A few weeks ago I attended a breakfast talk on philanthropy at my university. There were relatively few students there and I ended up sitting next to a man who seemed a little bit north of retirement age (let’s say over 55) who said he worked for the NY Department of Sanitation.

In something that is a regular event in my life, he turned to me and decided to forcefully offer me some unsolicited dad advice. Apparently kids my age assume that we’ll be able to live off of Social Security and boy are we wrong! I should really stop mucking around and get a good job with the government so I’ll have a pension. His pension is the equivalent of $1.3 million.

For the record, all that preceded this was my asking if this seat was taken and exchanging names.

What’s a pension worth?

A pension typically has defined benefits, so your monthly payment in retirement is determined by your previous salary and how long you worked for a company. The economy can tank and you still get paid.

With a 401k, IRA, or RRSP, you determine your monthly payment and nothing is guaranteed. The shift from pension plans to private retirement accounts are a way to shift investment risk from the company to the individual.

My friend at breakfast was telling me that he will get paid around $52,000 by the DSNY each month in retirement. These payments are probably indexed with inflation.

When you die, your family members may be able to continue to receive payments or get a lump sum payment. Some pensions end at death. Each pension plan has a different policy, but the payments are generally related to the amount of your actual contributions.

Putting in your time

Getting a pension requires being ‘vested‘ into a plan. Once you’ve met the requirements to be vested, usually a set number of years of employment with the same organization, your payments are guaranteed.

If you’re fired, become disabled, or choose to leave the company before your plan is vested, your contribution into the pension plan works like a 401k. You’re entitled to your contributions, plus any interest and earnings.

Building your own ‘pension’

I don’t have a pension plan, but I don’t expect to be living off of Social Security payments in retirement.

Few companies offer pension plans these days. Even in companies with pension plans, they are often reserved for workers who joined the company before a certain date and new hires are given access to a company 401k plan or RRSP.

Maxing out your tax sheltered retirement accounts is not enough, especially if you’re planning on retiring early.

Your allowable contributions to tax sheltered accounts are based on your income. So, if you’re like me and don’t make a lot of money, your allowable contributions will be far less than you’ll need to save for a comfortable future.

What do you do with the rest of the money you’re saving? The most common options are regular investment accounts, real estate investments, and investing in businesses. This diversification of income streams is important to reducing risk.

One way to mimic a defined benefit plan is by purchasing an annuity (or, even better, a charitable annuity remainder trust).

It can feel pretty baller to see your investment accounts hit six figures and then watch it climb in value. People who have self-directed plans often consider themselves millionaires when they hit seven figures, while people whose savings are in pensions may not be aware of their net worth.

One of the drawbacks of self-directed retirement plans is that, unlike with a pension, you have access to the money. If I wanted to spend all of my savings on…whatever I want…there’s nothing stopping me.

The tedious steps and tax repercussions of cashing out a tax sheltered retirement account give people pause before they go through with it. Any retirement savings beyond that are only retirement savings to you.

Having a lot of money in the bank, but not being rich

Since I’ve been house sitting full-time, I feel a little guilty over how much of my income I’m saving. However, while my friend hasn’t talked me into trading in my current job for a life in a cubicle, he did put my bank account balances into perspective.

Retirement savings don’t make someone wealthy, it just means they’re on safe financial footing to maintain their current lifestyle into the future. Plenty of retirees have $1 million or more in assets, but they’re not in the position to go buying whatever they want or making large donations if they plan on keeping themselves fed, clothed, and housed for their lifetimes. Generally, if you have $1 million invested, you have up to $40k a year to live on.

When I bought my first condo in Toronto, it was uncomfortable figuring out how to split expenses with my wife. Simply splitting things down the middle felt unfair, since we were essentially living in my retirement account. I didn’t want to make money off of my wife, but I was also aware of the facts that this was money I would have otherwise invested. She certainly didn’t need me to subsidize her living expenses and she was fine coming up with a way to split expenses that felt fair to both of us.

Yes, my friend at breakfast technically had $1.3 million, but he couldn’t really spend it. If he wanted to spend $700k on something, he’d need to get a loan based on his pension income, he couldn’t pay cash. I might technically be able to pay for something in cash, but I know I shouldn’t, lest it have major repercussions on my financial future.

While his unsolicited advice was a bit odd, it was a good reminder that, while this year has been great for recalibrating my long-term financial prospects, that’s not how people judge my financial success. I still make less than the median US income and that’s how people assess my finances. I might feel good about where I am financially, but I don’t need to feel guilty.