Understanding Your Employee Pension Plan
A company sponsored retirement savings plan provides you with incredible financial advantages. First, pension plans offer lower fees than you would normally obtain for your personal investments. For instance, defined contribution plans often charge less than 1% for investment management fees. Second, your employer, known as the sponsor, will typically contribute to your pension plan through matching contributions. Make sure that you maximize this benefit by making large enough contributions of your own. For example, if you employer will match your contributions up to a dollar amount, you will want to contribute this maximum amount. Third, enrolling in a pension plan functions as a forced savings account. For many Canadians, it is difficult to set money aside each month to contribute to your retirement savings. Your retirement may feel incredibly far away, and immediate spending opportunities take precedence. By automatically investing a set amount regularly, the headache of timing the market is alleviated and the emotional peaks and valleys of making investment decisions are reduced. A defined contribution plan will have default investment options; however, you may also feel comfortable with risk and take a more proactive role in choosing and managing your investments. As an experienced financial advisor, I can help you make sense of your employee pension.
What employee pension plans are available to you?
- Defined Benefit: a defined benefit plan provides members with a fixed level of retirement income that is predetermined based on a calculation that factors in the employee’s earnings and longevity with the company. A member may contribute to the plan at any point in their lifetime with the organization. Sponsor and member contributions are pooled in the pension fund and invested; however, the sponsor bears the responsibility of ensuring the required retirement income is payable to the member.
- Defined Contribution: a defined contribution plan differs from a defined benefit plan in that it removes the investment risk from the responsibility of the sponsor. Similarly, sponsor and member contributions are pooled and invested. However, investment options are up to the discretion of the member and retirement income is determined based on the investment performance.
It will be important for you to map out your retirement plan and contribute accordingly. Ask yourself: at what age do I want to retire? How much of my pre-retirement income will I need in my golden years? How much savings will I need to retire? These questions require complex answers, but bringing these issues to your front of mind is a great first step in achieving your goals faster. Take an honest assessment of where you want to be and match your current spending and savings plans with the help of a Financial Advisor. Understanding your financial status now will help you to retire happy later, even if it means living a leaner lifestyle for a few years. You’ll be glad you did.