Employer pension plans: Is it ever too early or too late to contribute?

It’s never too late to start, but starting as soon as you begin your first full-time job makes the most sense.

Now in my very young 50s and responsible for communicating the benefits of joining a company pension plan, I am forcing myself to take the time to do my own “missed opportunity” pension plan math, even though I have never been the type of individual to say “should have” or “what if I would have.” It just is what it is.

When looking back, it is always very easy to see where mistakes were made, where different decisions could have resulted in a much more favourable outcome as it relates to any part of your own life. So if you are like me, maybe you should do the “what if I would have” calculation before you miss out on potentially thousands of dollars of “free money” that employers give you as part of your company pension plan matching program.

What if I “would have” joined the pension plan when I started my first real, serious job? What would the numbers look like today?

Here is my story:

In my 20s: I was all about the sports car, the vacations, the clothes and the shoes. There never seemed to be enough money!

In my 30s: I was on top of the world because I was lucky enough to be asked to take on a couple of international assignments. I travelled the globe for six years exploring the world at every chance I got. In Europe I bought the furnishings for the house that I would buy when I got back to Canada. I did manage to pay off every dollar of debt that I owed during this phase of my life and saved a substantial amount of money, which I would use later to buy my first home back in Canada.

In my 40s: I was all about the real estate and the sports car. I purchased my first home and later in my 40s bought my dream loft in Toronto, hired an architect and designed the space myself. I did extremely well when I sold it!

In my 50s: With the help of my husband, I have settled down some. We have bought our dream home (thinking it will be a great contribution to our retirement nest egg when we sell). And, finally, lo and behold, I’ve signed up for my company pension plan, 30 years later than I first had the opportunity to do so.

Today, I have approximately $20,000 in my defined contribution pension plan (plus a certain amount I’ve saved in RRSPs).

As for my “what if I would have” calculation, it  astounded even me!

Based on my average income over the 30 years that I didn’t invest in an employer-matching contribution plan, I lost out on the following opportunities:*

Savings from my contributions: $125,000
My employer’s matching contributions at 50% (free money): $62,500
Interest earned: $185,000

Total value of my pension plan at 50 years old had I started when I was 20 years old: $372,500
 

Moral of the story: It’s never too late to start, but starting as soon as you begin your first full-time job clearly makes the most sense. I definitely should have!

*Calculation assumptions:

• Investment time horizon: 30 years. 1980 to 2009.
• Interest calculated on 1-year T-bill rate and compounded monthly
• Average salary assumptions: 1980s: $40,000; 1990s: $85,000; 2000s: $125,000.
• Based on following DCPP assumptions

Employee voluntary contribution of 5% of annual income. + Employer matches 50% of employee’s contribution (up to limit of 5% of employee’s annual income).