Millionaire on the Prairie

Tag: Pensions

  • Got a Pension? Ensure You’re Investing on the Side.

    Got a Pension? Ensure You’re Investing on the Side.

    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.

  • SOS! Funding Your Retirement is an Emergency

    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

    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!