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!
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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.
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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.
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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.
