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.
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.