Seems topical that Monday on my way to work I heard a mini documentary on pension plans and the power the larger institutional plans have based on the huge sums of money they control, because that was the day I was reminded that I am eligible to enroll in my company pension plan.
I went through the online process of enrollment and how much they assess me to need for retirement and how great my shortfall is. Yes, that's right, my shortfall. I'm a 24 year old male with another 40 years of earning potential and they're telling me I already have a shortfall. That's a depressing thing to hear before you've even enrolled. That's why my first priority and plan for retirement won't be to depend on my pension plan, which is a defined contribution and is subject to fluctuations before I receive whatever is left (which makes sense to me, but that's another post). This is not to say I won't be trying go manage my pension to earn the best return I can, I am just saying I don't want to depend on it and then have it come crashing down. I guess you can say that's really pessimistic, but it's the view I hold anyway. So, as a result of this thinking, my main goal is to pay off a house. I want to know that whatever happens, I will always have a place to live. Sure, I know that from an investment standpoint it makes more sense to leverage that money that I plan to tie up in the house and earn a return, but at the same time, I don't care - and that's also assuming I can earn a return of greater than the prevailing interest rate on a mortgage, which seems hard to do in this economic market, although I'm assuming that may change. I want to know that when it comes to the end, if all of my investments unravel, I won't need to cover $1,000 a month in mortgage payments.
Let's put it this way. The Service Canada website says the average monthly payout for CPP is $528.92 and for Old Age Security it says it is $510.17 (both based on one person receiving these amounts). So this is our base, our starting point. We will assume for ease of calculation that these amounts would be adjusted to inflation, which they should be, and that there is no income tax owing on these amounts as the yearly total falls underneath the sum of the base personal exemption and old age tax credits. Therefore, we have approximately $1,040 to work with each month. We already know that we would be in trouble if we had to make mortgage payments still. Now, assuming we take 10% off the top for charitable donations, that leaves us with $936 a month to live off of. If we allocate $250 for food, $300 for utilities, $200 for property taxes and $200 for transportation, we can get by. This may not seem like much of a life, but it should be noted that we're not aiming to be in this situation of low income, we're just preparing for it. And it should be noted that the situation improves dramatically if your spouse receives any CPP (or for those that are single, that decreases the amount to be spent on food).
Basically, the moral of the story is, if you're not comfortable with investing and the risk that is involved, buy yourself a home, completely, and make sure that money does not change from being in your hands, to being in someone else's with you holding the empty bag at the end of the day.
