When your pension isn’t big enough, what do you do? 

Many Canadian employers see DB plans, where retirees receive a guaranteed payout every month (sometimes indexed to inflation), as too expensive. And while the average time spent working for the same employer has actually risen over the last five decades, according to Statistics Canada data, spending a lifetime at one job—and collecting decades of pensionable earnings in the process—is a rarity these days. 

“My dad worked for a bank for 35 years. That was the only job he ever had,” says Kenneth Doll, a fee-only Certified Financial Planner based in Calgary. “Those days are gone.” 

Many Canadians must make do on partial pension coverage: either a small pension based on a decade or so of service, a defined (DC) contribution plan—where employers don’t provide backup funding if a plan underperforms—or a group registered retirement savings plan (RRSP), possibly with matching funding from their employer. Some Canadians don’t have a pension at all. “There is a massive decrease over the past 30 years in the number of defined-benefit pensions,” says Adam Chapman, financial planner and founder of YESmoney in London, Ont. 

These pensions won’t pay all the bills like a traditional defined-benefit plan. So, what can people with insufficient pension coverage do? Ultimately, the answer lies in balancing the small (or not so small) guaranteed income from a pension and pushing the limits of other income streams. 

How to plan your retirement now

Every Canadian’s circumstances are different, and financial planners avoid speaking in generalities. But the earlier you start planning for retirement, the better. This applies whether you have nothing except the Canada Pension Plan (CPP) and Old Age Security (OAS), a DB plan indexed to inflation and guaranteed for life, or something in between. 

First of all, sit down and figure out how much you plan to spend on life in retirement. Joseph Curry, a financial planner and president of Matthews Associates in Peterborough, Ont., says that when clients come to him, he maps out these details—as well as their expected income from CPP and OAS. All other income sources, including any pension income, are thrown in there, too. 

“We have clients who would spend as little as, you know, $2,000 a month, all-inclusive,” Curry says. “And we have clients who would be spending in excess of $200,000 a year in retirement.” 

One trick that works well is to max out any RRSP contribution room, then take the tax savings and throw them into a tax-free savings account (TFSA) for future retirement income. This can be tricky for Canadians with existing pensions, because their own and their employer’s pension contributions are deducted from their RRSP contribution room. For robust defined-benefit plans like the Ontario government’s Public Sector Pension Plan, it can remove thousands of dollars worth of contribution room a year. 

However, Curry still suggests retirees with an inadequate workplace pension use RRSPs, even if it isn’t as much as they’d hoped—and even if they’ll have to pay taxes on that income down the road. “It still generally makes sense to max out that RRSP contribution room,” he says. After all, he points out, the vast majority of retired people earn far less in taxable income once they stop working. 

Timing when you take your benefits

You also need to consider how much guaranteed income you need in retirement, versus more variable income at different stages. One of the advantages of having a partial pension is that you have some idea of how much you’ll pull in during retirement. If it’s enough to support your needs, along with a maxed-out RRSP, then delaying other pension sources might be a smart move. 

“In a lot of scenarios, if we want more guaranteed income, we’ll recommend people delay their CPP and OAS to get higher benefit amounts later on in retirement,” Curry says. 

In some scenarios, it might make sense to start delaying RRSP withdrawals, too. Doll points out that RRSPs need to be withdrawn by the end of the year you turn 71, but other sources can be deferred. If someone has a pension, especially a defined-benefit plan, it might be worthwhile to space out income streams. 

“We may start CPP and OAS at 65 as well,” Doll says. “So they’ve got their pension, CPP and their OAS, and then we leave their RRSPs.” 

Not everyone with inadequate pension coverage necessarily needs to stuff their RRSP, TFSA and other investment accounts to the brim. Chapman says a good DB plan might be equivalent to having $1.5 million in savings, and CPP and OAS might be worth $500,000—way more than the oft-quoted $1.7 million retirement plan as how much the average savings a Canadian needs to retire comfortably. 

“Those are the kind of people that actually, in a lot of cases, end up way over-saving because they have no idea what their defined benefit pension is actually worth,” he says. 

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Annuities: a pension substitute

For people who do need extra cash in retirement, Chapman suggests looking annuities, where a buyer pays an insurance company a lump sum (usually withdrawn from their RRSP) and receives fixed, regular payments in return. He does these sorts of deals all the time, and says they can provide a stable income source for someone who simply cannot depend on a pension. They can remove the risk of market volatility and even inflation. (Read: How annuities work in Canada.)

Chapman walks through a recent deal he did with one of his clients. “It was about a half-million dollars worth of money, and she’s now getting about $38,000 a year from that forever,” he says. 

Unlike a DB plan, Chapman says, annuities are customizable to a person’s specific needs. You can trade away some of the risk and worry of handling your own investments for a guaranteed payment. “It’s a great way to top up a pension,” he says. “If you only have half of one, you can buy a little more.” Someone with a partial pension might not need to buy an annuity to cover all of their expenses—just enough to supplement their mortgage, grocery bills or other life essentials. 

Any pension is better than none

It’s tempting to see having a limited pension as an advantage compared to a hefty DB plan. After all, those pensions can severely restrict contribution room to an RRSP, and give a steady, but relatively static, payout for life when many people prefer to front-load spending in their retirement while they are still active. And even a small DB pension can enable investors to take on more risk—and earn higher returns—with their RRSPs.

Doll says there aren’t too many advantages to having a partial pension. Sure, you can invest, but most people simply cannot do it well, and an actual pension provides some stability. 

“If you do it on your own, and you’re somewhat savvy, or you’ve got a good investment advisor, you can maybe make more money investing that money yourself in the markets than what a pension might pay,” he says. “But, again, I’ve got to stress: you’ve got to be very disciplined.” 

More on retiring without a pension:

• 30 and no pension
• 40 and no pension
• Self-employed and no pension
• Single and no pension

About Brennan Doherty

Brennan Doherty is a Toronto-based writer. His work regularly appears in the Toronto Star, Globe and Mail, BBC Worklife, The Local, and elsewhere.

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