The article “Is It Okay To Retire With Debt?” was originally published on MoneySense on August 28, 2018.

Steve has debt but also has a generous DB pension. Should he retire?

Q: I am eligible for retirement at age 57, as I have 30 years of service. I am now contemplating what I should be doing and whether I should keep working.

I have a mortgage and bills and need a steady income, but I do have hobbies and interests that could make extra money if done more frequently.

Many people are saying that if you can retire, go for it but, I am still having second thoughts.

Is there some solid advice you can provide to help me decide?


A: The first piece of advice I’ll give you Steve is to not be so focused on when you are “eligible” for retirement. I assume you’re referring to the point at which your defined benefit (DB) pension is not subject to an early retirement discount?

Some pensions have an age 85 factor, for example, so that if your age plus years of service equal 85, there’s no discount to start your pension before the normal retirement date (often age 65). Your pension may require 30 years of service to qualify for an unreduced pension from the sounds of it, Steve?

I find using this date to determine your retirement is kind of arbitrary. Given how frequently I encounter DB pensioners who literally choose it as their retirement date, I think companies with DB pensions should consider more education for their employees.

Even if you’re “eligible” for an unreduced pension at age 57, consider what would happen if you worked until 58 or 60 or 65. No matter when you retire, your pension would be “reduced” from what it might otherwise be if you kept working. Therefore, your pension is always reduced. Your retirement savings would also be reduced. Or in your case, your ability to pay down debt would be reduced.

But if we were always concerned with maximizing our retirement income, we would never retire. Instead, I believe we should aim to “optimize” our retirement income relative to our desire to do things other than work.

So, while the date at which your pension is no longer subject to a reduction is relevant for determining the monthly pension you would receive at a certain point and retiring a week short of that date might not be wise, it’s certainly not a magic date at which you should arbitrarily retire.

I think the best way for anyone to determine their retirement readiness is to develop a retirement plan, whether on your own, or with a professional financial planner. A professional can probably do a better job than you can do on you own, Steve, but a professional roofer could probably do a better job of re-singling your house, too. It’s up to you to decide if it’s worth it.

A retirement plan can be used to project your future DB pension, Canada Pension Plan (CPP) retirement pension, Old Age Security (OAS) pension, other income sources, investment accumulation/decumulation, expenses, and debt repayment.

With 30 years in a DB pension, Steve, assuming a 2% pension formula, you may receive 60% of your final average earnings as a pension. CPP or OAS may or may not make up the difference to 100%, but you can’t start CPP until 60 and can’t start OAS until 65.

Whether or not your pension is indexed to inflation makes a big difference as well. Receiving a pension of 60% of your final average earnings might be great now, but in 30 years, if it’s not indexed, it may only be 33% of your final average earnings assuming 2% inflation.

It sounds like you may be able to turn your “hobbies and interests” into some supplementary income, but you may need some savings to bridge the gap until 60 or 65. It’s also important to determine if your pension includes a bridge benefit that ends at 65 and causes your pension to decline thereafter.

Living expenses in retirement tend to decline only modestly in the early years, particularly for a 57-year-old retiree. Some of the better studies I’ve seen suggest 0-10% decreases, and sometimes, spending can even increase initially.

I think the main “expense” that’s a wildcard for you is your mortgage. If you only have a small mortgage and a few years of payments remaining, your income requirements may be on the verge of a big decrease. I’ve seen a lot of retirees with generous DB pensions work hard to pay off debt, retire, and suddenly find they’re flush with cash flow because their $500, $1,000, or $2,000 monthly mortgage payment disappears. With 30 years of pensionable service, CPP, OAS and some modest savings, your income may be comparable in retirement to pre-retirement, but your spending once mortgage-free could be much less.

You will also need to consider other factors, Steve, like whether you plan to downsize your house or whether you’re expecting an inheritance, which would obviously be bonuses.

Or on the flipside, do you have children pursuing post-secondary education or planning weddings? Do you have elderly parents who may need financial support? Are you going to be paying for your health care costs out of pocket post-retirement, costs that may have been covered by a group plan while working? These are some extraordinary costs to consider.

In summary, it’s not as easy as circling your eligible retirement date on a calendar and letting something arbitrary determine your financial future. This date may be later than some people should otherwise retire and too early for others. Consider your current and future financial situation to decide what’s best for you, Steve.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.