Finally, I made a decision and joined with my employer Defined Benefit pension plan. It is a late game, but I am in now.
Currently, I am working for a big employer in Canada, and the company has a Defined Benefit pension plan and it is an optional . Therefore, employees can join if they wish. Also, the pension plan is available for permanent employees only.
I became a full time permanent employee in fall 2011 after a series of part-time and contract terms. During the time, the pension plan did not make sense as we have no control or information about where our money is invested. The plan was too complicated for me.
Also, I had massive of credit card and student loan debts (almost $60 000). And, I was planning to build my own retirement income by investing in dividend stocks.
For last few years, I didn’t even think about joining the plan or show interest in learning and understand its benefits. I completely forgot about it, and was focusing on building my own retirement plan in my own terms.
Now, almost four years late, my financial situation is so much better than in 2011. My net worth hit $100K and I feel little bit financially secure than four years ago.
Also, my investment portfolios generate over $5500 per year pure passive income as of July 2015. In other words, over $455 per month income without doing a single work.
Great achievement!
But, I wasn’t happy and didn’t want to stop there. I was looking for more opportunities to strengthen my retirement income by diversifying asserts and income streams.
Therefore, I was looking for an alternative source of income along with my dividend income. As you know, having a multiple streams of income is always secure than relying in one or two incomes.
I studied few options including my company pension plan. I learned about the security, financial strength and reliability. Good thing is that pension benefit is protected against inflation. Finally, I made a firm decision and joined in my company DB pension plan 😀 .
Related
I filled out an online form with few my personal questions. It took only 10 minutes.
Within two days, I received a confirmation email with little more details including the bi-weekly contribution rates and expected income during my retirement periods.
That’s it! I am a DB pension plan member now.
One sad thing is that I need to contribute almost $200 from my bi-weekly pay cheque. Therefore, my monthly cash flow will be lowered by almost $400.
—Updated—
Update: Please note that my bi-weekly contribution has increased to $250 (rounded to nearest $50) from January 2016
But, the good thing is that the contribution is automated. Thus, I will get used with the lower income because of automated contribution. Also, it is tax detectable, so I won’t see much different in my pay cheques.
Now, I have new asserts class – Defined Benefit Pension Plan. I have added another layer of protection for my retirement dream. It will get stronger and bigger every month.
I will keep looking for alternative sources of income to strengthen my dream retirement. As I mentioned often, having a multiple streams of income is always secure than relying in one or two income sources.
Thank you so much for being in my finance journey!
I think you should reconsider how you value your DB Pension Plan fund – if you’re only using the value of your contributions I suspect you are seriously undervaluing what you have.
What you need to request (perhaps annually) from your Plan administrator is your “commuted value”. My commuted value is 4.9 x my contributions, and my wife’s is 4.5 x her contributions. We have been in our plans for 18 years and 15 years respectively. IMHO, you should be using the commuted value and not the contributions amount in your net worth calculation; you will get to your $1M goal much quicker. Our joint commuted value is now increasing by over $5,000 Canadian (yes, that is “five thousand”) a month!
From a quick Google search:
“A Commuted Value is the lump sum payout of the present value of an employee’s earned pension. It is the money that would have to be invested today, based on current long-term interest rates and mortality rates, to generate monthly cash flows equivalent to the DB pension payment.”
Sometimes the Annual Pension Plan Statement will show the commuted value, as with my wife’s plan. In my case, the statement doesn’t show the commuted value, but does show the monthly pension I’ve earned to-date. I run that monthly amount through an online annuity calculator to estimate how much money I would need invested today to attain the same level of guaranteed indexed pension income for life; and that’s my commuted value (or close enough to it).
The annuity calculator I use:
https://www.retirementadvisor.ca/retadv/apps/annuity/annuity_inputs.jsp?toolsSubMenu=general
Below are values I used to calculate a friend’s commuted value and to confirm the result was close to the number shown in her statement:
Type: Single, Based On: Monthly Income, Gender Female, Age when Purchased (person’s current age shown on the statement): 49yr 2m, Age when Payouts Begin: 60yr 0m, No changes in Joint section, ROR: 1.8% for 10yr, Subsequent Rate: 3.2%, Monthly Income: 416, Cost of Living: Yes, Guarantee: 15yr, Leave death % blank.
Using the above data, the commuted value is estimated to be: 79,274.
The actual total employee contributions over a 13 years period was just $16,200. Her annual salary is around $38,000.
Once you decide how to get or calculate your commuted value, always use the same method from year-to-year. The best method is of course to get it from your annual pension statement or the Plan Administrator. Note: The commuted value is affected by changes in interest rates and changes in expected lifespans, which are different for males and females.
If you choose to use your Plan’s commuted value as at a particular date e.g. the date of your statement, it would be relatively safe, and reasonable to use that as your base value and then add to it your monthly contributions (and your employer’s contributions) until you get your next official commuted value.
I understand our plans and have calculated our earned pensions several years ahead (with a few assumptions, like, union negotiated pay increases, and not being fired). From that I can estimate the commuted value 12 months from the last statement date and then have my spreadsheet formulas show the increase per month.
It would be interesting to see what your commuted value is for the $11,400 in contributions you made as at April 2017 or perhaps your last statement date.
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Hello Bob Lin,
Thank you for your valuable information.
Actually, I really don’t understand how DB pension plan works, and I didn’t have the interest to learn about it as our money manage/administrate by someone else and I have no control over it.
After read your comments (really thank you for the valuable information), I quickly logged into my pension plan website and checked the details that you highlighted. You are absolutely correct. My transfer value (they call transfer value not commuted value) is over $31 500 (May month contribution included) if I stop contribute today. It is almost 3 times higher than my total contributions. It looks like my pension plan is the best investment I made so far 🙂 .
I don’t have any plan to withdraw the money, but if I decided to withdraw the money then I need to pay income-tax (according to their website), unless I have enough room in my RRSP. It seems like my net-worth is about $20K higher than my last update 🙂 ..
Cheers,
You’re welcome, and congrats on finding the extra $20K – it’s real money so feel confident about recording it as such in your net worth.
The current Canadian laws protecting DB plans are quite strong, so anyone considering moving their money out of an ongoing plan should think very hard about what they are giving up; the prospect of better returns vs. the guaranteed income.
I consider our DB Plans as part of the Fixed Income portion of our portfolio.
Hello Bob,
Thank you Bob, I just started to learn how DB pension plan works. In my pension plan, I could buyback my past service as I worked couple of years before joining to the pension plan. I think it is really worth for the cost. I just need to prepare around $12K to buyback.
As you mentioned, I consider my pension plan as part of my fixed income :), thus, I can solo focus on my equities portion without worrying about fixed income (bonds).
Thank you once again for unlocking $20K hidden assets 🙂
Best Regards
Good job, I don’t want to say congrats because it’s the money you earned and it belonged to you from the beginning.
I always like to read your posts and your progress update, keep up the good work!
Just my 2 cents on DB plan, if you are interested to learn about it.
As its name suggests, DB (Defined Benefits) plan offers a pre-defined benefit amount. Usually a few factors are involved in defining that amount: your salary, and number of years of service. The higher salary you have, the higher the DB amount; also the longer you work for your employer, the more pension amount you’ll get. So you see, it has nothing to do with how much you contributed to your plan. Your contribution just helps fund the pension plan as most employers don’t want to take on that responsibility on their own.
Your employer pension plan booklet should have all the details to help you understand how your pension amount is calculated, they should have the calculation formula in the booklet so you can easily estimate how much pension you will receive.
Depending on the pension plan structure, sometimes the calculated (defined) amount represents the annual or monthly pension amount you’ll receive for as long as you live for. That stream of cashflow is then converted actuarially (meaning taking account of mortality and time value of money) into a present value lump sum, which is the “commuted value”.
DB plans are rare now due to its significant risks for the employer. If your employer offers it, take advantage of it and buy back as much service as you can.
Happy investing!
Forest Trader
Thank you Forest Trader for the information 🙂
I will definitely buy my past service as we have the option purchase.
Best Regards,
How are you calculating the value of you dB pension plan? I also work for large employer in Canada for some time now. The plan documentation only provides me with the yearly amount I will receive, so it is difficult to add to a balance sheet or asset list. I’ve heard each 100 per month is worth 18000. Wondering how you were calculating?
Hello Justin,
Thank you for stopping by. I’m just calculating based on how much I contribute to the plan. The actual value may be bit higher than I paid to the plan.
Regards,