Monday, September 20, 2010

Rules of Retirement Have Changed!

We all occasionally daydream of the day when we don't have to work anymore. Images of feet in the sand and a cold beer in hand come to mind. For most of us retirement is far from reality and it may seem to far away to think about. Now with the recent changes to company and government pension funds retirement may seem more like fantasy than reality.

First of all it's important to note that the rules of retirement has changed. In the past people would work at one company for 30 years or so and get a pension where 70% of there annual salary would be paid to them for the remainder of their life. This type of retirement plan is known as a defined benefit plan. Most companies have found that a defined benefit plan is too costly to their bottom line since they have to ensure they can pay for employees that are no longer working. Therefore, companies are moving towards a new type of pension plan known as a defined contribution plan. The way this pension plan works is the employee contributes a certain portion of their pay cheque (usually 5-10%) into a registered retirement savings plan (RRSP) and the company matches the contribution.

There is a dramatic difference between these two types of pension plans. The pro to a defined benefit is that the company will ensure that you get a steady pay cheque after you retire (unless the company goes bankrupt). The con is that you have to stay with the same company for 30 years, which is happening less and less these days. The pro to a defined contribution plan is that it is usually portable, which means it travels with you if switch to a different company sometime down the line. The con is that now the employee is responsible for the management of their own retirement fund (to a certain extent, more on this in future articles), so if the markets perform horribly just as you are retiring you are up the creek without a paddle.

So now that we know the rules have changed and that our retirement is now our own responsibility, what can we do to ensure that we can retire? The simple answer is to set a goal, calculate your current cost of living, and to save and invest wisely so that your savings and passive income can support your cost of living. This is one article that can lead to endless topics, but the most important step is to realize that the retirement rules have changed and we need to change our financial planning accordingly.

For more on passive income check out the following articles.

Top 4 Forms of Passive Income

Rich Dad Lesson: 3 Types of Income

Here is a clip from of David Bach the author of Start Late, Finish Rich on saving for retirement:

For information on "The Automatic Millionaire" by David Bach check out:


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