It’s up to you to feather your own nest, regardless of whether you have a pension. The first step is to take responsibility for Future You by investing some of today’s money for tomorrow. It is both risky and foolish to rely on your employer for your retirement income needs. You shouldn’t assume that your employer’s contributions to your retirement plan are going to be sufficient when you can no longer work for a living.
Simply put, a pension is a promise from your employer that there will be money for Future You when you quit working for that employer. While you’re employed, your boss sets aside money for your retirement. That money goes into the pension. It is then distributed to the former employees each month.
Under a defined-benefit pension, the employer contributes money to the plan and promises to pay you a fixed monthly amount when you retire. This is your pension payment, and it is calculated by a formula. The payment is derived from your years of service and your salary. In other words, you can figure out how much you’ll receive in advance of retirement. The longer you work, the higher your salary, the bigger your pension will be. Your employer takes responsibility for ensuring that there will be enough money to pay you a pension until the day you die. Your benefit is defined.
The defined-contribution pension works differently. Your employer promises to contribute to your pension plan. There are no promises about how much you’ll receive when you retire. Under this plan, it is the employer’s monetary contribution that is defined. Your employer takes no responsibility for ensuring what your pension payment will be when you retire. Determining the size of your pension payment is a responsibility that lies on your shoulders. You’re the one who has to ensure that the money is properly invested for the long-term. Your choices will determine if your pension payment will be big enough to pay your bills once you’ve stopped working. Under this pension, two employees working the same length of time for the same salary can receive vastly different pension payments when they retire. The difference is attributable to how each employee chose to invest their pension contributions.
Hedge your bets when it comes to funding your retirement.
No matter what kind of pension you have, you need to feather your own nest. Why? Simple – a pension is a promise, not a guarantee. If your employer goes out of business, your pension will be impacted. It may take years for you to receive the pension payments that you were promised. Just talk to some former retirees from Nortel or Sears Canada. They all saw their pension payments cut when their employers went bankrupt. What would you do if 30% of your paycheque disappeared today? Now imagine losing 30% of your pension payment when you’re too old to return to the workforce. What options would you have for replacing that chunk of your promised pension?
Having your own investment portfolio is like having insurance for your pension. Investing for the long term increases your chances of being able to live off the income from your portfolio. If things go in your favour, dividends and capital gains might eventually exceed your annual pension income. Every dollar earned by your investments is one that can replace a dollar from your pension just in case the worst happens to your pension. Think about it. The Nortel and Sears Canada employees with personal investment portfolios weren’t as badly impacted when their pension payments were cut. The income from their investments was available to replace the money cut from their pension cheques. Had they planned on spending the cashflow from their investments? Maybe, maybe not. The reality is that having that investment cashflow dulled the impact of the reduced pension.
Do Better for Future You
I know how seductive the pension promise is. It would be lovely to cast aside all responsibility for Future You’s financial health, to let “someone else” worry about that. It’s the path of least resistance, but it might be disastrous. You wouldn’t even know how disastrous until it was too late. Imagine working for decades then realizing that you won’t have enough money. You’ll be out of time to earn more money. At 70 years old, do you really believe that you’ll eagerly anticipate working another 10, 15, 20 years just to make ends meet?
And I recognize how persuasive the AdMan is! In a world where you’re constantly exhorted to live your best life, it’s hard to save for a future that is decades away. After all, living your best life is generally code for open-your-wallet-and-give-me-your-money. The AdMan won’t be there to pay your bills in your dotage. Trust me on that!
Again, a pension is only a promise. This is why you have to feather your own nest! Err on the side of caution and invest some of your own money for Future You. No one is suggesting that you become a miser. I don’t want you to give up all the things that you love in order to save for tomorrow. I recognize that no one is promised tomorrow. However, I do want you to admit that there’s little to no harm in investing a portion of today’s money for tomorrow’s needs. Having a pension and cashflow from your personal investment portfolio would be the best of both worlds. Why deprive yourself of that?
Start Today
The reality is that you have to worry about Future You. Living below your means isn’t a punishment. It’s an admirable way of governing your financial life. Doing so will maximize your comfort when you no longer can, or want, to work. Money invested for the long-term will generate annual income for you, regardless of the pension plan you’re in.
Shave a little something off of each paycheque and invest it for tomorrow. I would advise saving 25% of your net income, but you know your finances better than I do. If you can only start with $10, then start with $10. Every penny counts, but you have to start somewhere. As your income grows, as your debts are eliminated, increase the amount that you’re investing. Once you’ve saved a portion of your paycheque for the Care and Feeding of Future You, then spend whatever’s left however you see fit.
Feather your own nest. The worst thing that can happen is that your pension shows up every month. In addition, your investment portfolio would be churning out dividend and capital gain payments every year. You’ll have two sources of income in retirement. How could Future You have any complaints about that?