Four Retirement Planning Mistakes to Avoid

Retirement is your time to enjoy everything you struggled to squeeze into your busy work life: travel, relaxation, hobbies, spending time with loved ones. While many of us are aware of the value of diligent saving over the course of our working lives, it’s easy to fall into spending habits or make uninformed decisions that don’t make the most financial sense for your golden years. This exciting period of your life is more likely to live up to its promise if you avoid these four common retirement planning mistakes:

1) Having no Retirement Plan

If you’re going on vacation, you plan. Without one, you won’t know how you’re going to get to your destination, where you’re going to stay, and how much it’ll cost you. Retirement is no different: you’re leaving many things up to chance without a clear plan. Some of the decisions you should make are:

• When you’re going to retire, and if you’re going to do it all at once, or transition more slowly.
• If you’re going to work part-time after you retire.
• Where do you plan to live—in your current home, at your cottage, or in a pied-a-terre in the city?
• Whether you want to travel after you retire and how extensively you plan to travel.
• What do you see yourself doing with your days—indulging in new activities, starting a renovation project, joining a club?

The decisions you make affect your retirement lifestyle, but more importantly, they’ll help you figure out how much money you’ll need to save for your retirement and how much of your income you can spend while you’re still working. Talk your plans over with your partner and schedule an appointment with your financial advisor so that you can work out the details together because the only thing left to chance should be your lottery ticket!

2) Starting to Save Later in Life

It’s easy to put off saving for retirement, but there are a few smart reasons to start saving when retirement is still a long way off:

• The earlier you start, the more interest your savings will earn for you over time. This interest will contribute to your retirement income, so it is worth your while to maximize it.
• Starting early means your savings will be spread out rather than being bunched up at the end of your career so that you won’t feel the pinch as much. This means making fewer lifestyle sacrifices while still having enough left from each paycheque to allocate to your savings.
• Parking your money in an RRSP defers some of your taxes. When you withdraw the money as a retiree, your income will be lower, and you’ll be taxed at a lower rate.

Having those tax savings in hand also means you can invest them and earn money for yourself throughout your working years. Here are some additional tips for smart retirement saving:

• Work with a financial advisor. Studies consistently reveal that investors who work with an advisor fare better financially than those who don’t. Your advisor will also help you adjust your investments to reflect your risk tolerance as you move closer to retirement.
• Increase the amount of your savings when you get a raise.
• Have your retirement savings deducted from your pay automatically so that you don’t have to remember to transfer the funds. Set it, forget it, and watch your retirement income grow!

3) Failing to Plan for an Emergency

There is never an ideal time for an emergency, but planning for them can make the situation a lot less of a burden on your bank account and state of mind! If you’re not prepared for that major roof repair or a costly medical procedure for a pet, you may have to tap into your retirement savings to cover the associated costs. What’s worse, taking money out of an investment or RRSP comes with additional charges, either in fees, increased taxes, or forgone revenue. To avoid this, set money aside in an asset that you can liquidate quickly, such as a TFSA or a redeemable term deposit.

Serious illness is similar in that it’s unexpected and can eat away at your hard-earned savings. Critical illness insurance is a way to prevent this from derailing your retirement savings plan by providing you and your family with financial support while you’re in recovery.

4) Neglecting Your Insurance Options

Life insurance should be part of your financial planning at all stages of your adult life, especially if you have dependents. Having life insurance in place helps ensure your final expenses will be covered and can provide your family with a safety net for any outstanding debts – like mortgage payments or credit card bills – you may leave behind.

Choosing the right life insurance can be a factor in how much money you have to allocate to your retirement savings. For example, term life insurance may only offer coverage over a set period. Still, it is an affordable alternative to whole life (permanent) insurance, and it may be perfectly suited to your needs.

For example, if you have a young family and want to make sure their education expenses will be covered if you pass away, you can invest in term life insurance coverage that ends after your children are expected to graduate from their post-secondary school of choice. The difference in the cost between a term plan and a permanent plan can then be invested in your retirement savings, growing over time.

Since insurance quotes tend to increase as you age, there is great value in assessing your insurance options while young and healthy rather than waiting until you are closer to your retirement years. This includes locking in a low rate for Critical Illness Insurance. This living benefit can go a long way to offset the costs of disability, critical illness, or the need for long-term care, protecting your retirement income.

Planning for retirement can be a daunting task, but starting early, recruiting the right help, and checking the boxes one at a time makes your goals more manageable. There’s no time like the present to get started on securing a bright and comfortable future.

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SOURCES:

• Choosing a financial advisor: https://www.canada.ca/en/financial-consumer-agency/services/savings-investments/choose-financial-advisor.html
• The Value of Financial Advice: https://cirano.qc.ca/files/publications/2016s-35.pdf