Part III: Who Will Pay For Your Retirement?


In the second part of this retirement guide, I wrote about the million-dollar mark. Is it necessary to be a millionaire to retire? The answer is yes and no. In fact, it all depends on how our retirement income will be structured. If you rely 100% from your portfolio, chances are that you may need about a million dollar. However, if you have been able to create other sources of income over time, then, the iconic milestone is not a requirement anymore. Let’s explore your retirement options to show how you can shape your future income.

The Government won’t let you down, won’t it right?

Ah… the great promise of politicians to take care of you once you will be too old to work. Isn’t that attractive? Yes. Is it realistic? To a certain point. In fact, the “Old Age Security” pension (OAS) in Canada or the Social Security Benefits in the U.S. will always exist in different form. The argument is quite simple; it costs less money to pay a small pension to an aging population than dealing with the consequences of seeing all those people in the street.

However, thinking you will live the life on the Government pension is another story. I’ve looked at the OAS table since I’m Canadian, and my wife and I combined would receive $23,184… a little bit less than $2,000 per month. This is enough to pay for food, utilities and the basic stuff. Unfortunately, the Government will not pay for my retirement…

But I don’t care, I have a defined pension plan ?

If you are part of the lucky employees working for a city or a government, you probably are entitled to a defined pension plan. A defined pension plan put all the responsibility of the pension on the employer shoulders. This is what killed GM in 2008 by the way. I doubt many private companies still have them (besides Canadian banks…). Unfortunately, I have to burst your bubble. The thing is that most plans are underfunded at the moment even considering the incredible bull market we are running. What will happen? You can say that you have read it here: Upon the next economic crash, most Gov’t levels will renegotiate and modify their pension plan as they will claim they can’t afford them anymore. Don’t believe me, then answer this one. Imagine any city with a pension plan under the water. They have police officers, firefighters and all the administration to support. On the other side, how can they put more money in their pension plan? What are their revenue sources? Mostly taxes. Do you think cities will be able to raise taxes to a sufficient level to cover the actuarial deficit? Think again. Unless you are 50 and older, you are probably sitting on a ticking bomb if you have a defined pension plan. Don’t count on it too much… it will exist when you retire, but it will not be as generous as they promise you.

Rental income over time

If you can’t depend on the government and on your employer, you become your own last line of defense. It’s now time of thinking of how you can build your own pension plan. Buying a rental property at a young age could be a very interesting way to generate passive income at retirement. We are still in a good timing to buy real estate as borrowing cost is still at a very low level. Considering it will take you 25 to 30 years to pay off the mortgage (or have your renter paying it if you prefer!), you need to start young if you intend to reap the benefits of your investment.

While I was working in the financial industry, I had many clients with rental properties. One of the best trick I’ve learned from them was to keep increasing their rent by a very small amount (usually a little bit more than the inflation) each year and never skip. By not skipping a raise, you make sure your rent beats the inflation and your renters are not surprised by a sudden raise. Most importantly, when it’s the time to sell, your property is still showing current renting potential. This worth a lot from the banker’s perspective when it’s time to finance the property!

Consider a duplex generating $1,000 of rent today. If you are able to beat the inflation rate by 1% each year, your rental income in today’s dollar will worth about $1,350 in 30 years from now. Without much sweat, we are already at $3,350/month for a “young” retired couple. Not bad…

The key here is to buy a property where renters pay the full amount of mortgage on day 1… it may require you some serious cash down…

Build a passive income machine

I’m well aware not everybody is able to work on a side gig on top of managing their career and their family. However, a few extra hours could really make a difference at one point in time. Take my example; after working 18 months on my websites, I was able to generate roughly $3,000 per month net of all expenses. This income was maintained during my trip by working between 10 and 20 hours per week. It is not pure passive income yet, but I can easily expect to retire at the age of 65 and withdraw the same $3,000 monthly. I have other plan for my sites and I intend to grow a bigger business, but I think that most people should consider building a side gig. Who knows, even if you make an extra $1,000 per month, chances are you will be able to keep this sideline after you retire? Think about your passion, your hobbies. You may be surprised how you can help others (and get paid for it!) that know less than you ?.

Your dividend portfolio remains your best bet

In the next five years, I intend to buy a rental property and continue to work on my sites to build a strong passive income. However, I think that saving money aside and building a dividend growth portfolio is probably the most accessible option for everyone. You don’t need to amass a cash down and deal with renters nor have to develop a long list of skills to build a passive business. All you need if you want to go on the dividend growth route is discipline.

Through a sound budget, you can set your money aside from each pay check. Through a strong investment process, you can start building your retirement portfolio on the first year you work. In the next article, I will show you how to build this type of portfolio that will generate enough money at retirement that you can live the life you want.

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