As we’re so often reminded in the media, fewer and fewer employers are offering defined benefit pension plans. These were the pensions that your parents and grandparents might have had – they worked a fixed number of years and their employers would pay them a fixed monthly pension from retirement until death. The defined benefit pension was a form of deferred compensation. If you were receiving this kind of pension, retirement planning did not have to be a priority for you because your employer would be responsible for ensuring that you received money every single month after you left work.
Those days are over. You’ll have to bake your own cake!
In other words, your retirement is your responsibility.
More likely than not, your employer isn’t going to take care of funding your retirement years. This means that the burden falls directly onto your shoulders to make sure that you have grocery money for the days that you keep your teeth in a cup. There’s no way around it. No one else is going to have as much incentive in ensuring that there is some gold lying around for your golden years than you will. So hop to it!
Start Now – Stop Procrastinating!
You can’t save for your retirement if you’re spending all of your money. You’ll need to take some of today’s money and set it aside to pay for the days when you’re no longer earning a paycheque.
First things first – every time you get paid, you must set aside a portion of the money for your future. The new standard is 15% of your paycheque. For my part, I’d prefer to see you save atleast 20% of your income.
Secondly, this money should go into your Tax Free Savings Account or your Registered Retirement Savings Plan. Under either of the products, your money will grow tax-free. With the RRSP, you’ll get a tax refund today but you’ll have to pay taxes later when you withdraw the money. And you’ll have to start withdrawing the money from your RRSP when you turn 71. With the TFSA, you won’t get a tax refund today but you also won’t pay taxes in the future when you make a withdrawal. Unlike the RRSP, you don’t ever have to take money out of your TFSA if you don’t want to. It need not be liquidated.
Thirdly, the money should be invested for growth. There are roughly 7 bajillion portfolios from which you can choose. I’m not a certified financial planner so I can’t tell you how to invest your money. You’ll have to do some reading on your own, or you’ll have to work with a financial planner. (I don’t work with a financial planner because I’ve yet to find a fee-only financial planner in my city.)
How do I invest my money?
I’m so glad that you asked that question!
If you’re like me, you love the idea of building a dividend-paying portfolio in order to create an income stream in retirement. The following is one of many way to create this kind of cash flow. First, you’ll start by opening an online brokerage account. All of the major banks in Canada have their own investing arm. In the interests of complete transparency, I will share with you that I do my investing through BMO Investorline. I am not being paid to share the link to their website.
I’ve set up an automatic transfer to fund this account. A chunk of my net income is automatically transferred to my brokerage account every time I get paid. I use this money to buy units in my dividend Exchange Traded Funds, which I lovingly call my army of little green soldiers.
By buying units in my ETFs every month, I’m taking advantage of an investing method called dollar-cost averaging. I buy at whatever the price happens to be that day. Whether the price per unit goes up or down is not important to me because I’m interested in getting paid my dividends. The more units I have, the more dividends I earn. I don’t ever worry about buying units in my ETFs at the “right price”.
Every month, my dividends are automatically re-invested through my Dividend Re-Invesment Plan. Once again, the power of automation facilitates compound growth within my portfolio. I’m never tempted to spend my dividends because they are re-invested before I can ever get them into my hot little hands.
Educate Yourself
Dividend-paying ETFs are not your only choice for building a solid portfolio for your retirement. You can buy individual stocks. You can purchase bonds, or mutual funds, or real estate investment trusts if you wish. These can all be held in a brokerage account. Use Google to find information about these various products, their benefits and drawbacks, and whether they will get you closer to your goal of a comfortable retirement.
A brokerage account puts you in control of choosing and buying the investment products that will fund your retirement. The flip side is that you will have to be disciplined about putting the money into this account. Again, I can’t stress this enough – set up an automatic payment from your regular chequing account to your brokerage account. This way, your brokerage account gets funded every time that you do!
Overwhelmed by the amount of choice? Check out Vanguard Canada. Again, I’m not getting paid to mention this company. And I do own units in one of their ETFs. I like Vanguard because they offer low-cost investment products. Their website is user-friendly, which means I can find the information that I want and need relatively easily.
There’s always the option of hiring a financial advisor to do your investing for you. I’m not a fan of this method but I feel obligated to bring it to your attention. Good financial advisors will find products that fit your needs, and will invest your money with your best interests in mind. Before you hire a financial advisor, do a Google search on how to find a good one. After all, this person will be working with your money so you don’t want to accidentally hire the next Bernie Madoff.
Other ways to fund retirement…
You could choose to buy real estate. Check out Afford Anything or Bigger Pockets. These are US-based blogs, so the tax information does not apply to Canada and the tax rules are different. Still, the core principle of buying a few homes and paying them off to fund retirement works just as well in Canada.
You could also choose to forego buying real estate, save up a big pile of cash, and retire outside of Canada. This was the choice of the couple behind Millennial Revolution. Since quitting the rat race in their thirties, they have travelled extensively and written two books in addition to running a very informative, educational, and inspirational blog.
In order for your golden years to have any gold in them, you’ll have to start saving and investing today. Don’t let fear of the unknown paralyze you. Just start saving and investing! There’s nothing stopping you from continuing to learn about investing while you’re saving for your future. Don’t fall victim to the belief that there’s one perfect investment, that you’ll irrevocably harm your chances of a comfortable retirement if you make the wrong choice. You’ll have the chance to tweak your plans down the line as your investment knowledge expands.
Your retirement is your responsibility. Do whatever you can today to make it as good as it can possibly be tomorrow!