A defined benefit pension is a rare and precious thing in today’s work force.
There’s even a phrase, pension envy, to describe the muttering of pension-less people about those who will receive monthly retirement income for as long as they live, possibly with inflation protection. But contributing to a defined benefit pension can take a big slice of your paycheque. Perhaps too big, if you’re trying to save for other goals in addition to retirement.
A 30-year-old Globe and Mail reader has this problem. Recently, she began wondering why it was so hard to pay her bills and put money away for various savings goals. Her conclusion was that contributions to her DB pension have stomped on her finances. After paying her mortgage and other living expenses, there’s nothing left in her budget to save.
This reader – granted anonymity by The Globe – contributes $680 a month to one of the country’s largest DB pensions. If up to her, she’d allocate the money differently. “I would put part of it aside for retirement, but absolutely not all of it,” she said in an interview.
Some would go to improve her house in Mississauga, which she described as a fixer-upper, and some would be put aside to cover costs when she and her partner start a family.
“I would like to have savings to do different things,” she said. “I’m probably somewhat representative of most millennials in that we’re trying to balance a bunch of different things at this stage of life. Flexibility is really key in our finances, and pensions are inflexible by design.”
A fair question to ask here is whether it’s houses that are the problem, not pension. House prices have soared way ahead of incomes and young people often must carry big mortgages. But this reader says her mortgage payments are manageable because she and her partner saved six years for a down payment and received family help as well.
There will be a temptation to say boo-hoo to this person – poor you and your rich DB pension, which will shower cash on you in retirement with no worries about stock market crashes or low interest rates. Pension envy is definitely a thing.
But she does have a point. Young adults today are juggling more savings goals beyond retirement than previous generations. House down payments require a military-style regimen to save, and there’s a growing financial aspect to the discussions couples are having about starting a family. Basically, they’re asking, “Can we afford this?” Travel and upgrading their education and skills are other priorities.
And let’s not forget that young adults such as her will be a long-lived generation that is unlikely to work in jobs with pensions for an entire career. Her pension could be a difference-maker when she retires.
This reader has anticipated the arguments that her pension is for her own good and she’ll be grateful to have it when she retires. “What a pension does is create a model of work where you slug it out for your working life for a really great payoff at the end,” she said. “I’m not sure that I share that value of work.”
Her ideal would be to find work she loves and keep doing it as long as she can. Retirement would start later than 65 and be phased in a way that would make her less reliant on a pension.
This may or may not be realistic. You need to be in the right profession to have prospects of working indefinitely, and you also need good health. For some people, staying in the work force until 65 is a victory.
This reader’s pension has a rule that you can’t opt out while employed by an organization that participates in the plan. Nor should she opt out. A pension is a terrible thing to waste, especially when you consider that employee contributions are matched by employers.
At the same time, we have to do a better job of acknowledging that the lives young adults are leading are not carbon copies of their parents’ lives. This is partly a function of different priorities – witness our reader’s comments on slugging it out in the work force. Another factor is that it just costs more and takes longer to reach milestones such as home ownership and having a family.
Retirement is the top priority in life’s savings hierarchy, but we have to stop acting as though it must always take precedence over everything else. At least one millennial isn’t buying that line.
In recognition that young adults are saving differently than previous generations, we created the Real Life Money Launcher. It’s an online tool for young adults that helps them save and invest for multiple goals like travel, weddings, home ownership and retirement.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, May 16, 2019