Category: Pensions

Pension or Not, Feather Your Own Nest!

It’s up to you to feather your own nest, regardless of whether you have a pension. The first step is to take responsibility for Future You by investing some of today’s money for tomorrow. It is both risky and foolish to rely on your employer for your retirement income needs. You shouldn’t assume that your employer’s contributions to your retirement plan are going to be sufficient when you can no longer work for a living.

Simply put, a pension is a promise from your employer that there will be money for Future You when you quit working for that employer. While you’re employed, your boss sets aside money for your retirement. That money goes into the pension. It is then distributed to the former employees each month.

Under a defined-benefit pension, the employer contributes money to the plan and promises to pay you a fixed monthly amount when you retire. This is your pension payment, and it is calculated by a formula. The payment is derived from your years of service and your salary. In other words, you can figure out how much you’ll receive in advance of retirement. The longer you work, the higher your salary, the bigger your pension will be. Your employer takes responsibility for ensuring that there will be enough money to pay you a pension until the day you die. Your benefit is defined.

The defined-contribution pension works differently. Your employer promises to contribute to your pension plan. There are no promises about how much you’ll receive when you retire. Under this plan, it is the employer’s monetary contribution that is defined. Your employer takes no responsibility for ensuring what your pension payment will be when you retire. Determining the size of your pension payment is a responsibility that lies on your shoulders. You’re the one who has to ensure that the money is properly invested for the long-term. Your choices will determine if your pension payment will be big enough to pay your bills once you’ve stopped working. Under this pension, two employees working the same length of time for the same salary can receive vastly different pension payments when they retire. The difference is attributable to how each employee chose to invest their pension contributions.

Hedge your bets when it comes to funding your retirement.

No matter what kind of pension you have, you need to feather your own nest. Why? Simple – a pension is a promise, not a guarantee. If your employer goes out of business, your pension will be impacted. It may take years for you to receive the pension payments that you were promised. Just talk to some former retirees from Nortel or Sears Canada. They all saw their pension payments cut when their employers went bankrupt. What would you do if 30% of your paycheque disappeared today? Now imagine losing 30% of your pension payment when you’re too old to return to the workforce. What options would you have for replacing that chunk of your promised pension?

Having your own investment portfolio is like having insurance for your pension. Investing for the long term increases your chances of being able to live off the income from your portfolio. If things go in your favour, dividends and capital gains might eventually exceed your annual pension income. Every dollar earned by your investments is one that can replace a dollar from your pension just in case the worst happens to your pension. Think about it. The Nortel and Sears Canada employees with personal investment portfolios weren’t as badly impacted when their pension payments were cut. The income from their investments was available to replace the money cut from their pension cheques. Had they planned on spending the cashflow from their investments? Maybe, maybe not. The reality is that having that investment cashflow dulled the impact of the reduced pension.

Do Better for Future You

I know how seductive the pension promise is. It would be lovely to cast aside all responsibility for Future You’s financial health, to let “someone else” worry about that. It’s the path of least resistance, but it might be disastrous. You wouldn’t even know how disastrous until it was too late. Imagine working for decades then realizing that you won’t have enough money. You’ll be out of time to earn more money. At 70 years old, do you really believe that you’ll eagerly anticipate working another 10, 15, 20 years just to make ends meet?

And I recognize how persuasive the AdMan is! In a world where you’re constantly exhorted to live your best life, it’s hard to save for a future that is decades away. After all, living your best life is generally code for open-your-wallet-and-give-me-your-money. The AdMan won’t be there to pay your bills in your dotage. Trust me on that!

Again, a pension is only a promise. This is why you have to feather your own nest! Err on the side of caution and invest some of your own money for Future You. No one is suggesting that you become a miser. I don’t want you to give up all the things that you love in order to save for tomorrow. I recognize that no one is promised tomorrow. However, I do want you to admit that there’s little to no harm in investing a portion of today’s money for tomorrow’s needs. Having a pension and cashflow from your personal investment portfolio would be the best of both worlds. Why deprive yourself of that?

Start Today

The reality is that you have to worry about Future You. Living below your means isn’t a punishment. It’s an admirable way of governing your financial life. Doing so will maximize your comfort when you no longer can, or want, to work. Money invested for the long-term will generate annual income for you, regardless of the pension plan you’re in.

Shave a little something off of each paycheque and invest it for tomorrow. I would advise saving 25% of your net income, but you know your finances better than I do. If you can only start with $10, then start with $10. Every penny counts, but you have to start somewhere. As your income grows, as your debts are eliminated, increase the amount that you’re investing. Once you’ve saved a portion of your paycheque for the Care and Feeding of Future You, then spend whatever’s left however you see fit.

Feather your own nest. The worst thing that can happen is that your pension shows up every month. In addition, your investment portfolio would be churning out dividend and capital gain payments every year. You’ll have two sources of income in retirement. How could Future You have any complaints about that?

Taking Care of Future You

Quick! Take a look at your current net worth. If you had known 10 years ago that it would be what it is today, would you have been angry if you had been forced to save more money???

The reason I ask is because I’m getting older. And the older I get, the more I notice things. One of the things I’m noticing is that my friends are getting older too. And they’re starting to make worrying noises about not having saved enough for retirement. These disquieting rumblings are leading me to wonder if perhaps people shouldn’t simply be forced to save for their retirement.

It’s Easy to Put Off Saving

Want to know why I’m such a huge fan of automating your savings?

It’s due to the fact that automation removes freedom of choice. I know myself. If I to deliberately choose to siphon money from my paycheque to my future, then I wouldn’t. I’d go through that money like a hot knife through butter! I’d be no further ahead financially but I’m sure I’d have more stuff – clothes, electronics, whatever…

I’ve curbed my ability to spend away my retirement savings by setting up automatic transfers. My paycheque comes in – the automatic transfers are triggered – I spend whatever’s left over.

Yet, I’m realizing that a lot of people don’t use automation to improve their financial futures. To be fair, I’m not talking about people who don’t have any fat to cut. Sadly, lots of people are living by the skin of their teeth and an automated savings plan won’t help those people.

I’m talking about the people who do have fat to cut. The ones who can cut back without eliminating all the little extra in life in order to fund their future financial goals. Many of them don’t do so… a situation that I find perplexing.

There’s Little to No Urgency

Perhaps the Ones-Who-Can simply don’t because retirement is so far away. It’s in the distant future, so why worry about it now when it won’t be here for a very, very, very long time?

Good question.

The answer is that tempus fungit, which is Latin for “time flies”. Yes, I’m old enough that I took a semester of Latin in high school. It still blows my mind that this year was my 30-year anniversary of graduating high school!

Your retirement will be here before you know it. Everyone gets the same 24 hours in a day. And they pass by at the same speed for all of us. No matter how busy you are, no matter how full your life is of other priorities, believes me when I say that you will get old…unless you die. Sorry to be so blunt, but it’s the truth. The only people who aren’t getting any older are the ones who have already passed.

Regardless of how far away it feels, your retirement is on the horizon. Saving up enough money to pay for it is a priority that you should focus on throughout your life.

Money From Others…

Yes, that’s right. It’s up to you to pay for your own retirement. Whether you’ll earn CPP, OAS or GIS (or Social Security and its equivalents), the amount of money you get from the government won’t be enough.

If you’ve been promised a pension, then all you have right now is a promise. The harsh reality is that pensions can fail. Think of a pension as a repository of deferred pay. Your employer pays you less today with the promise that they will pay you after you’ve retired. When a pension fails, it means that the employee who did the work doesn’t get paid as he or she was promised. It sucks and it’s unfair, and it causes a lot of havoc to pensioners who can’t turn back time and go back to work.

You should be saving your own money to supplement whatever you receive from the government and your pension. If the government and/or your pension still has money to pay you in your dotage, then that’s great. If not, then you’ll be very happy that you made the choice to tuck a little something away over the years. Err on the side of caution and start saving for your retirement.

It’s Vitally Important

There’s not much more to say at this point. You know how happy you are when you’re hungry and you eat something? That awful hungry feeling goes away and you can go on about your daily life.

You will continue to be hungry when you’re retired. You’ll still need shelter, a few clothes, access to transportation, some entertainment once in awhile. When you’re retired, I promise you that you will still yearn for your creature comforts – much in the way that you do today. In order to acquire them, your retirement funds will have to take the place of your paycheque.

Gathering sufficient retirement funds is an integral step in taking care of Future You. For the vast majority of us, it’s going to take a very long time. So unless you’re next to destitute, take immediate action. Set up a plan whereby you funnel some of today’s money towards tomorrow’s financial needs. I promise that you won’t regret doing so when the time comes to live off your retirement nest egg.

Yet…

I suspect you’ll read this, think it’s a good idea, and go on about your lives. There might be one or two of you who actually take my suggestion and plant their money tree. The rest of you… not so much.

All of us will need money until we draw our last breath. That’s the world we live in. And that’s why I’m starting to come around to the idea that people must be forced to save for their retirement. It cannot be optional. If it’s optional, then people will choose not to do it and that’s a bad choice. No one is telling you to give up all of the things that make you happy today in order to save for tomorrow. Instead, I’m encouraging you to cut back a little bit. This is so you’ll have the money you’ll need for Future You. Isn’t taking care of Future You worth a little bit of sacrifice today?

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Weekly Tip: Use your tax refund in a way that allows you to pay down some debt (30%), to invest in the future (50%), and to enjoy the present (20%). Life is about balance and enjoying the journey along the way.

Money Mistake – Not Buying Equities

I think I’ve made a money mistake.

According to the personal finance blogs that I follow, the stock market has been on a bull-run since 2009. A “bullish” stock market is one where the stock market is rising. A “bearish” stock market is one where the stock market is falling.

Since 2011, I’ve been busily building my army of little money soldiers and I’ve been rewarded with nice, plump dividend payments every month. I don’t use those dividends for living expenses – instead, they’re automatically re-invested into buying more dividend-producing assets. I’m proud to say that I’ve created a lovely cash-flowing side income for myself that will supplement my other retirement income when the time comes.

After hearing about pension failures and the impacts on retirees, I wanted a source of cash that would allow me to survive during retirement if my monthly pension payment happened to be cut or eliminated. I’m a Singleton. This means that I can’t depend on someone else’s salary or expect that anyone else will take care of me. Creating a portfolio that pays me dividends every single month eases my worries about how to survive if my pension disappears.

That said, if I had invested that same money into the stock market over the same time period, my net worth would be a lot higher. I would be that much closer to early retirement!!! I hate to admit it but I’m realizing that choosing not to buy equities since 2009 was a very big money mistake.

Choosing dividends over straight equity investments was very definitely not the right move to make in 2011. According to the good folks on the Internet, the stock market returns have been higher than the returns on my dividend portfolio. In my defence, I wasn’t as knowledgeable as I am now. I succumbed to one of my many flaws – I’m stubborn. I was utterly convinced that my path was the absolute right one for my circumstances.

So now it’s time to fix this money mistake.

My new plan is to invest in an exchange-traded fund that invests in the global market place. This is an equity ETF and I plan to hold it for a very long time. I do believe that over the long-term, the stock market rises.

One of the wisest things I’ve ever read on the internet was an article that stated that one shouldn’t invest believing that age 65 is a portfolio’s end date. It persuasively argued that one’s investment horizon ends at death, not at retirement. People are living into their 80s and 90s, which means that a 40-year old still has a 40+ year timespan over which to watch their money grow. That bit of wisdom shook me up. I’ll need the growth from my equity investment to power my portfolio until the end of my life, not just until the end of my career.

I’ve also decided not to divest myself of my dividend-producing assets. They’ll continue to grow over the next few decades. I’ve accepted that their growth will be slower since I won’t be adding new money to that part of my portfolio. Once my equity holdings make up 40% of my investment portfolio, then I’ll start to consider re-directing new cash into buying more units in my dividend ETFs.

So my portfolio will continue to churn out dividends, and my new money will go towards buying units in my global equity-focused ETF.

What about the recession that’s coming?

Yes – I’ll admit that the Talking Heads of the Media have been nattering quite a bit about the upcoming recession. It caused me concern for about 3 minutes, then I chose to ignore them. I won’t allow their incessant chinwag to dissuade me from my chosen path.

First, no one has been able to tell me when the recession will start, how long it will last, nor how bad it will be. There’s nothing I can do about the recession.

Second, there will be a recovery from the upcoming recession. There is always a recovery from a recession. I have no reason to think this time will be any different. Much like the recession itself, the recovery’s details are a mystery. No one knows when the recovery will start, how long it will last, and how good it will be.

Third, recessions are a natural part of the economic cycle. Stock markets do not rise forever. They go up and they go down. It’s normal and natural. The best bet is to ignore the hysteria from the Talking Heads, to invest early & often, and to go about the daily business of life.

Fourth, I plan to be in the stock market for the long-term. I’m not timing the stock market. I’m starting to put time into the stock market. The only way for me to have time in the market is to start buying now. I’m going to follow the advice of J.L. Collins, who wrote The Simple Path to Wealth, by buying into an equity product and letting the stock market do its thing for a very long time.

I’m never going to make the perfect investment choices all of the time. However, what I am going to do is continue to learn and think about how best to achieve my money goals. And when I find that I’m making a money mistake, I’m going to stop making it.

When you know better, you do better.

SOS! Funding Your Retirement is an Emergency

This week, I heard a very sad story about how seniors in Canada are becoming increasingly impoverished as they age. They don’t have enough funds to support themselves in their dotage. Here’s the link to the article. I’d encourage you to read it for yourself.

Here’s one of the main take-away’s from the article. If you don’t save for your own future, no one is going to do it for you.

Your employer is not looking out for your financial well-being. Pensions are vanishing. If truth be told, your salary is a business expense that is only grudgingly tolerated. If your employer ever figures out a way to eliminate that expense before you’ve figured out a way to live without your salary, then you will be up shit creek without a paddle. When was the last time a gas station employee pumped your gas?

Your parents probably want to help you, but chances are good that they will need their money to pay for their expenses. Maybe they need nursing care. Perhaps they helped fund your education or had a big debts so they didn’t have a chance to save for their own retirement. Maybe your parents didn’t earn a lot during their working years so they still live hand-to-mouth. If your parents are flush and have promised you everything, you should still save for your own retirement. Inheritances are meant to be received, but they should never be the bedrock of your future financial security.

What about your friends? They may love you to death. You may have the kind of friends who would bring the shovels to help you bury a body without asking any questions. Even friends as treasured as these are not going to fund your retirement. They have their own retirements to fund. At best, you and your friends could figure out a way to buy nice, big house and live together as senior citizens – it could all be very Golden Girls!

As a Singleton, you probably don’t have the benefit of a second income coming into your household. In other words, you generate all the income and the paycheques stop when you do. There’s no second earner to help you bring home the bacon. You won’t benefit from survivor’s benefits or a life insurance policy if your partner pre-deceases you. There’s no back-up salary unless you create one by investing your money today so that you have a cashflow for tomorrow.

****** Stop, Blue Lobster – just stop! What is a “back-up salary”? And how do I get one? Simply put, a back-up salary is a cashflow that comes to you without you having to go to work. Think of dividends. Once you’ve bought the stock, you don’t have to do anything else – the dividends will roll in like clockwork unless something very, very bad happens. Another example is royalties from a book or music. You write the book or the song once – it sells – the royalties roll into your wallet every time the book is sold or the song is played. Think of your back-up salary as money you don’t have to sweat for. Pretty sweet, isn’t it? *******

It’s on you to do the heavy lifting. Should you be fortunate enough to have fat in your budget, then you owe it to yourself to trim it away and to put that money to be better use. Set up an automatic savings plan so that a portion of each paycheque gets squirreled away. Invest in an equity-based index fund or exchange-trade fund. Get out and stay out of debt. Save for purchases before you make them.

If you can max out your TFSA and your RRSP each year, great! If you can’t, then contribute as much as you can. These are registered savings vehicles, which means that your money will grow tax-free while inside them. Money that comes out of a TFSA is never taxed. Money inside an RRSP is taxed upon withdrawal. Remember, you can accumulate money faster if you aren’t paying taxes on it every single year.

When it comes to your retirement, saving money is the factor that matters most. Without savings, there can be no investing. You have to save & invest the money now or else you won’t have enough money later. It’s really that simple.

Absolutely clarity is required for this next point: Simple doesn’t mean easy. Not once in my life have I ever said “It’s too damn easy to save money!”

It’s always hard to save money. There are so many things I want. Temptation – aka: advertising – is everywhere. Truth be told, I like love spending money. You know what else I love? Knowing that I’ll be able to buy groceries after I retire.

If you’d rather not be working in your 70s and 80s, then start saving & investing for retirement today. And if you’ve already started, then good on you – don’t stop. You don’t get a pass on taking care of your financial future just because it’s hard.

It’s up to you. Funding your retirement is an emergency.

The days are long but the years are short. This is an old-fashioned way of saying that time passes by very, very quickly. Even if you think retirement is decades away for you, I want you to believe me when I say it will be here before you know it.

Your Retirement is Your Responsibility

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!

Pensions and Portfolios

I still save even though my employer has promised to pay me a pension when I retire. Despite this promise, I ensure that I do the following every two weeks: I siphon a solid chunk of my paycheque out of my checking account and I squirrel it away into my investment portfolio.

Why do I do this even though I’m one of the Fortunate Few who is still promised a pension?

I do it because I’m a person who likes to mitigate risks. I check both ways before crossing the street. I don’t text-and-drive. I use the hand-rail when going down the stairs. There is little, if any, upside to taking unnecessary risks with my future financial well-being!

No Need to Waste Money

I see no need to waste money or to buy stupid stuff just because my budget can accommodate it. I have everything I need and most of what I want. No one has ever convinced me that it’s a good idea to spend money just because I have it. If money’s not going to the basic necessities or to the little luxuries that make me happier, then I’d rather save that money and put it to work in my portfolio.

Money for Extras

There is absolutely nothing wrong with building a nice cash cushion so there’s money for the extras in retirement.

Once I’ve retired, I want to be D-O-N-E! I’m not one of those very lucky people who loves what they do for a living. I’m good at what I do. I’m competent at what I do. I’m efficient at what I do. However, if I wasn’t being paid to do this job, I’d be doing something else. I’ve heard of people who love their jobs so much that they would do them for free. I hope to meet one of these rare creatures someday…

Pensions Can Fail or Disappear

Having a healthy investment portfolio mitigates the financial impact on my life should this nightmare scenario come to pass. I don’t want to be in the position of these unfortunate employees of the company formerly known as Sears Canada. If for some reason I’m no longer receiving my pension, then I need to have some serious cash in place to continue paying for my life’s expenses. Those bills won’t disappear just because my pension has! I won’t take the risk of not having a little something set aside…just in case.

Retiring Earlier Than Originally Planned

Income from my portfolio relieves the pressure to work for a full 35 years in order to receive a penalty-free pension. How so? Well, my particular pension is reduced by 5% for each year that I retire before putting in atleast 30 years. This is lovingly-called the early retirement penalty. (Between years 30 and 35, there’s no penalty.)

If I decide to retire in year 27, then that’s a 15% reduction of my monthly pension payment. However, if my portfolio is paying me the same as or more than the amount of the decrease, then I don’t need to work for those extra 3 years. I will effectively receive a monthly payment amount that’s equivalent to a 30-year tenure. How? My pension payment – based on 27 years of service – plus my portfolio’s monthly dividend payment will be equivalent to a payment based on 30 years of service. Sweet!

Essentially, I’m buying myself the option of retiring early by ensuring that my investment portfolio grows alongside my pension.

Creating a Legacy…Maybe

If I can live off my pension amount, then my portfolio can continue to grow on its own. Strictly speaking, I won’t need to make any further contributions. (Though, knowing myself as I do, there’s a good chance that I will continue to live below my means until I’m pushing daisies.) Let’s say that nothing ever goes wrong with my pension and the monthly payment flows to me until the day I die. Hooray! And let’s say that it’s always enough for me to pay for all my needs and all my desires, no matter what they are. Hip, hip, hooray!

Odds are good that I’ll still contribute a little something to my investments when I retire. One of the things that I love best is investing in my portfolio.

If all goes well, my portfolio can stay intact and be a huge boost to the lives of my beneficiaries once I’m gone. Nothing wrong with that!

Long-Term Care Will Need to Be Funded

Sixthly, should I live long enough to need it, my portfolio will assist me to buy high-quality assisted living and/or end-of-life care once I can no longer live independently. The Baby Boomers are just now, ever-so-slowly starting to move into the realm of needing extended care. I have no doubt that the cost of that care is going to skyrocket before I need it. And I harbour no illusion that the government will have the problem of caring for large numbers of infirm elderly solved by the time I need that sort of care.

While the private system won’t be perfect, I’m confident that it will be expensive. I’m also quite certain that I will need money to ensure that I can buy the kind of care that I’ll want to receive.

So There You Have It…

Many in my life have told me that I should enjoy my money. I think they mean that I should spend my money in a way that they would like to spend my money. And that’s fine.

They can have their opinions and they can make their comments. At the end of the day, I’m sticking to my investment plan. I know that I want to have more options when I retire. I can no more predict the future than you can, but I take comfort knowing that I’m taking steps now to have a financially solid retirement.

RRSP Season

It’s Registered Retirement Savings Plan season! From now until the last day of February, there will many advertisements all over the place exhorting you to make a contribution to your RRSP.

If you need more detailed information about the rules, then I would suggest that you visit the website for the Canada Revenue Agency. Alternatively, you can talk to your accountant or a financial advisor. This article does not in any way, shape or form constitute comprehensive accounting or legal advice about RRSPs. I am not a professional nor am I giving you any kind of investing advice. This post is a starting point for you to make inquiries, learn the basics, and take responsibility for your future by determining how to use RRSPs to your best advantage.

For my part, I really like RRSPs. I’ve been contributing to mine since I was 21 years old. Every year, I get a tax refund which is promptly re-invested for retirement or put towards an annual vacation. I’m very diligent about automatic transfers to my investment portfolio so I’m quite comfortable with spending my RRSP-generated tax refund on whatever my heart desires.

RRSPs offer tax-deferred growth. You can pick almost any kind of investment to put under the tax-deferred umbrella. On top of that, you might even qualify for a tax refund if you make a contribution. If you’re in a higher tax bracket when you put money in than when you take it out, you’ve saved money on both sides of the transaction.

Remember – it’s tax-deferred savings, not tax-free savings. If you contribute when you’re in the 33% tax bracket, then your tax refund is based on that tax bracket. If you’re in a lower tax bracket when you take the money out, say the 26% tax bracket for instance, then you’ll pay tax on that RRSP withdrawal at 26%. This means you’ll be 7% to the good. Woohoo!

In my humble opinion, RRSPs have many commendable benefits.

However, not every product is perfect. RRSP contribution room can be lost if you make a contribution and then withdraw the money outside of two very specific RRSP programs. Those programs are the Lifelong Learners Plan or the HomeBuyer’s Plan. In short, if you contribute $1000 to your RRSP and then withdraw that money outside of the aforementioned programs, then you cannot put that money back into your RRSP in the future. Unlike the Tax Free Savings Account, which allows for contribution room to be re-captured if a withdrawal is made, your RRSP contribution room is gone forever once you withdraw your money.

Another associated drawback to RRSPs, in certain circumstances, is the creation of a nemesis commonly known as D-E-B-T.

“How can an RRSP result in debt?” you ask.

It’s quite simple. At this time of year, banks love to give people RRSP loans. Customers borrow money, contribute to their RRSP, and then they’re supposed to use the tax refund to pay down the RRSP loan. Whether the tax refund is actually applied to the outstanding balance on the RRSP loan is anyone’s guess. The tax refund goes straight to the borrower who took out the loan and it can be used however the borrower wants it to be used. Concert tickets? Holiday? Extra mortgage payment? Cigarettes? The choice is limited only by the borrower’s imagination and common sense. There’s no requirement for the tax refund to pay down the RRSP loan.

In my humble opinion, failing to pay down the loan with the tax refund is most likely a stupid move because do you know what else belongs to the borrower? The loan payments! If the tax refund is spent on something other than the RRSP loan, the loan payments still have to be made because the borrower put himself into debt by taking out the loan in the first place!

Even if the tax refund is applied towards the RRSP loan, trust me when I say that the refund won’t be enough to cover the principal of the loan which means that the borrower is on the hook for the remaining balance of the loan.

Keep in mind that the banks aren’t lending you money interest-free. They might defer the interest on the first 90-days of the loan, in the expectation that you’ll apply any tax refund towards the debt, but don’t hold your breath. Way back in the Palaeolithic period when I worked for a financial institution, this is what my overlords did for the customers. I have no idea if this is still the practice. However, if you can’t repay the loan in full within the grace period, then you will be paying interest on your RRSP loan until it’s completely repaid.

The other big drawback to the RRSP loan is that it, more often than not, requires more RRSP loans in the future if a person is intent on funding their RRSP each year. A cycle of debt is created – this is bad. See, if you’re required to make loan payments on this year’s loan, then you’re most likely not setting money aside for next year’s RRSP contribution. If you had set aside the money in the first place, then there would not have been any reason for you to have taken out an RRSP loan. Following this logic, when next year’s RRSP season rolls around, then you’ll be more inclined to take out another loan to make your next contribution.

This is an ass-backwards way to set aside money for the future. Yes – make the RRSP contribution. No – do not go into debt to do it!

“So what’s your bright idea, Blue Lobster?” you ask.

It’s simple. Go to any bank’s RRSP loan calculator and enter your numbers. The calculator will spit out a loan payment amount. I want you to set up a transfer from your bank account to your RRSP in the amount of the loan payment. Maybe the calculator spits out a payment amount of $500/mth. If your budget can accommodate this number, great – contribute $500 to your RRSP every month like clockwork. Maybe your budget can only tolerate a monthly hit of $350. That’s fine too – you’ll contribute $350 to your RRSP each month.

The point is that instead of paying money and interest to the bank, I want you to contribute that money to your RRSP. If you were willing to pay the bank some interest for the privilege of borrowing money, then I see no reason why you won’t make interest-free payments to yourself.

Either way, you’ll be setting aside money for your future. Why not do so without going into debt?

Create Your Own Pension

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!