Building Your Own Pension Plan
The Problem of No Pension Benefits
Hannah’s Exciting Start
At 24, Hannah has just graduated with a master’s degree, specializing in Information Systems and Design. She’s landed a job in the tech sector in Toronto, earning a solid salary of $85,000 per year.
The Missing Piece
While the job pays well, Hannah quickly discovers that the position offers no pension benefits—no group RRSP with matching, no Defined Contribution (DC) pension plan, and no Defined Benefit (DB) pension plan. This was not unexpected given the industry she has chosen to work in. People in tech tend to move from job to job so employers tend to focus on salary over pensions. The extra compensation relieves employers of the extra administrative requirements of setting up a pension plan while giving employees the extra room to save on their own.
Unlike some of her peers in other industries who benefit from employer contributions, Hannah will have to, in effect, create her own pension plan if she wants to retire with any degree of confidence.
The Wake-Up Call
Hannah realizes that without a formal pension plan, the onus is on her to use that extra income to save for her retirement. She will need to be disciplined in her retirement saving strategy, ensuring she makes the most of the tax-advantaged options available to her.
The Complexity of DIY Pension Planning
Hannah begins her investigation of pension planning with a consideration of the Tax-Free Savings Account (TFSA). From her perspective, however, she decides that the TFSA is suboptimal. First of all, there is the matter of discipline. First, a TFSA can be withdrawn without tax implications whereas a withdrawal from an RRSP, except for two circumstances (withdrawals under the Home Buyers Plan [HBP] and the Lifelong Learning Plan [LLP]), results in tax withholding. Second, a withdrawal from a TFSA can be re-contributed as early as the following year. A withdrawal from an RRSP means the permanent loss of that contribution room, except in the cases of the HBP and LLP. Third, given Hannah’s combined federal and Ontario marginal tax rate of 29.65% (in 2025), and the likelihood of a lower marginal rate in retirement, she decided that the RRSP made more sense for her now. More than anything else, the relatively high cost of living in the Toronto area meant that she calculated that she could not contribute to both tax-advantaged accounts this early in her career. The TFSA was definitely on her mind, though.
Decoding RRSP Limits
While learning more about RRSPs, Hannah learns that she can contribute up to 18% of her earned income to an RRSP each year, with the unused amounts carried forward to future years if she does not take full advantage of her available room. High earners are capped at $32,490 in 2025, assuming no contribution room is being carried over from previous years. This means someone who has earned income of $180,500 or higher will be able to fully contribute the $32,490 ($180,500 x 18% = $32,490).
With her $85,000 salary, Hannah’s RRSP contribution limit is $15,300 (18% of $85,000). This would work out to a tax deduction of $4,536 ($15,300 x 29.65%) if Hannah were to max out her contribution room.
Comparing Herself to Peers with DC Plans
Many of Hannah’s friends with DC pension plans benefit from a matching arrangement between the employee and employer. A common arrangement is a 5% contribution from the employee plus a matching 5% employer contribution.
Given the RRSP maximum of 18%, even with this employer support, those friends can still contribute 8% more to their personal RRSPs. This calculation would be reflected in the Pension Adjustment (PA) shown on Hannah’s friends’ T4 slips. For example, if one of Hannah’s friends employed with a company offering a DC pension earned the same salary of $85,000 then a 5% employee + 5% employer contribution to the pension would result in a PA of $8,500. Since the RRSP contribution room limit of 18% or $15,300 on $85,000 of qualified earnings, a PA of $8,500 would mean room remained for another $6,800 in personal RRSP contributions, which works out to exactly 8% of $85,000. Most of her friends are not maxing out this extra 8%, however, as they, like Hannah herself, are still settling into a new job and paying off student loans as well as household setup costs.
Hannah recognizes that to be on par, she should aim to contribute at least 10% of her salary annually to her RRSP, essentially replicating the 5% + 5% arrangement offered via her friends’ DC plans, though ideally, she wants to get closer to the 18% maximum.
What to Invest In?
One of Hannah’s friends with a DC plan mentioned that his default investment, which he accepted, was to invest in a target date fund (TDF) with a retirement horizon of 2065, aligning with their expected mid-60s retirement age.
She discovers that funds with a 2065 “maturity” typically hold:
- 3%–6% in fixed income
- 94%–97% in globally diversified equities
Recognizing the simplicity and diversification of TDFs, Hannah considers this a good starting point for her own RRSP portfolio. She found a discount brokerage that doesn’t charge a commission for mutual funds and given the requirement for discount brokers to offer lower-cost F-class funds that do not embed an advice cost, she thinks she’s found a good arrangement for now. Hannah also likes the fact that she can set up automated contributions that will send the money directly from her bank account to invest in the fund inside her RRSP.
Feeling the Pressure
Hannah’s training in systems design is helpful but she acknowledges that saving for retirement is a complex undertaking. She has to decide how much to save, where to invest, and how to manage risk; it all feels quite daunting without the guidance of a default workplace plan.
A Realistic “DIY Pension” Strategy
Emulating a Defined Contribution (DC) Pension Plan
- Hannah decides to mimic the structure of a DC plan.
- She sets a goal to contribute 13% of her salary to her RRSP:
- $11,050 annually (13% of $85,000).
- This amount is equivalent to the 5% employee portion that goes into the example of her friend’s DC plan and the 8% in direct personal RRSP contributions. This exceeds the total her peers are contributing with their employer-sponsored pensions in total (employee + employer) but falls short of the full 18% contribution room available to her. Hannah commits to increasing her contributions by one percentage point each year for the next five years, anticipating that her salary increases will more than match her goal. Eventually, she expects to contribute enough to cover all her contribution room left over from previous years.
Investment Choice
- Hannah opts for a 2065 target date fund in her RRSP, providing:
- Automatic diversification across global stocks and fixed income in one fund; and,
- Gradual de-risking as she nears retirement, meaning she doesn’t need to think about adjusting her asset allocation as she gets older. It will be done for her.
Staying the Course
- Hannah commits to automating her contributions with regular deposits of $425 into her RRSP every two weeks on her payday.
- By automating contributions on this schedule, Hannah ensures consistency and eliminates the temptation to spend her paycheque before contributing to her retirement savings.
Envisioning a Future with Steady Retirement Income
Thinking Ahead
Even though she’s young, in her quest to understand more about how RRSPs work, Hannah is already considering how she will convert her RRSP into income during retirement.
She explores two main options:
Registered Retirement Income Fund (RRIF)
Hannah learns that in the year she turns 71, or earlier, she must decide about her RRSP assets. The most common choice among Canadians is to transfer their RRSP assets into a RRIF. Then, beginning the following year, she needs to withdraw a certain minimum amount based on her age and the value of her RRIF at the turn of the year. Following this formula means that her RRIF assets should last for the remainder of her life, although she can withdraw more if she wants. This will give Hannah flexibility and control over her funds.
The negative side of a RRIF is that if she withdraws too aggressively, Hannah runs the risk of outliving her savings, especially if her investments perform more poorly than expected. This risk is mitigated somewhat with income from a DC pension plan, which is commonly converted to a LIF (Life Income Fund) at retirement. Both RRIFs and LIFs have minimum amounts that must be withdrawn, but LIFs also impose a maximum annual payment that restricts the ability of the annuitant (the retiree or LIF owner) to wipe out their retirement savings too early.
With these issues in mind, Hannah realizes that she will have to do some careful planning for retirement spending.
RRIF + Annuity Combination
Wanting to mitigate the risk of running out of money in retirement, Hannah continues her research on retirement savings and income and learns about an annuity. It is essentially a way of converting her assets into the equivalent of a Defined Benefit pension plan. That is, when she gets to retirement, she can take a portion of her RRIF and use it to buy an annuity from an insurance company which will give her a guaranteed amount of income for the remainder of her life. Her two favourite books on this topic are Pensionize Your Nest Egg by Moshe Milevsky and Alexandra Macqueen and Retirement Income for Life by Frederick Vettese.
By keeping a significant portion of her RRIF in an investment portfolio, Hannah retains the flexibility to make changes to her income as needed and allows her assets to grow in the way an income stream from an annuity cannot.
This growth should not be taken lightly. While the risk of losing money is eliminated, an annuity runs the very real risk of not keeping up with inflation. Holding a significant portion in a portfolio that includes equities will give Hannah a better chance of maintaining her purchasing power.
Weighing Annuity Allocation
These realizations prompt Hannah to think about how much of her RRSP/RRIF should go into an annuity. She has heard ranges of 20% to 33.3% but it will depend very much on Hannah’s circumstances when she retires. If her salary has consistently enabled Hannah to maximize her CPP contributions, and she has eventually taken advantage of the TFSA as well as the RRSP, she may very well be at a point where an annuity provides a minimal advantage. Unsure of the right proportion, especially for a decision that probably lies 40 years into the future, Hannah anticipates revisiting this issue when the time is right.
The Confidence of a Self-Made Pension Plan
Hannah’s Smart Move
By taking the initiative to begin contributing 13% of her income to her RRSP, Hannah effectively recreates a DC pension plan for herself. She benefits from tax-deferred growth within her RRSP and a simple, diversified portfolio through a target date fund. Her consistency and foresight put Hannah on track for a secure retirement, despite the lack of employer pension benefits.
Key Takeaways
- Hannah’s story highlights the potential for you to build your own pension plan even without employer support.
- By taking the initiative with consistent contributions and smart investment choices, young professionals in tech and other non-pensioned fields can secure their financial future.
“If you, like Hannah, are in a job without a pension, it’s worth thinking about how to create your own. While it takes some planning and discipline, the rewards of a secure retirement make it well worth the effort. A financial planner can help you develop a strategy that fits your goals and ensures you’re making the most of your RRSP and other savings opportunities.”
This is the 283rd blog post for Russ Writes, first published on 2025-03-24.
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