Yes, really. This post is about the fact that that employees without employer-provided pensions bear the responsibility of saving enough money to ensure their own financial comfort once they’ve stopped receiving a paycheque. All employees should be setting aside a chunk of money from every paycheque so that the money is still around when the paycheque ceases to exist.
Everyone justifiably laments the fact that employers routinely fail to provide pension plans for their employees. A pension used to be part of the compensation package. In other words, a pension was a form of deferred compensation. The loose contract between the employer and the employee was that the employee would do the work today and the employer would provide compensation via a pension payment tomorrow, i.e. when the employee retired.
Way back in the day, employees had the luxury of allowing their employers to set aside money for the day when the employees became retirees. For the vast majority of people, those days are over. Employees are being forced into the position of thinking about their own futures and of making the decision to set aside a portion of today’s money in order to turn it into tomorrow’s money. Employees are fiercely howling about this situation because this turn of events means that they have to be responsible enough to say no to some of their present-day desires. Way back when, the employer said no on the employees’ behalf, squirrelled away the money, and then doled it out to the employee-turned-retiree in monthly allotments. Essentially, the employees were liberated from the requirement to discipline themselves to saving money for a future beyond the next allotment.
Today, pensions for the vast majority of employees are a daydream. Today, employees do the work and they get a paycheque for their time. The employees bear the onus to defer spending some of their money today so that they have the ability to spend it tomorrow. They are responsible for paying for themselves when they are retired and they cannot rely on their employers to take care of them in the future. In short, there is no longer an agreement between employees and employers that there is any deferred compensation waiting for employees after their last paycheque. An employee’s compensation is immediate and employers are not holding any of it back for later.
The responsibility now lies on employees to create their own pensions. The duty to take part of today’s paycheque and set it aside for tomorrow’s expenses rests squarely on the employee receiving the paycheque.
I’m not here to debate whether this shift is fair or effective. My purpose with this post is to impress upon you that every paycheque you receive is an opportunity for you to set aside money for your retirement so that you can stave off poverty when you finally stop working.
If you’re in the camp of not having money to save after today’s expenses are satisfied, then you need to reduce today’s expenses so that you can save for your future. Alternatively, you need to find a way to increase your income without increasing your lifestyle so that you have some money to set aside for Old You. The government is not going to have enough money to pay for your old age unless you learn to enjoy living in conditions that you wouldn’t tolerate while earning a paycheque. You have to prioritize your future and you must save some of today’s money in order to accumulate tomorrow’s money.
How do you start? I would suggest that you start with $10 per day, which translates into $3650 per year. That money should be invested in passive index funds or exchange traded funds (ETF). Fill up your tax free savings account (TFSA) and your registered retirement savings plan (RRSP). Fill up the TFSA first, then make your very best effort to max out your RRSP – both of them allow for tax-free growth so long as the money stays put. Invest this money in equities and bonds. The younger you are, the more money should be directed to equity investments. As you age, the percentage of your portfolio going to equities should gradually decline. Keep in mind that you will need the growth from equities for your entire life so even when you hit your 80s and 90s, no less than 30% of your portfolio should be invested in equities.
A great book to read was written by J.L. Collins, called The Simple Path to Wealth. I strongly encourage you to read this book and put its principles for investing into practice. (I don’t get paid if you buy this book. I’ve read this book and I liked it a lot. I wish I’d read it 20 years ago, but what’s done is done. I can still implement the author’s advice now and benefit from it going forward. So can you.)
This next part is crucial to the success of your plan. Keep your mitts off your investments until you retire! Do not use it for vacations or home renovations. Do not use it to supplement your grocery expenses or to fill up your car. Give up cable – slice your own pickles – cook your own food – cut down on your smoking – drink less alcohol – cut back on entertainment – host more potlucks – throw more card parties! Do what you need to do in order to find $10 per day to set aside for your retirement. Your retirement money is only for your retirement, nothing else.
Sadly, you cannot rest on your laurels at $10 per day. Unless you start this program at age 15, you won’t accumulate enough money for a comfortable retirement on only $10 per day. You will have to do whatever is necessary to increase your income and thereby increase your savings. If you get a raise, allocate half of your new net income to increasing your retirement savings and the other half can go towards your day-to-day living expenses. Life is about balance so I don’t expect you to save every penny for the future. You only get one life so you have to find ways to enjoy the journey.
What I want you to do is increase your contributions to your TFSA and RRSP until you’re putting away 25% of your net income. If you max out your TFSA and your RRSP on less than 25% of your net income, then I want you to invest the difference in a non-registered investment portfolio. Your goal is to be living on only 75% of your net income and investing the remainder in your retirement plan, aka: your self-created pension.
I also encourage you to keep learning about money. Financial literacy is not taught in schools, nor is it available in every home. The television’s job is to present you to the marketers who want your money so you definitely won’t learn about sound financial principles from the media or its minions. For your own benefit and that of your loved ones, you should be reading and learning about investing throughout your lifetime, starting right now. So many people have written so many good books on the topic of personal finance that I can’t name them all but you should start by visiting the personal finance section of your library.
- David Chilton, “The Wealthy Barber”
- Gail Vaz-Oxlade, “A Woman of Independent Means” (and many others)
- David Bach, “The Automatic Millionaire” (and many others)
- Suze Orman, “The 9 Steps to Financial Freedom” (and many others)
- George S. Clason, “The Richest Man in Babylon”
- Mary Hunt, “Debt-Free Living” (and others)
These are just a few of the authors and books who have changed my views on personal finance. (Again, I am not getting paid for mentioning these authors in this blog post.) Much like everything you’ve learned to do up to this point, you won’t know everything about investing from just one book but I promise that you will start to figure out the basics as you continue to read and learn from a variety of sources. While you are learning, start putting the money aside in a dedicated retirement kitty. You can both save and learn at the same time. When you’re ready to make that first investment, the money will be there. I promise you that no one has ever regretted having money set aside for their retirement.
There’s no way around it – you will need to create your own pension so it’s best that you get started right now. Start funding your future today!