what your pension will be, then RRSPs may be a waste of time, since they'll be taxed heavily as you withdraw them.

[speedyforme]

I'm not sure about your math?

If you were getting 60% of your highest 5 years averaged, at $120k/year, that means that you were making an average of $200k per year in your highest years! I'm not aware of any positions (even directors) in your field (which I think I can tell by your posts :) ) that make that much!

That being said, if that's what your pension will be, then RRSPs may be a waste of time, since they'll be taxed heavily as you withdraw them.

Well we get an auto raise very year and COLA every year as well, I did the math that if all else constant, my salary in about 30 years would be over $250k. Of course inflation would strip the VALUE of it away but you get the point.

So hence I wonder why people can count RRSP as savings but not money put into Pension Plans??? I figure I would include either the 3-4% or the 2% I earned per year based on the pension plan?

And yes, I pretty much won't really so RRSP since the tax on that will be quite heavy when I retire, plus I'd rather put that money towards the mortgage.

[randomthoughts]

You may want to check that your COLA is included in the 5 year average.

I think you can included the 3-4% that you contribute to the pension as savings, for the purpose of determining how much you are 'saving' per year.

The 2% earnings is the 'end result' and should be considered when you are determining how much money (if any) you will need once you retire. In your case, though, you probably don't need to be concerned :)

[speedyforme]

Thanks, the COLA is added onto my salary annually, so say my base raise is 4% this year and the COLA is 3%, my annual salary bumps up 7% forever.

That's the few bonuses of working for the government.

[i6s1]

When people calculate a percentage of their income and the amount saved, how does tihs work for pensions?

Let's say I contribute about 3.5-4% of my annual gross salary to my pension plan and when I retire, for every year of service and paid pension, I earn 2% of my highest 5-year average income. So say I work for 30 years, I get 60% of my highest 5-year average salary.

So if I were to give a percentage of how much I am saving per year, do I use my 3.5-4% or do I use my 2% I earn each year?

Thanks.

2% is money that is coming out. That's your retirement spending rate.

Count your contributions, plus your employer's contributions.

You also have to define retirement savings and total savings. I put money into my RRSP, but it's for a down payment on a house (once the market corrects) so I consider that like a housing expense.

I think that 10% retirement savings is a good number if you want to retire at a normal retirement age. There's nothing wrong with saving more, but you do want to have to scrimp and save now so you can vacation every year when you're too old to enjoy it. Your pension, combined with CPP and OAS, is already enough to live off very comfortably. You won't have a mortgage or children to pay for.

[speedyforme]

2% is money that is coming out. That's your retirement spending rate.

Count your contributions, plus your employer's contributions.

You also have to define retirement savings and total savings. I put money into my RRSP, but it's for a down payment on a house (once the market corrects) so I consider that like a housing expense.

I think that 10% retirement savings is a good number if you want to retire at a normal retirement age. There's nothing wrong with saving more, but you do want to have to scrimp and save now so you can vacation every year when you're too old to enjoy it. Your pension, combined with CPP and OAS, is already enough to live off very comfortably. You won't have a mortgage or children to pay for.

I have never even looked into my compan'y pension contribution (if any). Currently I am trying to balance paying down mortgage and enjoying life (vacation). Being single, it's a bit harder I guess to pay down things without a second income. My mortgage amount was $274k last year when I bought my first home and I planned to go down to $200k at the end of the 5 year term, leaving less than $7k on vacations for the next 4 years, not a lot so I might have to reconsider depending on the lifestyle I want to live.

It's harder to vacation when you're single, finding people to go with you etc. So far I haven't gone on any MAJOR vacation this year, just smaller ones to get away and relax.

Also, is assuming my monthly costs increasing at a rate of 4% per year reasonable for budgeting into the future? This includes mortgage, utilities, bills, insurance, food etc.? Too conservative?

[TrevorK]

It's high but its good! the higher your savings rate the better. Ideally people should try to save about 20% of their income, but people rarely do. If you doing 24% good for you! maybe aim to reach 30% savings rate.

In what world do you think people should be saving 20% of their income for savings? It sure isn't this one.

Saving money is nice, but to have everyone aim for 20% is ridiculous in our society.

[TrevorK]

If I take all of my expenses (money going out) from my NET INCOME, I come to about 24% savings left over annually, add in my pension contribution (4%) = 28%. Seems kind of high isn't it?

It does seem high, but it depends on what your plans for the savings are.

If you're saving for a house, mortgage, vacation, car, etc... you may find yourself "saving" a large percentage of your income only to "spend" it later.

If you're saving 28% for retirement, and plan to continue this throughout your working life until retirement, then yes, it seems like a lot.

[speedyforme]

It does seem high, but it depends on what your plans for the savings are.

If you're saving for a house, mortgage, vacation, car, etc... you may find yourself "saving" a large percentage of your income only to "spend" it later.

If you're saving 28% for retirement, and plan to continue this throughout your working life until retirement, then yes, it seems like a lot.

Hm haven't even thought about it. So far I guess it will all go towards being mortgage-free, after that, I will probably spend it since my retirement will most likely be covered by my pension.

[Mike2000z28]

In this world, most people have a negative savings rate! Well until recently that is.