Why I Save Outside Of My Defined Benefit Pension

The Financial Post featured a story recently about a man in his late 40’s who had the luxury of two defined benefit pension plans.  The first pension was earned at the young age of 38, after twenty years of military service; the second plan is from his current employment with the federal government.

In total, assuming he retires at 60, the two pension plans will pay a combined $70,000 per year for life.  That pegs the value of these pensions at about $2 million!

Related: Lifetime Pension vs. Commuted Value

With a rock solid retirement plan in place, this man doesn’t set aside a dime for the future.

“Today, I happen to be very well situated financially and yet I have absolutely no personal investments; all of my income is dedicated to living for today, anything that is left at the end of the month goes towards the next month of fun.”

Can you afford to spend freely and forego other savings vehicles knowing that a defined benefit pension will be there for you in retirement? 

For most of us, the answer is no.  After all, many pension plans are massively underfunded and even previously ironclad provincial plans have been forced to scale back benefits and increase member contributions to deal with shifting demographics.

When I changed careers, moving from the private sector to the public sector, I also changed my approach to saving and investing.  Back then I was investing in my RRSP and getting some matching contributions from my employer, but now 10 percent of my salary gets automatically deducted from my paycheque and goes toward the pension plan.

Related: Have We Seen The Last Of The Gold Plated Pension? 

I’ll be 57 by the time I can retire with my full pension, but upcoming changes to our plan will likely mean a few more years of work.  At that point I’d start to collect 2 percent of my highest average salary, multiplied by the number of years of service.

Assuming my highest average salary is $100,000 and I’ll have worked 30 years, I can expect to receive $60,000 per year in retirement.  That’s almost as much as the man featured in the above story.

So why am I still socking away a bunch of money on top of my normal pension contributions?

There’s no guarantee I’ll stay with my current employer for 20+ years.  A defined benefit plan is great if you can see it through to the end.  The last five years of service is what really counts when it comes to calculating your retirement benefits.

I’d like to think my job is secure, but with an uncertain economic climate in Alberta and a government looking to reign in education spending, a round of layoffs is not out of the question.

I’ve also developed a bit of an entrepreneurial spirit and can see myself pursuing other endeavours down the road, whether that is freelance writing or something in financial services and education.

Related: Ways To Make More Money

For those reasons, I still put 10 percent of my salary into my RRSP and plan to build it to half a million dollars before I turn 55.  I like the idea of building multiple income streams so that all my retirement eggs aren’t in one basket.

Final thoughts

Having a defined benefit pension is a blessing today when you consider that 11 million Canadians don’t have a workplace pension plan.  But frankly the uncertain future of these plans scare me because we all recognize that major pension reform will need to occur for them to be sustainable for the long term.

That’s why – contrary to the two-pensioned man featured in the Financial Post – you won’t see me spend, spend, spend my last dollar while I gloat about my defined benefit pension.

Because, dammit – I saved too much for retirement! – said no one, ever.

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  1. The fiscally fit on September 27, 2013 at 12:37 am

    Hey. Is that 2 million based on a net present value or a commuted value? I love the savings component of your plan but what options have you explored for more tax efficient income streams in the future? The tax deferral of the growth is great but that can be achieved in non registered accounts along with more tax efficient income streams in the future. Your thoughts? Or what else have you explored?

    • Echo on September 27, 2013 at 7:15 am

      @The Fiscally Fit – the $2MM value was mentioned in the article in the following context:

      “How much would one need to save to assure a lifetime annuity of $70,000 per annum, not to mention the annual increase to cost of living?

      Answer: approximately $2 million!”

      I haven’t thought this all the way through but I’d like to explore the possibility of leaving work in my fifties, using my RRSP money as a bridge for a decade until my pension kicks in.

      I’d draw down a tax-efficient amount from my RRSP each year and stash a bit of it in my TFSA.

      Right now I’m just focused on saving and paying down my mortgage. Once my mortgage is paid off (hopefully by 40) then I’ll adjust my plan accordingly.

  2. Jane Savers @ Solving The Money Puzzle on September 27, 2013 at 5:19 am

    I have only been with my current employer for a few years so the pension that I will be entitled to will be enough to pay my property taxes and my car insurance every year. I will rely on the government pensions and my private savings for my modest retirement.

    Where is this guy in his late 40s with 2 defined pension plans? Is he single?

    • Echo on September 27, 2013 at 7:18 am

      @Jane – I was going to mention in my post that the article didn’t say whether the man had a family, and I was left to assume that he didn’t.

      Any plans to move to Ottawa?

      • Jane Savers @ Solving The Money Puzzle on September 27, 2013 at 5:01 pm

        In Ottawa most of the streets are one way and I can never find an intersection where it is legal to make a left hand turn.

        Because of that I would never want to live in Ottawa.

  3. canadianbudgetbinder on September 27, 2013 at 5:20 am

    One of our relatives works for the government and relies on her pension with them which i think is wrong. No job is secure and anything could happen at any time. Some people might be forced to leave due to injury or illness and where does that leave them for retirement? I’d save outside as well…I never rely on one source. Great post

    • Echo on September 27, 2013 at 7:21 am

      @canadianbudgetbinder – Thanks! Gone are the days when employees stayed with the same employer for 35-40 years.

  4. Jambo411 on September 27, 2013 at 6:41 am

    I have one of those pensions. I will get 2% of my salary times 30 years. But my salary is only 77% of my total compensation. So I get 60% of 77%, or 46%. It is lowered also by averaging salary over 6 years, which means 46% of my compensation package 3 years ago. Also in 5 years my pension is integrated with CPP and lowered to about 29% of my current compensation package. Also I don’t know anyone making anywhere near $100,000 per year so it’s 29% of a much lower amount of money. Bottom line is you better save some money in your RRSP, or better yet in a spousal for your huggy bear who doesn’t have a pension.

    • Echo on September 27, 2013 at 7:29 am

      @Jambo411 – A spousal RRSP is another great option to consider. I haven’t gone that route because I feel like the ability for income splitting in retirement cancels out the benefits, but it’s something worth looking at down the road.

      For the record, I’m not making six figures, but I can dream, right?

  5. Hannah on September 27, 2013 at 7:55 am

    Remember the old tale about the little red hen planting seeds, tending the garden, cutting the wheat, grinding the wheat, baking the bread?? ” Who will help me plant the seeds? Not I, said the cow, Not I, said the pig….etc.” Then, at the end,” Who will help me eat the bread? ” And everybody wanted the bread? And didn’t get to share and eat. Those old story tellers always had a message. I think we should pay attention. Spending all your discretionary income on “fun” results in less saving. Less saving, means less income in retirement. (The ant and the grasshopper) another good store.

    • Echo on September 27, 2013 at 8:44 am

      @Hannah – I just read that to my daughter the other night; it’s one of her favourites!

  6. Robert on September 27, 2013 at 8:07 am

    Good plan you have! I’d sure save my own wad even with a golden-looking pension.

    I would have thought those that will get DB pensions is under 30% of the population and falling rapidly – mostly the civil service. I am a boomer and it was always obvious to me that a pension was highly unlikely without entering the civil service.

    Even in the civil service I would not think that the DB pension is a lock. If they prove to be short on funds down the road the promises will be set aside since you ultimately cannot demand pension funding from people that have no pension themselves (ordinary taxpayers). Then you have private cases like Nortel where the bondholders and pensioners are slugging it out for the remaining scraps.

    (One technical point – $70k to me implies a much smaller pension value. A 60 year old could buy a life annuity of that amount for about $1.1 million – a pension fund ought to do as well or better.)

    • Echo on September 27, 2013 at 8:45 am

      @Robert – thanks! I’m not sure where the $2MM value came from but I’m under the impression it’s valued higher because the pension is fully indexed to inflation.

      • fiscally fit on September 27, 2013 at 9:07 am

        Ya I agree, the $2MM is a generous (incorrect haha) valuation. Even with todays rates, one could buy a lifetime annuity (at age 60) with an annual indexing of 1%, with a 10 year gaurantee, and only have it cost about $1.2MM

  7. My Own Advisor on September 28, 2013 at 7:23 am

    “There’s no guarantee I’ll stay with my current employer for 20+ years.”

    Smart thinking, great minds think alike.

    A DB plan is great if you’re 30+ years into it. Who knows what the future holds.

    I have 12 years into mine right now and if I work until 55, it will be 27 years.

    That, with the intention of having a $1M investment portfolio and a paid off home at 55, should do it for retirement for my wife and I.

    A round of layoffs is looming at our workplace as well.

    Take care Robb,

    • Echo on September 28, 2013 at 1:10 pm

      @Mark – We definitely share a similar outlook and plan to have multiple sources of income in retirement. I like to have control over a few of those income streams, rather than rely on a relatively unknown pension amount.

  8. Kevin on October 9, 2013 at 12:52 am

    That’s exactly why they’ve stopped “double dipping”. You can no longer draw a government pension while earning a gov’t paycheque. It all works out to a single pension now, you’ll just be contributing for longer if you take another gov’t job.

    “…I still put 10 percent of my salary into my RRSP…”

    I also have a defined benefit pension (military), and was wondering how you are able to still put 10% of your income into RRSP’s? Fter my pension adjustment, I’m only able to contribute about 7% before I max out.

    Actually, never mind…with the $2000 overcontribution limit I can get to 10% as well.

    Thanks! Great article, and I love your blog.

    • Echo on October 9, 2013 at 7:03 am

      @Kevin – thanks for the kind words. I have quite a bit of unused contribution room from working 10 years in the private sector. My Pension Adjustment leaves me with about $3k of RRSP contribution room each year and the rest of my contributions are just using up the extra. It will run out in five years or so (at this pace), and then I’ll start maxing out my TFSA instead.

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