Ah, got it! But are we talking $875k x 2 because my husband has a similar pension?
And in your opinion, it would be a bad idea to retire earlier and get a lump sum instead of the pension?
Yes, if you are both in the same pension plan it would be x2.
Lump-sums aren't always bad, but generally they are not as generous as staying in the plan. You have to keep that in mind in your retirement plan. If you have a lot of savings outside of your pension plan you may be in a position where you can sacrifice the stability of the pension plan and take the lumps on your taxes when you retire.
Retirement pension plans are designed that the last 5 years of your plan contribute significantly to your commuted value. If you retire 5 years early, you will likely reduce your guaranteed pension by a significant amount (say $1800 instead of $2900). This means your pension value by my math drops a lot, from $875,000 to $550,000. To make things easy lets say at age 50 your commuted value of each pension is $500,000. When you take a lump sum, it will be divided into two parts: 1) a large portion will go into a LIRA which is a locked in RRSP that you can withdraw from starting at age 55, with a few other exceptions for health emergencies etc. 2) a smaller, but still large portion will be paid out in cash. This part counts as regular income but you could elect to fill up any excess RRSP room with that to help reduce your tax bill for that year.
Lets say $400,000 goes into the LIRA and $100,000 is the "excess portion". You anticipated this payment so you didn't make any RRSP contributions for the last couple years and now you have $20,000 in RRSP room (paying more tax each year along the way). Even if you retire on January 1, your taxable income for that year will be $80,000 after the RRSP contribution. You would likely lose around $20,000 to taxes each that year ($40,000 total). That's probably more than a year of living expenses gone.
The $420,000 that you have been able to save from your pension value will turn into $560,000 when you turn 55 if it compounds at 6% return on investment. This will generate $1800 a month for life at a 4% SWR. This is significantly less than the $2900+ that you were promised and you took on a riskier investment portfolio because although 4% withdrawal rate on a 75/25 stock bond split portfolio is about 95% safe, it is not 100% guaranteed for life like your pension theoretically is.
Of course I'm just pulling numbers out of my butt here, but they are probably in the ballpark for reality. If you want to estimate the commuted value of your pension at age 50, just pull out your pension statements for the last 5 years. Looking at the estimated commuted value alone, calculate how much that is increasing percentage-wise each year on average. Then with a little math you can figure out the future value when you turn 50, or whatever other age you want.
I would say that you would be better off to keep the pension in the plan until you turn 65, but after taxes its likely not true. At 65 you will start to collect CPP/OAS so the pension just counts as extra income on top of that. It has the potential to increase your taxes significantly, maybe even resulting in clawbacks on OAS. That is something you will have to decide when you get your pension option package, there they will provide an estimate of your pension payments at age 65.
I don't know how flexible your employer is, but the best option might be changing to a 0.5 position when you want to slow down and ride it out to age 55. This way you will still be in the plan until 55. You pension estimates will go down a bit because your wages will drop, but it probably takes the average best 5 years of your earnings anyways (not the last 5 years).
I'm in a similar situation as you are, but I really don't care about my, or my wife's pension at all. In fact I'm looking at the pensions purely as a bonus and my retirement plan is based on the assumption that I won't have a pension at all. But I'm in a different situation because I plan to "retire" at age 35-40 tops, making sure my savings will generate more money that I need at 4% WR. Age 35-40 is a long way away from age 55 so it makes no sense at all for me to consider working an extra few years to get the pension without the headaches.
