Does My Pension Make Me A Better Investor?

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Having access to a workplace pension has made me a more aggressive investor

According to research by Statistics Canada, workers who participate in a workplace pension plan also have a better return on their investments outside the pension.

The research found that investors who participate in a workplace pension had between a 0.5%-1.25% higher annual return on their personal investments compared to investors who did not participate in a workplace pension.

Why might this be?

There are two significant factors at play

  1. Having a pension causes us to think about retirement and saving earlier in life and;
  2. Having a pension allows us to become more aggressive with our investments outside the pension

Thinking about Retirement

The logic here is quite simple. The earlier you start thinking about retirement, the earlier you will start saving for retirement. Anyone who’s ever participated in a workplace pension will know that your employer will constantly distribute information about the pension and retirement planning in general.

  • You’ll get annual pension statements that detail how much you contributed to the pension that year
  • How much your employer contributed to the pension that year
  • How the assets in your pension are invested and their annual return
  • How much money you might expect to have
  • Your expected retirement age

While all of these are important things to know, I think having your expected retirement age written down on a piece of paper will motivate people to start thinking about their retirement.

One of my personal motivating factors to seriously increase my savings rate was when I saw that my expected retirement age (with a full pension) was 65 and my wife’s expected retirement age was 55.

The idea of starting my retirement a decade after her filled me with anxiety.

If I wanted to retire at the same time as my wife, I would need to begin saving and investing in a serious way.

Investing Aggressively

Having access to a pension plan, particularly a Defined Benefit pension plan provides that person a “floor” when it comes to their retirement income. Having access to that floor allows that person to be more aggressive with their personal investments because even if the market tanks, they will have access to their pension income.

I was 28 at the time I realized my wife’s pension would allow her to retire at age 55 while my pension would allow me to retire at 65. I realized if I wanted to retire on the same day as my wife, I would need to make up for 10 years of lost pension income.

I had 27 years before I turned 55 so that task, while difficult was certainly achievable. I simply needed to save as much as I possibly could every month and invest aggressively.

Given my timeline to retirement and risk preferences that meant I started investing all of my personal retirement savings into the stock market.

Having access to a workplace pension has made me a more aggressive investor. I am not convinced that has made me a “better” investor, but it does raise my expected return on investment over the long term as risky assets such as stocks generally outperform less risky assets over long time horizons.

If I am a “good” investor, it is because I am a disciplined investor. I have the self-awareness to know that over the long term I will not be able to beat the market by picking stocks.

I also know that Mutual Fund Managers are unlikely to beat the market enough to cover their fees.

Knowing these facts, I stick to investing in an S&P 500 Index fund and a balanced Index fund of international stocks.

The only variable I must think about is increasing my savings rate as much as possible.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.