This post is about the importance of you investing for your future, regardless of whether you have a pension. At its heart, a pension is simply deferred compensation. Your employer is promising to pay you money when you presumably are no longer able to earn a living. In exchange, you give your loyalty and service for the best years of your life. Undoubtedly, your pension can be a very lucrative part of your compensation. That said, you need to understand that it’s not the be-all and end-all of your retirement planning.
My intention is to motivate you to think about how you’ll survive if your pension up and disappears and you can’t get the pension that was promised to you. I want you to think about this possibility today, not tomorrow. What would you do if that happened to you? You retire then find out that your pension is gone, or that your promised amount has been cut?
It’s never prudent to rely on someone else to secure your financial future. Ultimately, you’re the person responsible for your future financial comfort. While you’re earning a paycheque, it’s in your best interests to always pay yourself first. Having your own investments growing alongside your pension is never a bad idea. The truth? No one cares about your financial well-being as much as you do.
Do Your Own Investing Too.
There are 2 kinds of pensions. Both you and your employer make contributions to your pension. At its core, a defined benefit pension is one where the employer has full responsibility for ensuring that there is enough money to pay you a fixed amount every month once you’re retired. The other kind of pension is a defined contribution pension. This is the one where you have the responsibility for picking the correct investments so that there is money available for your employer to pay you when you retire. Under the DC pension, it’s up to you to decide how the money is invested.
Whichever pension you have, I’m here to tell you that you should always invest outside of your pension. Personal investments are your insurance in case your don’t get the money you were promised, for whatever reason. Pensions are promises to pay you in the future. Sometimes, pensions fail. Think of Sears. When that company went bankrupt, its pensioners – aka: retirees – lost 30% of their promised pension payments. You do not want to be a retiree who, through no fault of your own, loses 30% of your pension.
Your best protection against a possible pension cut is to have your own retirement money. This means that you should be maximizing your contributions to your RRSP and your TFSA. Doing so might take you a long time, but that doesn’t matter. Do it anyway. Once you’ve stuffed those registered accounts to the gills, then go and open a brokerage account so you can start investing in well-diversified, equity-based exchange-traded funds.***
Blue Lobster, I don’t understand. How does investing on the side prevent my employer from cutting or reducing to my pension payment after I’ve retired?
Your Investments Are Your Back-Up Plan.
Good question. Strictly speaking, your personal investments won’t prevent your employer from going bankrupt or from fraudulently raiding the pension funds. Instead, they are going function as the back-up plan in case something very bad happens to your pension. In the extremely unfortunate event that your pension is snatched away from you, your investment portfolio needs to take its place. Instead of a pension, it will be your investments paying you enough to live until your last breath.
Ideally, your standard of living will stay the same when you part ways with your employer. Once retired, you’ll still need to pay for your shelter, your food, your utilities, and all of your other expenses of life. It doesn’t matter if the money comes from your pension or your personal investments. Money is needed and it has to come from somewhere. Do yourself a huge favour and make sure that you have enough on the side just in case something happens to your pension.
Live below your means, regardless of whether you have a pension. The amount between what you spend and what you earn is the money that should be squirrelled away for Future You. Invest a portion of every paycheque you receive. Start where you are. Every year, try to increase that amount by atleast 1%. More is better, but do what you can. Set up an automatic contribution to your investment account. Make sure you have the dividend re-investment plan turned on to automatically re-invest the dividends and capital gains. When it’s time to retire, you can walk out of the workplace secure in the knowledge that your pension isn’t the only bulwark you have against the expenses of the future.
Your Pot of Gold May Be Even Bigger!
If all goes well, your personal investments will be a nice supplement to your pension. There’s also the chance that work become optional because those investments will be enough to sustain you, even without the pension. Early retirement generally means a reduction in your pension payment, but so what? You aren’t going to willingly retire early if you didn’t have money already socked away to cover your future expenses. If you’re very good at picking investments, there’s always the chance that your investment portfolio’s returns exceed your pension payment. If so, well done!
Think positive! If your pension doesn’t fail, then your retirement funds will be there to pay for all those extra luxuries in retirement. At the bare minimum, you’ll have a bigger income in retirement than you’d thought you would – a pension for life + investment cashflow. You’ll have the best of both worlds and there’s absolutely nothing wrong with that.
*** I’m a fan of investing in the stock market. Other people invest in real estate. They run the numbers, then by real estate to rent to others. Eventually, they pay off the mortgages and live off the rental income. Other people start their own businesses. Some people invest in gold or crypto. There’s no one right answer to everyone. Do your own research and figure out what works best for you.