Why A Pension Makes You A Millionaire

tuxedo

One of the goals of financial independence is to get out of the rat race. That means you no longer have to work just to make ends meet and pay all your bills on a monthly basis. Everyone’s dream is to retire early. Quite frankly we probably weren’t made on this earth to work for life.

Getting to the point where you have enough money saved to last the rest of your life is difficult. For many people we don’t even think about our lifestyle and the cost it would take to maintain it after we stop working. Once we leave the workforce, our goals shouldn’t be to live miserly and stay stuck to your couch in your home.

That’s where having a pension kicked in. A defined pension was a way to provide retirees a means to continue living at their usual standard of living even into retirement. This involved taking a bit of money from each paycheck and investing it on behalf of the employee. Despite the success of such a model, it has become prohibitively expensive for employers to continue this practice, and thus for many companies, this benefit was removed. Those that still have a pension can be considered the lucky few.

Cash Flow

cashforlifeIn the past, a defined company pension is what made retirement possible. A pension provided the cash flow necessary to maintain the standard of living we are used to. Cash flow is essential because we all need to pay our bills. Even in retirement, there are monthly bills that need to get paid. Utilities, entertainment, food and taxes don’t pay themselves!

A pension provides that kind of cash flow and it’s perpetual. So long as the company doesn’t throw their retirees out on the street, the pensioners will continue to get their payments well into their older years.

Just how lucky are pensioners? Let’s consider that when you talk to any financial adviser, he or she will tell you that the rule of thumb is to withdrawal 4% of your savings each and every year in retirement. 4% is very little, but if you consider how much money pensioners give then you’ll soon realize that people making a pension are indeed millionaires!

Why’s that? If you are a pensioner and you get $40,000 a year in retirement, which is around $3333 a month, that means in order to achieve that same kind of cash flow as a non-pensioner you would need to have $1,000,000 in the bank withdrawing 4% annually.

So let’s think about it this way. Since the pensioner receives $40,000 each year during retirement, then that means they constantly have one million in the bank at all times! Sure you might not feel like a millionaire, but if you were actually holding a million dollars, this is how a financial adviser would tell you to use your money so that it would last through retirement. It’s like Cash for Life.

Making Your Own Pension

Unfortunately for the majority of us, a pension doesn’t really exist. As I’ve mentioned, pensions are expensive for companies to maintain and thus they vanished as costs became prohibitive. This means the onus is on us, the individual, to build our own pension.

The story that all financial advisers will give is that in order to build your own retirement plan you need to save. People with pensions always gripe about the dues they have to pay to their union, but the fact is the union is investing on their behalf for their own future benefit. They have access to the best fund managers that are able to put their money to work for them. We as individuals have to do the same thing.

When we do it ourselves, we don’t have Ivy School grads working as analysts for us, nor do we have hot shot fund managers that know all the inside information on businesses. That’s why we as normal folk stick to index funds. Cheap and easily accessible.

Portfolios like the Canadian Couch Potato were designed to give regular Joe’s a chance. That’s why we save. To build our own pension-like investment portfolio so that we can one day retire like those with a defined pension. We want to be millionaires too!

The Commitment Is Long

When there are bad times, pension fund managers don’t sell all their investments. That would be absurd. Pension plans still have commitments to their members. How long do you think it would take to drain the entire pension fund if no investments were made and cash was paid out on a monthly?

That’s why as individual investors, we too shouldn’t take rash actions when markets take us for a ride. Remember that the exit isn’t tomorrow. It’s 10, 15, or maybe 25 years away. That’s a long time for human kind to progress. Do you really feel the world is going to end tomorrow, just because the stock market drops 300 points? Probably not.

That’s why it’s important to stick with it and be patient. Let the compound interest work for you. Continue to grow your nest egg until one day you realize how something that you started that was so small, can become something so substantial.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s