How to Create Your Own Pension

By Matt Redshaw

Most people these days don’t have a guaranteed pension plan that will provide for all of their retirement income needs. So why don’t you go ahead and create your own pension plan? Now it may not technically be a pension, but it can function very similarly and provide for your retirement income needs. Here’s how you can do it:

Step 1 – How Much Income You Need in Retirement?

Of course we’d all like limitless income. But it’s helpful to get specific and realistic. If you earn $80,000 of income today, your goal might be to have 60% of this number in retirement - $48,000. Now we need to add inflation. If you want to retire in 25 years, then you’ll need $78,749 of income in 25 years to buy what $48,000 buys today (assuming 2% inflation). The formula to determine this future income need is $48,000 x 1.02^25 = $78,749. You can substitute your numbers into this formula to get to your own goal.

Step 2 – How Much Money Do You Need to Produce that Income?

Pension fund managers think about how much money they need in order to fund their future liabilities. You can think the same way about your own “pension” plan. How much money do you need to have in 25 years to sustainably provide $78,749 of income?

The Rule of 4% is a good rule of thumb. It assumes that you can sustainably draw 4% from a well-invested portfolio in retirement, with a high degree of confidence you won’t run out of money. It’s no guarantee, but it’s a good start and gives us a goal to shoot for. So our goal of $78,749 of future annual income is 4% of what number? The formula to figure that out is $78,749 ÷ 0.04 = $1,968,725. Let’s round that to $2 million. If you want half of this income in retirement, then your goal is $1 million. You get the picture. Substitute your own numbers into this equation and estimate your goal.

Step 3 – Maximize Time, Savings and Investment Return

Now that you have a goal, it’s time to figure out how you’ll get there.

At the Tycuda Group we say this all the time to our clients: there are only three things (apart from taxation, a subject for another time) that will affect your retirement outcome. How much time you give yourself, how much you save regularly, and how your investments perform. Increasing any of these variables will improve your outcome. Start as early as you can, contribute as much as you can, and invest intelligently.

Here is an illustration of one way to achieve the goal of having $2M in 25 years, starting with zero dollars today. If you increase one variable (such as rate of return or starting amount), the other variables don’t need to be as high. You may say “I can’t afford that much per month”. That’s OK, start where you are and grow. Doing something will put you in a better position than not getting going. Play around with the numbers for your plan, including time frame and rate of return, on this calculator


Starting Amount:



25 years


$2,000 per month
(growing at 2% per year)

Rate of Return:


Future Value:



Where Do I Go From Here?

There are a number of factors that can affect your outcome which I haven’t covered, such as the taxation of your investments, whether you invest inside registered or non-registered plans, and the actual returns you get on your portfolio to name a few. This three-step method is a not a substitute for in-depth financial planning; it is a way to get you started.

You may not have a gold-plated pension, but that doesn’t mean you can’t build your own plan. Not only will you enter retirement with more confidence, but you will retain flexibility in how you invest, manage and eventually withdraw your money. Why not take 5-10 minutes and create your own pension? I bet your future self, and those who will be around you, will thank you.