Will A Pension Plan Handcuff You To Your Job?
It’s getting harder to find a job with a good pension plan these days. The average employee with a defined benefit plan will typically spend three decades working for the same organization and can be set for life in retirement.
I consider myself lucky to have a pension plan, but ask me again in ten years. For many people, complacency sets in after years of doing the same thing for the same employer, day-in-day-out.
Psychologically, you can be trapped for decades doing something you no longer feel passionate about because of the appeal of maxing out your pension plan.
Yet in order to maximize your pension plan benefits, you need to be in it for the long haul. I’ll need to reach the magic number of 85 (age + years of service) to receive full benefits. I was 30 when I started working for my current employer, meaning the earliest I can retire with full benefits is 57.
The average employee, however, spends less than five years in the same job. Generation Y employees in particular seem to fall in-and-out of love with their jobs faster than Apple puts out a new iPad.
Related: How Young Adults Can Still Thrive Financially
For young Canadians, spending 25-30 years with the same employer can seem like a life sentence rather than setting them up for the good life in retirement. Here’s why:
Contributing to your pension plan
I contribute just over 11% of my salary toward my pension plan, which leaves me with little opportunity to create my own investment portfolio outside of my pension.
Directing such a large percentage of your savings toward retirement when you’re young may help build a sizeable nest egg, but if you have other financial priorities this may not be in your best interests.
Related: Our Fast Track To Financial Freedom
When you contribute to your RRSP, you can use the Home Buyers Plan to withdraw money for a down payment on your first home. And with the Tax Free Savings Account you can withdraw money at any time, tax free!
These investment options can give you much more flexibility compared to a rigid defined benefit pension plan.
Leaving your pension plan
If you leave your pension plan before your normal retirement date, you have three options to consider:
- Leave the funds in the plan and collect the pension benefits at the time of retirement.
- Transfer the funds to a new pension plan, if the new pension plan allows this.
- Transfer the amount into a locked-in RRSP, or LIRA. A LIRA is similar to a regular RRSP except withdrawals are not allowed until the employee reaches retirement age.
There was a time when landing a job with a pension plan right out of University was considered a ticket to a golden retirement. Employees were loyal to their employers and in turn expected to be taken care of when they retired.
Related: Decoding Your Company Pension Plan
Don’t get me wrong – for most people, having a pension plan is a blessing and will likely lead to a comfortable retirement.
But Generation Y doesn’t envision working for the same employer for their entire career. They want to take the time to find their passion, reach outside their comfort zone, or maybe start their own business. They want the ability to invest their own money and to choose their own retirement date.
I’ve never had a job where having a pension is an option, but I think if I did have the option, it would likely make me strongly consider staying a company than if there were no pension offered.
I like to call these kinds of employer supplied benefits, Golden Handcuffs. These are things like pension plans, employer matched share purchase plans, extended health insurance, and even things like breaks employees might get on mortgages, car loans, etc. They are great for employees, but I agree that they can lock you to an employer. If you are considering leaving an employer that supplies any of these perks, then you need to seriously consider what your financial plan might look like.
I see so many teachers that are in the grips of “The Golden Handcuffs”. Basically they are sticking in the profession specifically because they only have X number of days left until their full early retirement at 55. When combined with the unparalleled job security, the end result is that basically the students get screwed and the teachers really don’t like their jobs much.
Why are you picking on teachers? I agree that a small minority do stick it out past their best-before date in order to qualify for their full pension however, this applies to society right across the board! I have dealt with any number of people who have become tired of their jobs in a wide variety of occupations.
This includes salespeople, tax collectors,mechanics, millwrights,dentists, accountants,etc. etc..
Don’t go dumping on the profession of teaching. Those people are highly educated individuals, most of whom start their careers with the best of intentions, although some do become worn down from years of dealing with your children!
Give it a break!
who knows maybe
I only wish i could find a company that still offered pensions.
Agreed, most young professionals today seem to have a difficulty of finding their ideal jobs and seem to hop from one employer to another.
I’m uneducated 25 years in automotive assembly. Have to commute 2 1/2 hours every week and maintain apartment where my job is. I work 11-12 hour days. I’m miserable!! But only 5 more years to get full pension. But paying for house in 1 state missing my family and life. Paying rent in another state, commuting every weekend. Should I stay or go?
Hi Teresa, wow you are amazing because you have worked so hard. I can’t tell you what to do. Analyze where you are at and work the scenario both ways. Many women don’t have a pension. Many women would not have been able to survive for 25 years in your business. Many women do not have a home. Congrats…you have worked hard. Hats off to you!!