By Olev Edur
Avoid these errors and enjoy the retirement you deserve.
Retirement planning is one of the most complex and important undertakings in most people’s lives. Numerous changes, both financial and psychological, take place as we enter our golden years, so it’s not surprising that people make mistakes, and these errors or oversights can have serious and costly consequences.
For the most part, though, you can avoid or largely mitigate these mistakes —and their adverse consequences— but to do that, you have to understand exactly what you intend to do once you’re retired and what it will take to get you there. Given the many factors that can be involved, professional advice can be more valuable in retirement planning than at any other time in your life.
To that end, Good Times reached out to a few seasoned financial advisors for guidance on the most common mistakes people make in preparing for retirement and what you can do to avoid them. Here is what they had to say about making sure your golden years are indeed golden.
1. Not creating a proper retirement plan
Our advisors were unanimous on this: you absolutely need to have a detailed and comprehensive plan if you expect to have a successful and comfortable retirement. “A lot of people don’t have a retire- ment plan, but everybody needs one,” says Jeet Dhillon, vice-president and senior portfolio manager at TD Wealth Private Investment Counsel in Toronto.
“Retirement now is very different from what it was in the days when everyone worked until age 65 and then retired with a company pension,” Dhillon says, adding that with our dramatically increased life expectancy, proper retirement planning has become much more important. “Re- tirement can be different for different people, so you need to put a personalized plan in place. What things do you want to do? For example, do you want to travel a lot? What are the financial implications? This is important —what resources will you need in order to do those things?”
Calvin Greefhorst, vice-president and regional director at BMO Private Wealth in Vancouver, says: “Your planning needs to go beyond just the finances, because failing to consider the other implications can reduce the joy you get out of retirement. You need to discuss your plan with your spouse, for example, because often in the case of married couples, each spouse may have a different idea of what retirement looks like. Do you both want to do a lot of travelling, or does one of you want to move to the cottage or to the country somewhere?”
Differences in how retirement is viewed need to be resolved in advance, Greefhorst adds. “If you think about this too late in the game, it can create problems and lead to stresses in the relationship.”
2. Not planning far enough in advance
Our advisors also agreed on the need for you to start your planning as soon as possible. “Not putting enough money away for retirement is definitely an issue with many people,” says Stephen Wiles, an Edward Jones financial advisor with almost 20 years of experience practising in Dartmouth, N.S. “You need to start early.”
“The sooner you start, the better off you’ll be,” Greefhorst agrees. “Once you’re retired, you may not have time to change your plans or to save enough money to do all the things you want to do. And it’s not just about money; It’s also about lifestyle. What does retirement look like to you? You need to consider these things early so you don’t have to worry when you’ve retired and it’s too late to change. You need to speak to a financial advisor before you retire—they have ex- perience in these matters and can think of all the things that need to be built into your planning.”
Because the average life expectancy is much longer than it was in the 1950s or ’60s, the amount of money you’ll need is considerably greater than it was in past. And this leads to the next common mistake.
3. Underestimating your retirement financial needs
All three advisors say that people aren’t always realistic about how much retirement will cost and end up with inadequate resources as they get older. “One of the biggest mistakes we see is people under- estimating how expensive retirement can be,” Greefhorst says. “It comes up over and over again. For example, you may want to do a lot of travelling, but travelling is very expensive, and it’s getting more so. Those costs aren’t always built into the retirement plan. You may need to buy a new vehicle — and some people may want a more expensive car or an SUV. It can be done, but it needs to be built into your planning early on so you have enough time to save. If you get to the point where you’re too close to retirement and realize ‘Oh, it’s all too expensive,’ then you need to make a choice between working longer —and that may not be possible —or prioritizing.”
“People often think they’ll need less money in retirement than they do now,” Dhillon says. “But in retirement you have more time to do the things you want, whether it’s travelling or buying more life- style products. You have to consider what your retirement looks like from day to day and what resources you’ll need.
“People often don’t think about what happens if they get sick or injured,” Dhillon adds. “You might need to move into a long-term- care facility at some point, and that can be hugely expensive. We often see this being overlooked. You need to build some contingency room into your retirement budget. Moreover, certain things —employer health and dental plans, for example— go away when you retire; how do you replace them? There are some insurance products available, such as long-term-care insurance, and that’s another area to be considered early on.”
Yet another concern has reared its head recently, and that’s inflation. While prices for most things have been relatively stable over the past 20-odd years (except, perhaps, for house prices), in recent months, we’ve begun to see inflation affect everything we buy, including food and travel. Even at a modest two per cent annual inflation rate, the price of everything will be 50 per cent higher in less than 20 years. At five per cent inflation, prices can double in 15 years.
“You have to be realistic—don’t automatically assume that retirement will be cheaper,” Dhillon cautions. “Do a budget and determine what expenses will go away and what will be added. Look at your lifestyle to- day and ask yourself ‘What will change? What will things really cost?’ We’re all living longer, so if you want to retire and expect to live a long time, use the most conservative estimates in determining whether your money is going to last.”
4. Not looking beyond your own retirement
Another issue that Greefhorst suggests is often overlooked is the need to consider not just your own interests but also how your plans will affect your loved ones. “It’s important in your retirement planning not to lose sight of other concerns, such as estate planning,” he says. “People often do not give enough thought to what happens when they pass on or when one spouse dies. You have to think about not only your own plans but also those you have made for a surviving spouse or the kids. How will they be looked after when you are gone? You need to think about things like your will and powers of attor- ney. Don’t limit yourself just to your own retirement plan.”
5. Being too dependent on external factors
“Another important point in planning is that you shouldn’t rely on external resources such as government pensions or inheritances,” Dhillon says. “People are living longer now, so, for example, what happens if they end up needing the money that you expected to inherit? Or maybe you won’t get the investment re- turns you thought you would. Your in- vestment income could be lower and your expenses could be higher, so you have to assume the worst -case scenario. If things turn out better, great. That will only improve your situation— think of it asgravy.
“The point is, you should use very conservative assumptions when it comes to your resources and build a lot of slack into the plan to account for things that will consume those resources,” Dhillon says. “For example, if the kids need your help, could you do that? Would you? Are you in a position to accommodate them? The key is not to rely on external resources; try to be self-sufficient.”
Greefhorst concurs: “Yes, there are some long-term -care options available through the government—for example, for those with low incomes— but it’s important to try to pay for these things yourself. There are social services available, but they may be limited and not as efficient as you might like.” In addition, they might not provide the quality of life that you had hoped for in your retirement.
6. Not prioritizing the TFSA
As a final suggestion, Wiles stresses the importance of prioritizing your use of the tax-free savings account (TFSA). These plans can be particularly valuable to most retirees because the proceeds will be tax- free in their entirety and won’t affect your entitlement to benefits such as the Guaranteed Income Supplement (GIS) should your own resources fall short.
“This is money that will be completely tax-free, but people don’t maximize the opportunity or they misuse the plan,” Wiles says. “You should put as much as you can into these plans and leave the money there to grow as long as possible. Many people treat the TFSA as a temporary bucket—they may put some money in but withdraw it in a few years, maybe to buy a new car.”
Wiles advises: “You should put as much as you can into a TFSA and don’t touch it until you need it. If you have money in an RRSP or a RRIF, use that money first. Don’t make big withdrawals —that may drive you into a high tax bracket —but take maybe $10,000 or $15,000 a year out, and, if you don’t need the money right away, put it into a TFSA if you still have contribution room left.”