Why 20-somethings might have trouble retiring

In the three private sector jobs I’ve had since graduating college, none offered a defined benefit pension and only one offered a group RRSP option where the company contributed to my plan.

It highlights how things are different for 20-somethings then they were for their parents. There's a shortage of job opportunities and as more employers opt for defined-contribution pension plans over defined-benefit plans (or no pension at all), it changes the retirement picture. What will that look like in 30-40 years? Will retiring at age 65 be an option for those entering the work force today?

Defined-benefit pension plan (DB)
With a defined benefit plan, you contribute via payroll to your company's plan and after 25 years of service or more,  you get a monthly payment for life, based on a  formula involving your years of service  and your highest average salary during your last five years. It may or may be adjusted for inflation. These pensions let you plan for your retirement because you can estimate your  income and save outside of your pension for extras. 

Defined-contribution pension (DC)
With a defined contribution  plan, the income is based on the assets within your individual retirement account at the time you retire. You and your employer usually contribute to the plan - though your employer may not - and  you must do something with the lump sum when you retire to turn it into a stream of payments.

The employer contribution is usually based on a percentage of your salary or dollar amount, and may or may not require you to make a matching contribution.  This Moneyville article Why $1 million in an RRSP isn't a pension takes a look at the differences between the two

What that means for 20-somethings
A May 2009 study done by Statistics Canada showed a substantial decline in defined benefit coverage among Canadian employees, from 41 per cent in 1991 to 30 per cent in 2006. The  reasons for this shift is that it's cheaper for companies for defined-contribution plans and lower administrative costs.

In my three jobs  one employer offered to match my contributions up to 4  per cent of my salary. If your employer offers a matching incentive, it is in your best interest to max your contributions with the company plan (because it’s essentially free money). However, if your employer doesn’t offer sort of pension or group RRSP program, you will need to be diligent in creating your own retirement plan.  

Create your own retirement plan
As a 20-something, if you have a job, it’s time to start thinking about your retirement plan. Figure out at approximately what age you want to retire, what kind of lifestyle you want to lead during retirement, and what you have to do to accomplish that goal. 

If your employer doesn’t offer any sort of pension plan, don’t tell yourself that you will wait to start saving for retirement once you find an employer who does. Don’t rely on future earnings, your partner’s income, your children, or even the government CPP payments to take care of you during retirement. Run your numbers through a variety of online retirement calculators and figure out what you need to do to make your retirement dreams a reality.

Also read:

Four common RRSP types
What should I put in my RRSP?

What kind of pension plan does your employer offer? Are you on pace to retire by 65?

Krystal Yee is a marketing and graphic design professional living in Vancouver. She also blogs at Give Me Back My Five Bucks. You can reach her on Twitter (@krystalatwork), or by e-mail at krystalatwork@gmail.com.