This guest post was written by Robb Engen, who blogs about Canadian personal finance at Boomer & Echo. Together with his mom, (she’s the Boomer, he’s the Echo) they offer their own unique perspectives on saving, investing and personal finance. Add Boomer & Echo to your RSS reader today!

Did you know that the average person will stay in the same job for less than 5 years? This means that you will likely have at least 6 to 10 different jobs throughout your entire working life.

For the 29% of Canadian workers who currently contribute to a defined benefit pension plan this presents a bit of a challenge, especially for younger employees.

The Golden Retirement Plan

A gold-plated pension has been seen as a blessing for Canadian workers for decades, but these pension plans are now hard to come by outside of the public sector. Employees lucky enough to have such a plan were thought to be set for life in retirement.

The basics of the defined benefit plan look something like this:

- Employee contributes a certain percentage of their salary towards the public or company pension plan

- Employer matches that contribution

- As your salary increases throughout your career, contributions continue to grow

- Employees max out their pensionable service when they reach the magic number of 85 (age + years of service)

The retirement benefits will vary depending on the type of plan offered by the employer, but a typical defined benefit pension formula can look like this:

2.0% x Years of Service x Best 5 Year Average Salary

Using real numbers, if you were hired by your employer at the age of 25 and worked there for 30 years with your best 5 year average salary of $100,000, your annual pension income would be $60,000.

Set For Life, Or Life Sentence?

As a young worker, there is one number that stands out above all the others. 30 years with the same employer? In order to maximize your defined benefit pension retirement benefits, you need to be in it for the long haul.

That seems almost inconceivable for this generation of employees who fall in and out of love with their jobs faster than Apple updates the iPhone.

I’ve witnessed firsthand the complacency that sets in amongst many public sector employees who do the least amount of work possible in order to collect their paycheque every two weeks until they finally reach that magic number where they can retire and receive their gold-plated pension.

Is that any way to live your life? If complacency is setting in after just 5 or 10 years with the same organization, how in the world are you going to make it for 25+ years? Young workers definitely have to consider this when choosing their long term career.

Leaving The Pension Plan Before Retirement

If you leave the pension plan before your normal retirement date, your eligibility for benefits depends on the length of your pensionable service and your age.

There are three options for those leaving a company with a vested pension:

1. Leave the funds in the plan and collect the pension benefits at the time of retirement.
2. Transfer the funds to a new pension plan, if the new pension plan allows this.
3. Transfer the amount into a locked-in RRSP, or LIRA.  A LIRA is similar to a regular RRSP except withdrawals are not allowed until the employee reaches retirement age.

Are You Better Off Investing On Your Own?

My defined benefit contributions make up more than 11% of my salary, leaving me with little opportunity to create my own investment portfolio. Directing all of your savings towards retirement when you’re young may help build up a sizeable nest egg, but is it in your best interest?

With an RRSP you can use the Home Buyers Plan to withdraw money for a down payment on a house, or use the Lifelong Learning Plan to upgrade your education. And with the Tax Free Savings Account you can withdraw money at any time, tax free! These investing options give you a lot more flexibility compared with the rigid defined benefit pension plan.

Changing The Way We View Pensions

There was a time where landing a job with a defined benefit pension plan right out of University was considered a ticket to a golden retirement. Employees were loyal to their employers and in turn expected to be taken care of when they retired.

But Generation Y doesn’t envision working for the same employer for their entire careers. They want to take time to find their passion, reach outside their comfort zone, or maybe start their own business. They want the ability to invest their own money and choose their own retirement date.

Readers: What’s your take on the gold-plated pension known as the DBP? Is it a blessing or a curse for the young generation?

Related posts:

1. The History of Gold Coins
2. Why should you value your retirement accounts?

There has been a lot of talk about which one is better, the RRSP or the TFSA in both the PF blogosphere and the media.  Both are great tools for saving for us Canadians.  Given that it’s a fresh year (and almost time the RRSP contribution deadline for 2011- March 1, in case you forgot), more people are thinking about the TFSA and the RRSP.

In an ideal world, one could max out both the RRSP and the TFSA.  That would be ideal. Though in the real world, life happens, and it is oftentimes very difficult to be able to scrounge up the money (without having to sell a kidney on the black market-kidding!) to be able to max out both the RRSP and the TFSA.

In my opinion, the RRSP and the TFSA are like siblings. Very different siblings. Almost mirror opposites and the inverse of each other. They both compete for your money and attention.  They are both good, but as we all know, one can be better for you than the other, just like parents really do have a preference of one sibling over the other, but they just don’t say it aloud (uh oh, is my middle child syndrome coming out in my post?!  Sorry about that).

So let’s talk about the RRSP first (the older sibling):

The Basic Lowdown on the RRSP:

• The RRSP was introduced in 1957 (yeah, it’s the really old sibling)
• As detailed in my RRSP post, the RRSP can hold a number of things (including GIC’s, stocks, mutual funds, bonds); it’s like a basket of investments sheltered from tax
• Contributing to the RRSP is with PRE-TAX income (the tax refund you get is your pre-tax money, but given to back to you at a later date)
• You will have to pay tax eventually when you take money out of it- it’s a tax deferral program (the hope is that when you take money OUT of the RRSP, you’ll be low income aka retired, so there won’t be as much income)
• You are supposed to contribute to it to reap the tax deductions when you’re at a higher tax bracket, and take it out when you are at a lower tax bracket.
• There are two options where you are allowed to borrow money from your own RRSP: 1) Home Buyers Plan and 2) Lifelong Learning Plan (with both you are expected to pay back 1/15 and 1/10 respectively, of the amount you borrowed per year until its fully paid)

The Lowdown on the TFSA:

• People could first contribute to a TFSA in 2009 (this is the new baby sibling, becoming ever popular)
• Each year after the age of 18, you can contribute to $5000 per year to a TFSA
• Currently in 2011, if you haven’t opened a TFSA before, you can contribute up to $15,000
• Like an RRSP, you can hold a number of things. The TFSA is like a basket of investments (GIC’s, High Interest Savings Accounts, stocks, bonds etc.)
• Money contributed to it is AFTER TAX income, but you can take out money that has been compounding in the TFSA TAX FREE.
• You can take out the money any time- tax free
• You have to wait until the next year to contribute back to it, otherwise you will be dinged A LOT.
• Many people have been using the TFSA as an emergency fund, but with the increasing amount allowed ($15,000) I think people should be looking at other options for their TFSA- like my personal favourite, the Tax Free Trading Account

Do you see what I mean about them being the inverse of each other? RRSP= pre-tax dollars invested, taxed when you withdraw; and TFSA= after tax dollars invested; no tax when you withdraw.  Now that we’ve introduced the siblings, lets look at their good and bad traits.

PROS of the RRSP:

• It feels awesome to get that tax return.  Especially when you use that tax return to contribute to your RRSP again for the following year.
• Like Jim Yih (a fee only advisor and best selling author and financial speaker on wealth), I agree that RRSPs are great in that you are forced not to want to withdraw from it (other than for school or for a first time home purchase)… because we all know that we all have sticky fingers and it’s hard not to take from the cookie jar!
• Hence, it’s a great way to develop disciplined investing into your RRSP
• It’s a good tool for those with high incomes who are taxed to the nines.  It can feel good to get some of your tax dollars back.
• You can hold USD stocks in it- great for big dividend payers stocks like Coca Cola, Johnson and Johnson etc. Because if these stocks are held OUTSIDE of an RRSP, you would have to pay hefty taxes on it because foreign income is treated like interest income- taxed at your marginal rate (e.g. if you paid 40% income tax, you would pay 40% tax on your dividend income from Coca Cola)

CONS of the RRSP:

• It’s a tax deferral… if you have a great pension, you will be taxed to the nines when you are in retirement, especially when you are forced to take your RRSP out, little by little each year.
• You can’t take money out except for buying a home (first time or very long time since you’ve bought a home) or for education for you or your spouse (up to the age of 71)
• If you aren’t making much money that year (e.g. if you are a student) there isn’t too much point in taking a deduction for the RRSP.  You already aren’t taxed that much, so you wont’ get much of your taxes paid back.
• The Home Buyer’s Plan and Lifelong Learning Plan are great, but the money you pay back to your RRSP isn’t tax deductible.

Now let’s look at the hotter younger sibling, the TFSA

PROS of the TFSA:

• Everyone gets the same amount- so it could be more equitable that way.  Everyone can contribute $5000 starting from the age of 18.
• So, theoretically if I contributed $5000 to a TFSA until I was 65 and had zero returns (which is highly unlikely) on my investments, I would still have a little over $200,000 in the bank.  Tax Free.
• It is easy to get your money out
• You are rewarded for investing smart.
• If you invested really well and made $4000 on top of your $5000 contribution, and you withdraw $9000, you can contribute $9000 back the following year instead of $5000 (Balance Junkie proves this is true by calling up CRA to double check)

CONS of the TFSA:

• The problem is that it is being heavily marketed as a Tax Free High Interest Savings Account by all the big banks.  You get 2% interest if you’re lucky, and as we all know this barely keeps up with inflation (this is understandable because with such little amount able to invest, the banks don’t want to waste their money or time if you have so little to invest with them- that’s my two cents anyways)
• With little contribution room available ($15,000 so far), it might not be feasible to invest in equities or trade very often, because this eats away at your contribution room ($29 a trade can really add up).
• It’s very easy to take money out (it’s both a pro and a con) so being able to save for something long term (like retirement) will be difficult, what with our natural tendency towards instant gratification

Youngandthrifty’s Take:

Personally, I am trying to contribute to both.  I don’t have very much money that I am allowed to contribute towards an RRSP anyway because of the Pension Adjustment, so a little tax refund is always nice to offset some things like capital gains, interest income etc., otherwise I might be paying more taxes when I’ve already paid so much in taxes from my primary source of income.

I do like that the RRSP allows you to contribute USD.  I do like that with the TFSA, it can be used as a short term mode of investing and saving.  I like them both, for different reasons.

I would recommend that for those who are not taxed to the nines yet (like students, new grads, young adults etc.), it is better to contribute to a TFSA.  The TFSA would be better for short term goals (within 1-10 years), like saving for a down payment, saving for a car, saving for that future baby, or saving for that big trip.  The TFSA (younger sibling) is great for those short term goals. If you are able to invest well with the TFSA, those goals can become reality that much sooner.  However, just as we can’t ignore the wiser, older sibling, we must not forget about the RRSP. We need to make sure we have enough to retire on too.  Because compound interest and TIME is on your side (because we’re young!), once you start making some money, I would sock some money away at an RRSP for now.  It’s hard to play catch up when you’re saving for retirement.

However, for the 32% of us that have a big pension to retire on, I would mainly recommend the TFSA.  With $200,000 available to be withdrawn tax free and a pension, there should be enough money available for a comfortable retirement.  That is unless can’t resist dipping into the cookie jar before then!

Of course, everyone is different and would have a different reason for having one or the other as a better option for their situation.  It’s best to sit down and really think about the merits of each option to figure out which one you want to allocate the majority of your hard earned money to.

Readers, what do you think? Do you prefer the RRSP or the TFSA?  Are you planning to contribute to both?  If you had to pick one, which would you choose?

Related posts:

1. RRSP Part two: what to keep outside of that RRSP
2. RRSP’s: aka Registered Retirement Savings Plans:
3. TFSA (Tax Free Savings Accounts) Basics

This guest post comes to us from Jack at Darngoodblogging.com. He usually talks about debt and credit cards on his blog. Thanks Jack for writing this guest post. I don’t know much about US retirement accounts and this has helped shed some light on it for me.

Your future essentially depends on how you handle your present. The more prudent decisions you make now, the better your chances for creating a secure future for yourself and your loved ones. Retirement plans form a very crucial part of your future planning. You definitely wouldn’t want to step into your retirement with scanty funds and looking for cheap debt consolidation or debt settlement services to resolve your debt issues. So, it is absolutely important that you get geared to prepare a proper retirement plan to secure your financial future.

Surviving on your retirement income

Surviving on your retirement income is a matter of real concern. Social Security, company pension plans, and the individual retirement investments are the three main sources available for retirement income.

Under the Social Security Administration, Social Security offers about 40% of the fund you require for a pleasant retirement. And pension plans are becoming rare day by day. Most of the companies that offer pension plans require the plan holder to be an employee with the company for a specific span of time. But unlike earlier, they are no more considered a source of substantial retirement income.

The uncertainty associated with the above sources highlights the need for a proper retirement plan that contains the right mix of investment and savings.

Save substantially for your retirement

Substantial savings is the key to a comfortable post-retirement life. Always remember, if at all you work after your retirement, it should be your choice and not a necessity. Often a lot of retired people are forced to work hard at an old age, simply because their savings are not enough to last them throughout their remaining life. The inflation, soaring costs of commodities, tax obligations, rising medical expenses add to their plight and make their living all the more difficult.

Such costs are expected to rise even more in near future, making the baby boomers’ post- retirement lives all the more expensive. So, to begin with, create a new savings account where you can deposit a certain amount every month as a
part of your retirement plan. Save as much as you can.

Consider long term investment plans

Smart investments are very crucial for a fruitful retirement plan. You can consider reliable retirement plans such as IRS Roth conversion and 401K plan to spice up your retirement planning.

It is very important to understand how your plan works and what benefits you will receive. Keep a track of your retirement accounts so that you can retire peacefully. There are different types of retirement accounts you can choose from and it is best to talk to a financial advisor about which account might be right for you and your situation.

Amongst a number of retirement accounts to choose from, 401(k), 403B and IRA are the most common type that people make use of today. Using Roth IRA can also be very advantageous because it offers great tax advantages. If you are confused with the host of options out there, seek the advice of a certified accountant to help you choose the account that is right for your situation. Remember, retirement is not the end of life; with proper planning, you can rediscover the joy of living!

EDITORS NOTE: I agree that we shouldn’t be relying on the government or pension plans for our retirement.  I must admit that it’s hard to think about retirement being so young, but I know it’s necessary.  It’s just that other priorities come into play (like kids, a house, saving up for a wedding etc.)   I definitely do want to work after retirement (when I retire early, of course) but maybe just once or twice a week and just for fun.  Studies have shown that working after retirement can help prolong life (the brain doesn’t get stagnant because you’re constantly working it out).

Readers, what do you think?  Do you think about retirement a lot? Would you want to work after retirement?

Related posts:

1. RRSP’s: aka Registered Retirement Savings Plans:
2. TFSA (Tax Free Savings Accounts) Basics

Here’s a guest post by fellow PF blogger PT Money (aka Phil Taylor) who started blogging since 2007 and has a limit-less site talking about saving money, debt reduction, and living a frugal life.  I thought I would include his post on 401K’s because I wanted to learn more about the US counterpart of the RRSP.  I picked the photo to the left, by the way.. so it in no way reflects the thought-process of PT Money.

I love the company 401K.

It makes retirement savings easy. It’s automatic at most companies. But it’s not the perfect tool for retirement savings. It could be improved. Luckily some of the improvements can be made by you.

Here’s some advice on making the most of your 401K.

1. Try to reduce fund fees.

The choice of funds within a company 401K are often limited by the 401K administrator. It’s easier for them to manage a 401K if it has fewer funds. But fewer funds means you’re more likely to be stuck with expensive investment options. Pay attention to the fund expense ratios and factor that in when making fund choices. A great website that can tell you more about the fees within your 401K is brightscope.com. Use them to compare your 401K with other companies. Show it to your human resource department. Start a campaign to improve your company’s 401K fees.

2. Set up a proper asset allocation.

Another thing you could do is to take a look at your retirement account asset allocation . Are you investing your money according to your risk tolerance and time horizon? There is no exact science to this, but you want to at least be comfortable with your allocation. Putting all your eggs in one basket (i.e. company stock) can leave your retirement susceptible to too much risk. An easy way to instantly improve your allocation is to consider a target-date fund. Not perfect by any means, but they will at least get you to a baseline of allocation.

3. Create an automatic contribution increase.

A nice feature that most 401Ks are adapting these days is an automatic annual contribution percentage increase. For example, you automatically contributed 3% from your paycheck last year, and this year your company automatically bumps that up to 4%. This will help to ensure you invest you raises each year. And trust me, once you start investing for retirement automatically, you’ll realize that you don’t really miss the money. Bumping contributions up by a percentage point won’t hurt. But it will definitely happen if you make it automatic.

4. Make sure you get the company match.

There’s free money to be had for investing in your company 401K. Most companies will match a percentage of your contributions with their own money. If you aren’t currently getting the full matching percentage, make sure you step up contributions so that you do.

5. Turn it into an IRA.

Finally, if you are leaving your job, or you recently left, consider rolling your 401K over into an IRA. Doing so will likely give you access to funds with lower fees. It will also give you more investment choices. The process is simple and tax-free if you roll it over according to IRS rules. Phil Taylor is the creator of PT Money: Personal Finance. Follow PT as he write about saving more money and gives tips for using the best 0% balance transfer credit cards available today.

Related posts:

1. Why should you value your retirement accounts?

One of my favourite personal finance bloggers is Budgets are Sexy- he makes personal finance well, sexy and fun. He started a Million Dollar Club where you can pledge your mini-goals to reach the ultimate goal of a million dollars.  So I decided to join the Million Dollar Club.  Nothing like having your goals out in the public eye to make you stick to them, right?

Besides, that badge is really cool looking- so I wanted it on my sidebar. Kind of looks like the Fred Perry logo that they have on those $75 golf shirts, maybe Budgets are Sexy can start a new brand! The Million Dollar Club (catchy, huh?)

Because I’m 20-something and of the generation Y blood, I don’t want to be working until I’m 65. I want to have it all- enjoy life, save money, spend it on things that give value to me (e.g. TRAVEL!) and also as Rich Dad Poor Dad says: make my money work for me, not work for my money.

So without further adieu, here is my pledge in order to reach my goal of $1,000,000 net worth. Man, when that day comes, you better believe that I’ll be enjoying a good drink (maybe some Silver Patron?) to celebrate! (I must have TI’s You Can Have Whatever you Like in my head). In the meantime, I’ll be livin’ it up to Having Whatever I Like, Weird Al Yankovic style in order to work hard, spend less, and achieve my goal of achieving millionaire status.

Young and Thrifty’s Million Dollar List:

1. Max out my TFSA every year ($5000 contribution every year)
2. Track my net worth every month (This is one of my 2010 Resolutions too)
3. Max out my RRSP’s every year
4. Continue to track my investments regularly with Questrade
5. Pay off my credit card every month and use a reward based no-fee credit card
6. Invest in a good first home that will hopefully provide a good return on home equity (max out my Home Buyers Plan first)
7. Continue to automatically contribute into my High Interest Savings Account (and not to touch that account unless for investment purposes e.g. put money into the TFSA)
8. Continue to aim for “No Spend Days” as well as avoid the Latte Factor that the Automatic Millionaire talks about- not to spend $5 a day on coffee/ lunch at work

There you have it.  Please feel free to ream me out if I’m not “on track” with this pledge!  Sometimes I need a good kick in the backside to realize that I’m not practising what I preach!

Do you want to join the Million Dollar Club?  Head on over to Budgets are Sexy’s page and submit your pledge!  Also, signing up for frugal tips from yours truly wouldn’t hurt either.

Related posts:

1. If You Had a Million Dollars…

Okay, what are they? To clarify, they are not mutual funds, but they can HOLD mutual funds. They are akin to the States’ 401 K.

Think of it as a grocery basket. Mutual funds, GIC’s (guaranteed income certificates), stocks, bonds all go into this grocery basket.

A non-registered account is like another grocery basket that holds the same items, BUT the downside is that any income you make on it is fully taxed.

I know I know, you’re thinking “hey but I’m only 24, why the heck do I need to think about retirement?? You may not be thinking about retirement now, per se, but you can start thinking about buying a home (Home Buyer’s Plan) OR going back to school (Lifelong learning Plan) in which case you can withdraw $25,000 from your RRSP for FREE- as long as you pay it back within 15 years (we’ll talk more about this later– stay tuned).

The RRSP is like a “vehicle” (the financial people like to use this term) in which you can defer your taxes. You don’t pay tax on your income now, but when you take money out of it, you pay the taxes. The gist is that most people take money out of their RRSP’s when they retire, hence lower income, and lower taxes.

So what that means is, the government encourages us to save; and is giving us free money!! (really, we’re taxed to the nines, so we should definitely take advantage of this when we can). So why aren’t more people taking advantage of it? (Statistics show that only about 25% of Canadians contribute to an RRSP). Beats me. I suggest you don’t be that statistic.

AND another bonus is that investments in an RRSP grow tax sheltered, so it’s like hitting two birds with one stone! You get money back for contributing, and the money you have in it doesn’t get taxed, so it’ll grow faster.

You can see how much “RRSP contribution room” you get from your Notice of Assessment. You get more tax refund (can you hear, ka-ching?) when you contribute to an RRSP, it produces a “tax credit”. Basically, your goal is to contribute (or max it out) to your RRSP when you have higher income. For example, when you’re a student, you don’t make that much money, and you don’t get taxed that much—so you wouldn’t really get much money back from your RRSP tax credit.

Now that you’re all excited about RRSP’s, you’re probably wondering how much you can contribute.
For the 2007 tax year people can contribute 18% of their income, up to a total of $19,000, but if you have a pension adjustment, you have to subtract that. Just check out your Notice of Assessment, you’ll see it there.

The Canadian Govennment has a more dry explanation of what is means:

Next time, I’ll talk more about what to pick to hold in this awesome grocery basket.

Related posts:

1. RRSP Part two: what to keep outside of that RRSP
2. RRSP holdings: part one
3. RRSP versus TFSA: Head to Head Comparison