I will work until I die, maybe
My friend Carlos (fictitious name) always refused to save money for retirement. He always said that things will turn out fine, that he loves his job and that he would work until the day he dies.
Well, my friend Carlos is in his early 60s. He still loves his job, but things are no longer the same. It takes him so much more effort to do the job than it used to. He loses his patience easily when talking with his clients, and he finds that he gets tired easily.
What is the Canadian Pension Plan
At this stage of his life, he has started wondering about the Canada Pension Plan. What is it? How can he benefit?
Because he wants to work less, he has decided to start collecting benefits before the age of 65. What are the consequences of that?
There are millions of people like my friend Carlos. People who earn just enough to live and who have the capacity to save for retirement but don’t. If by any fortuitous event they earn more, they take longer vacations, or they simply work less. They live life for today and they will deal with the future tomorrow.
What if I save for nothing?
Last year, I was speaking about personal finance in front of a group of college students. One girl asked me: “I could die tomorrow. Why would I save all that money for nothing?” My answer was: “What if you don’t die tomorrow? What are you going to tell your older self when you are struggling to pay the rent?”
There are two big problems with financial planning:
- We don’t know when we are going to die, and
- We don’t know what rate of return we will get for our money.
So, it is very difficult to plan for the future. Will I save enough? Will it be too much?
Why we are forced to contribute to the Canadian Pension Plan
At one time in history, I used to resent the government for forcing us to contribute to a Canadian Pension Plan. How dare they take such a paternalistic stance and force us to save for our retirement? We can make our own decisions. Now I understand. The government has taken such actions because there are millions of people who think like that college student. There are millions of people who think like my friend Carlos. The future will take care of itself, and I will spend my money now, in the present, because we don’t know if there will be a tomorrow.
Unfortunately, in spite of the government’s good intentions, the Canadian Pension Plan sucks. It takes money from us all throughout our working lives and when we need it, at age 60, 65, or 70, it is never enough.
The average pension pay that Canadians are receiving today is about $664/month. Can you imagine living on $664? The rent for one person is about $650 in Montreal in a mediocre neighborhood. If they pay the rent, how are they going to eat?
My friend Carlos, who decided to start collecting now, before turning 65, will be getting about $350. This amount is nice, now he can afford to work even less. But what is he going to do when his ability to work will decrease even more? How is he going to live on $350 per month?
Generally, when someone retires at age 65, they might collect full benefits ( about $664). If someone decides to retire at age 60 their payment will be about 30% less. In the case of my friend Carlos, he is collecting about $350. If someone delays retirement until age 70, their payments will be 30% higher (about $865 ).
It’s hard to live on so little
We have to wake up to the reality that it is difficult to live out of our pension benefit. Assuming that we retire at age 65 and we live until 81, we have to have a significant amount of savings to carry us for 16 years.
My solution is simple: my solution is not to depend on the government, not to depend on the Canada Pension Plan. My solution is to take your fate into your own hands, to think that you will live at least until your life expectancy. My solution is to save money, at least 10% of your income. The earlier you start, the better off you will be.
Living a long life should be a gift from the universe, not one more thing to endure.
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