Retirement - Millionaire on the Prairie

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!

Automation is beautiful!

I got my first part-time job in grade 11. Every two weeks, roughly $137 was plopped into my bank account via electronic deposit. And every two weeks, I would go to the bank machine and manually transfer $50 from my chequing account to my savings account without fail. It was simple and easy.

When I got older, I learned about automatic money transfers that can be set up once and left to run indefinitely. My money would be transferred on the schedule I set and in the amount I wanted so that I could meet whatever specific goal I chose. I set up an automatic money transfer as fast as I could!

When I started my first, real grown-up job with my own office and everything, I opened up several bank accounts and designated them for various goals: travel, utilities, insurance, property taxes, charitable donations, Christmas gifts, RRSP/TFSA contributions, home renovations, etc. Every two weeks, the following process took place: my paycheque hit my bank account, my automatic transfers went into action, and the money leftover could be spent on whatever I wanted for the next 2 weeks.

Thanks to automatic transfers, I’ve fully funded my registered retirement savings plan (RRSP) every year. When the tax free savings account (TFSA) was created in 2009, I was able to fully fund that account as well. My automatic transfers mean that I always take a vacation every year, in addition to short road-trips. Automatic transfers mean that I don’t have to scramble to find money to pay for my annual home and vehicle insurance premiums, nor do I panic when it’s time to pay for my annual property taxes. When it is time for me to buy my next vehicle, I will have the funds in place to simply pay cash because I have an automatic transfer in place to set aside money to replace my current vehicle.

When one goal is fully funded, the automatic transfer stays in place. I don’t suddenly add those funds back to my day-to-day spending to be frittered away on things that won’t last. Nope! Instead, those monies continue to accumulate for the next priority of my list. Next year’s annual insurance premiums are paid off? Great! The monies can now go towards hitting the RRSP goal a bit sooner. Oh? I’ve already met my RRSP goal for next year? Then the monies go towards the TFSA! Really, that goal is funded too? Then it’s time to seriously start planning that vacation…

You see what I mean? Having the automatic transfer in place means that I’ve made the conscious choice to take some of my today money and to turn it into tomorrow money. Part of my paycheque is allotted to deferred gratification so that I can meet my future goals and satisfy my priorities. The leftover money is to be used for immediate guilt-free gratification. I don’t need to worry that I’m spending too much on an item today because I already know that my future expenses are being paid. When the time comes to pay for the non-sexy elements of life (did I mention car insurance?), the money will already be in place for me.

Automatic transfers are one of the best tools available for meeting financial goals. Once you’ve determined the priorities for your money, automatic transfers ensure that those priorities are met. I can’t think of a single better method for ensuring that money is set aside to meet your goals.

Even if you’re in debt, you can use automatic transfers to meet your goals. Simply set up a recurring payment to a particular debt so that the debt is paid down every single time you get a paycheque. The benefits of this are two-fold. First, you’re meeting your priority of getting out of debt. Second, you’re paying the least amount of interest on your debt because you are ensuring that the principal is being paid down as fast as possible which minimizes the time period over which the interest can compound.

As an example, if you have a credit card balance then you need to get rid of it. The credit card company will tell you that you only need to pay a minimum amount every month and the balance can ride until next month. For the privilege of paying less than the full amount you owe, the bank will charge you interest on the outstanding balance. It’s a recipe for riches for the bank. It’s a recipe for disaster for you.

So here’s what you do to avoid disaster. You STOP using your credit card. You go to your online bank account. You add your credit card as an online payee. You set up an automatic transfer of atleast $100 to your credit card that matches your paycheque schedule. This system means that your credit card balance is paid down on a steady schedule, at an amount that is (hopefully!) higher than your monthly minimum payment. You do this until the credit card balance is paid in full.

Make sure that automatic transfers are working in your favour, not your creditors’ favour. It astonishes me that people are so willing to give their money away when they work so hard for it. Trust me – it only takes a little bit of patience to keep it for yourself!!!

How many bank accounts do you need?

One of the smartest things I’ve ever done with my money was to learn how to separate today-money from tomorrow-money. Today-money is the stuff that gets you from one day to the next – it’s the money for groceries, for your shelter, for your transportation, for your charitable donations. Tomorrow-money is the money that you will need to buy those very same things when you’re no longer earning a paycheque.

If you’re going to retire at some point in time, you’ll need to save some of your today-money so that it becomes tomorrow-money. I know that sounds simplistic but it’s one of the most fundamental tenets of personal finance – if you spend all of your money today, then you won’t have any money tomorrow.

So, let’s avoid that eventuality – no one should ever strive to be old and poor. It’s not charming. The first step to avoiding impecuniosity is to figure out the answer to the following question: How do we accumulate tomorrow’s money?

It starts with an income and a bank account. You need to have money coming in and you need a place to keep it. If you’re getting paid, you need a bank account to receive money from your employer. I’m going to assume that you have a chequing account and that from your chequing account, you pay your rent/mortgage, your utilities, your vehicle payment, your student loan payment, your credit card payment, and any other payment that you’ve agreed to pay. Chequing accounts are great for day-to-day living expenses. They are perfect for today-money, which is the money that you need to spend today in order to live the life you want.

You know what chequing accounts are not good for?

They’re not good for tomorrow-money. It’s a very rare person who can keep a nice float of money in their chequing account without finding some way to spend it on a day-to-day purchase. Maybe family’s visiting on the weekend, or a road trip with friends is in the works. Whatever the temptation, tomorrow-money doesn’t have a shot in hell of surviving and thriving in your chequing account.

Enter the savings account. You’ve heard of living below your means. That phrase means that if you’re earning $1000 each week, then you’re only living on $900 each week. Your means is the $1000, and you’re living below your means by only spending $900. The difference between your earnings and your spending is your savings, which in this case would be $100. So where to put the $100 of savings that is going to eventually burn a hole in your pocket? Where do you put the money that isn’t spent?

The $100 is sent to your savings account. It goes into your savings account and is not spent on the day-to-day expenses of running your life. The $100 is your seed money to fund your retirement. The $100 is tomorrow-money and your sole goal for this money is to make it grow.

So how do you make it grow? That’s simple too! Every time you get paid, you transfer money from your chequing account, where the today-money lives, into your savings account, where the tomorrow-money lives. And then you do not withdraw the money from your savings account. You must commit to not using this money. It is savings, which means it is sancrosanct – it is not to be touched!

I can already hear your next objection – what if I have an emergency and I need to use the money in my savings account?

Again, the answer is simple. You’ll have a second savings account that’s for emergencies. You will continue to live below your means while you build up your savings account to a pre-determined amount of money. Let’s say you will feel best if you have $7500 set aside in your emergency fund. Over time, you will live below your means and you will make transfers from your chequing account to your emergency fund until you have $7500 set aside.

See? It’s a simple process. You get money from your employer deposited into your chequing account. Then you transfer money from your chequing account into your two savings accounts, some money goes into your tomorrow-money savings account and some money goes into your emergency fund savings account. And you don’t ever spend money from your savings accounts. Instead, you live on the money in your chequing account.

The trick to funding your savings accounts is to set up automatic transfers. Trust me when I tell you that 99.9% of the population does not have the discipline to manually transfer money to their savings accounts every time they are paid. You might be one the very few who possesses this divine power, but what if you’re not? Why take the risk? Why not simply set up an automatic transfer and get on with your life?

Automatic transfers always work. Putting automatic transfers in place results in one less chore for you to have to remember to do every two weeks. They ensure that you’re meeting your twin goals of one, creating a pool of tomorrow-money to live on when your paycheque-money stops coming in, and two, setting aside money for those instances when an emergency rears its head.

Retirement planning starts today!

On February 22, 2018, the Atlantic put out the following article about elderly people living in poverty because they had insufficient retirement savings. It’s one of the saddest articles I’ve ever read.

https://www.theatlantic.com/business/archive/2018/02/pensions-safety-net-california/553970/

The reason why I found this article so sad is because I think it’s terrible that people can work so hard for their whole lives and not have some respite in their final years. Back in the day, employers provided pensions. A pension is a fancy term for retirement monies paid to you by your employer. A pension is a promise from an employer to an employee whereby the employer holds back some of the employee’s earned wages today and agrees to pay those wages to the employee when the employee retires at a pre-determined age. Under a pension agreement, the employer is legally obligated to pay the pension. The employee retires and waits for the monthly pension cheque to come to her for the rest of her life.

For the past few decades, employers have been moving away from the defined-contribution pension system. Instead, there are now two employer camps. In the first camp, employers are giving their employees the option of having a defined-contribution pension. This means that employers are giving employees control over how their pension money is invested. If the investments do well, the employees will have enough money in retirement. If the investment do poorly, then the employees will not.

Do you see the problem with the defined-contribution pension plan system? If not, here it is. Under the defined-contribution system, all of the risk of making good investment decisions over the decades of an employee’s working life rests with the employee. If employees do not know how to make investment decisions that will provide them with a steady stream of pension income in retirement, then the employees may be facing an impoverished old age. The weight of making properly investment decisions used to be the employer’s problem – today, that problem rests entirely on the shoulders of the employees who participate in a defined contribution pension plan.

The second employer camp is comprised of employers who do not offer their employees any kind of pension plan. These employers simply pay their employees their salary. It is entirely on the employee to invest their money in registered plans, such as the RRSP and the TFSA, or to invest in investment account, or to find some other way of investing their money to ensure a comfortable retirement. Other such investments could include rental properties, a small business, Bitcoins, gold, royalties, futures trading, or any other endeavour with the end purpose of earning money. Employers in the second camp take no responsibility for the retirement income needs of their employees.

Today, most people are responsible for creating their own streams of income for retirement, whether through define-contribution pension plans or through other investments. This means that people have to start saving for their retirements as soon as they start working!!! Not only do they have to start saving, they have to start investing their money for growth because money is always under attack from inflation. Money sitting in a bank account at less than 1% interest is not going to be sufficient in retirement when inflation is eroding that money’s purchasing power every single year. Finally, employees are responsible for ensuring that they have the proper asset allocation of their retirement funds so that their investment grows big enough to support them in old age.

Failing to do any one of these things means that a person runs a very real risk of being destitute in old age. Surviving on inadequate social services/benefits from the state is not an appropriate reward after a lifetime of work. Going hungry or refraining from life’s small luxuries isn’t a suitable way for the elders of our society to spend their remaining years. Watching every penny every single day and feeling despondent when those pennies are not enough is a horrible way to live, particularly when time to grow an investment portfolio has long since passed.

It takes years and years to build a retirement portfolio. However, there is no comprehensive system in place to teach people how to do it. Some people will learn on their own. Some people will inherit money. A few lucky souls will have pensions that will be sufficient to satisfy their needs. For everyone else, financial hardship of varying degrees is the reality that they will face sooner or later.