you have to make do with second best.
With some financial discipline, in many cases, making your own pension
may work out to be even better than the corporate pension or forced government
pensions like CPP.
If you really do it well, you can build your own pension and get the regular
income for life along with some of the extra benefits that a traditional pension
So how do you build a really strong pension? Here are five steps to getting
1. You need a disciplined savings plan.
Commit to putting 12% of your gross income into your retirement savings every
year. This works out to 1% of your gross salary per month. If you make $100,000
a year, then a full $1,000 a month goes into retirement savings.
2. In your 20s, 30s and 40s, be growth oriented and don’t worry about
market pullbacks. Over the long term, stocks usually outperform bonds.
Avoid money market funds and GICs for this money. You don’t need guarantees.
Time will provide you with a virtual guarantee of growth. In fact, you should
also look at smaller and mid-sized companies as a group, as they will generally
grow faster than the largest, most established companies. You want to aim to
earn 7.5%+ per year on this money over time.
3. In your 50s, the savings percentage should grow to 15%, and the
investment mix should start to become more conservative. It shouldn’t
be too conservative because these funds are meant to fund your pension for the
rest of your life. If you are 55 and live to 85, that is still a 30 year time
horizon for a portion of this savings. Generally speaking, you might want to cut
your weighting of small and mid cap companies in half, and ensure that bonds of
medium risk might represent 20% to 35% of your portfolio depending on where bond
4. Once you reach five to eight years before you want to retire, take
stock of your retirement savings, your expenses, your work goals, and do a real
financial plan. This is very important for a number of reasons, not
the least of which would be that you want to see if your pension is overfunded,
funded adequately, or underfunded. The outcome of this financial projection may
allow you the freedom to make certain changes to your lifestyle and work goals.
You also want to factor in real estate values and reasonable inheritance
expectations or realities that will impact your reliance on your
5. When you are able to financially retire and want to retire,
you can aim to draw from this pension plan at a rate of 65% of your final full
year’s income. At that point, it might make sense to adjust the
portfolio to be a little more conservative. This should not be a sudden jump to
GICs and money market funds. Keep in mind that these funds are still aimed at
funding a retirement of well over 20 years. It is not short term investment
money. You might want to eliminate the small and mid-sized companies from the
portfolio, and bring the bond weighting to somewhere between 35% and 60%
depending on risk tolerance. The other possibility is maintaining the same
investment risk profile as before, but taking 10% to 20% of the portfolio and
buying a life annuity that will fully ‘pensionize’ some of the portfolio. This
percentage invested in annuities can range significantly from 0% all the way up,
but should be somewhat dependent on buying an annuity when interest rates are
not at historical lows, and also dependent on how risk averse someone is.
Source: www.FinancialPost.com - Ted Rechtshaffen
Linked In: http://www.linkedin.com/profile/view?id=101576891&trk=nav_responsive_tab_profile
Disclaimer: This article & any other form of content in the
news and updates section of www.DavePavelich.com do
not necessarily reflect the views of Dave Pavelich or his