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Build Your Own Pension Plan

Over the years I’ve been fortunate to have the opportunity to speak to and interact with many people and gain from their perspective. I’ve always been fascinated to observe how some people are able to take a challenging situation and turn it into a positive while others take that exact circumstance and feel defeated.

When it comes to personal finance and retirement planning, the number one topic I hear about from workers is pensions; namely, those that have them feel more confident than those who don’t. Over time pension plans have been working their way out the door at many employers and this trend is likely to continue well into the future. Pensions tend to be a drag on companies and that is only exacerbated by the increasingly long life spans of retirees.

With that in mind, rather than feel like retirement is never going to happen, I believe it is important for everyone and especially those who have no promise from their employer for retirement earnings to take charge and build their own pension plan.

Dividend Growth Investing Is The Key

When it comes to building lifelong streams of earnings that exhibit durability amid crises and the potential to outstrip even inflation, Dividend Growth Investing (DGI) is one of the few free lunches in the investment arena.

We consider dividends to be the basic building blocks for stock market participants. Reinvested dividends are the steam engine that just keeps trucking along down the rails as time goes on. As an investor, dividends fuel your growth and supercharge the returns you earn. Dividends tend to provide far steadier returns than elusive capital gains which can be fickle and fleeting as the market ebbs. We love dividends so much around this site that we don’t even invest in companies that don’t pay them!


Diversification provides insulation from company-specific risk. Even if one company happens to reduce or eliminate their payout to shareholders, a properly diversified investor should still receive more annual income as the increases from the rest of the portfolio offset what is lost.

I have argued many times that it is far safer to be receiving dividends from thirty companies than earning a paycheque from one individual employer (if you are getting both dividends and a regular paycheque, all the better). That argument holds true with pension plans as well. History is littered with examples of companies that once appeared to be rock solid who later were bankrupted and ruined the pension savings of their constituents.

Trusting one’s retirement entirely to a single body is questionable practice. What if the pension plan is mismanaged? What if the company goes bankrupt? What if there is fraud? What if the pension plan changes the rules as to when you can retire? In return for the comfort of fancy brochures being mailed to you every now and then promising things will be okay, you risk everything by putting your hopes in the hands of one pension plan/company.

The added diversification of building your own pension plan in addition to the one you may be receiving at work may well save your financial life someday. Even if you’re confident in how things will be for you, it never does hurt to add some extra backup just in case.

Inflation Protection

Inflation is known as the hidden tax in the investment world. It is the silent theft that takes place every day as central banks print currency and the cost of goods go up. The debate is currently raging in the U.S. over whether to raise the minimum wage and by how much. The reason this is significant is because over the course of time it costs more to buy eggs, bread, milk, go to the movies, and do anything else that costs dollars and cents. If someone is living on a fixed income, inflation could put them in the poor house. Likewise, if a person receives no raise from work each year, they actually have received a pay decrease in real terms while still being paid the same amount in nominal terms (the dollar value you see on your paycheque)

Inflation protection is provided over time by quality companies which increase the prices of the products they sell and pass the profits on to shareholders in the form of rising dividends. As the investor reinvests those dividends over years while they are in the “building” stage for their personal pension plan, the returns are able to blossom. In retirement, the prudent investor is able to receive increased payments from their investments which allow them to not only keep pace, but actually beat the rate of inflation. Without any extra effort, the investor is able to continue purchasing all of the goods and services they require to live their life.

Just for two examples, at the time of writing I’ve recently read that Toronto-Dominion Bank (TD) has increased its dividend by 8.5% and BCE Inc. (BCE) has bumped theirs up by 5%. Receiving increases from my investments like these provides assurance that I will be doing just fine in retirement. Even as prices increase over time, I will still be able to purchase as much or more of the goods I use every single day.

Better Returns

Typical pension plans will pay out at around 60-70% of a contributor’s top-five earning years so long as they have the maximum required time contributing in the pension plan (often 25-30 years). Such pensions receive decades of payments from an individual who then winds up having to live on less in their supposed golden years. Working your whole life to have to skimp in retirement is ridiculous and so is the notion that your expenses will be significantly reduced at that time. Think about it: Unless you’re going to kick back on your armchair day in and day out for the remainder of your life, retirement is going to cost money; golf clubs/memberships, vacations/travel, desire to help out loved ones, these things all strain the pocketbook. The time you previously spent punching the clock at work becomes leisure time where money might be spent.

An individual investor who commits to a dividend growth investment strategy has the opportunity to build their own pension plan that, if managed effectively, should certainly be able to more than replace 60-70% of their income with 30 years worth of contributions and reinvested dividends.

In my personal case, I contribute to a defined benefit pension plan which is fully funded and which should provide a very solid income stream when I am ready to begin collecting (55 is the minimum retirement age). Nevertheless, I have seen enough pension plans go bust and enough people struggling to make due on the payouts from the pension plan to know that I am going to need more. As a result, I am currently doing as I suggest in this article, which is building my own pension plan to confidently achieve financial freedom.


The message here is simple: Why settle for the risk that comes along with a pension from one company when you can build your financial future with payments from thirty to forty companies? Why settle for a retirement of less when you have access to a future of increasing payments?

Building a pension plan for yourself is not only possible, it is actually easy if you start today. DGI provides the framework on which to build lifelong streams of income. It is accessible and has a proven track record throughout the stock market’s history.

Even if you already are set to earn a pension from your employment, what’s the harm in adding an extra layer of protection for yourself? There is never a bad time to get started down the DGI road.

Thank you for reading.


How do you feel about building your own pension with your personal investments?

Full Disclosure: Long TD, BCE

Pictures courtesy of pixabay.com


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