I thought I would start a post to follow up on MMM’s pension post:
http://www.mrmoneymustache.com/2013/01/29/pension-schmension-retire-on-your-own-terms/! I suspect there are a number of people in a similar situation to myself (government defined benefit pension (DB)).
I fortunately love my job - but that’s not the point of the following exercise. The point is to stay or leave on your own terms and at the earliest time (to allow FI) of your choosing. The general concept that MMM serves up is right of course – in particular in the following case - the notion of a 35 year career in order to ‘qualify’ for the full 70% pension is absurd. No Mustachian requires this much (btw – the 70% is more like 100% since you no longer contribute to the DB, CPP (Canada pension plan), union dues etc)
The formula for federal government employee pension in Canada is simple:
(average 5 highest consecutive paid years) X (number of years’ service (max=35)) X (2%)
This can be collected without penalty starting at 60. It is indexed to inflation annually.
In the case of Ottawa’s family – we will be opting to retire much early and deferring our employer pension until 60.
The question to consider in this situation is how many years of service are required at 60 and how much cash is required to make it to 60? The biggest hurdle here is the psychology of leaving 1 million dollars in potential income on the table in addition to potential pension.
Some more info: Current Plan
Retirement ‘eligible’ target = 5 full calendar years (~1800 days).
Age at retirement – turning 46.
Mr and Mrs Ottawa combined current service = 14 years. Add 10 more (5 each) for a total of 24 at ‘eligible’ target date at 90K (each). Plugging into formula:
90K X 24 X 2% = $43,000 combined to collect starting at 60 (inflation adjusted annually).
Current spending 35K (including child care) – to drop to 30K September of this year.
Annual net savings – 93K
Current Stash = 150K index invested.
Junior Ottawa school stash = 36K (not used in net worth calculation)
Mortgage free house = 300K
So, total invested cash stash in 5 years at 4% (very conservative = safety margin) approximately 700K. This should throw off around 30K in dividends without eating principle until pension at 60.
Yes; I know this is excessive. I’m really having a tough time with the psychology of cutting FI down further!
As I have typed out this post, I thought of the simple sliding calculation table below (Stash Projected at 4% dividend reinvestment only - Capital gains assumed zero)!
Age 41 42 43 44 45 46
Date Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18
Pension
Worth 24870 28046 31222 34398 37574 40750
Stash 150000 250000 355000 465000 582000 703000
|
This table shows current ‘5 year’ FI at far right. Now that I look at the numbers…depending on conditions over the next couple years…I think FI could occur in 1000 days!?? Age 43!?? That would see a stash of 400K and a pension of 33K at 60…
Have I answered my own question?
Face Punches Most Welcome.
