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By Matthew Ardrey
Special to the Financial Independence Hub
One of the greatest things I can do for my clients is to reassure them that they’ll be financially independent when they’re ready to retire. Unfortunately, not everyone meets their financial retirement goals. When they don’t, it’s often because they’ve made one or more of the five following mistakes:
1.) Not understanding your spending habits
Most people know what they earn and what they save, but have no idea what they spend. As you approach retirement and your ability to earn income is more limited, understanding what you spend and where you spend it becomes crucial.
Not knowing what you spend can lead to living beyond your means. Spending more than you earn can result in debt accumulation and, ultimately, reduced savings. Think of savings as fuel for your retirement; if you don’t have enough in the tank, you might not make it to your final destination.
2.) Carrying debt into retirement
A cornerstone of financial independence is being debt free. Debt payments, such as a mortgage, are often the largest single expense in a person’s budget. The more debt you have, the more payments you have, and thus, the higher your expenses.
To fund those expenses, you would typically use income. For many, there’s no income in retirement beyond government pensions, so the payments must be funded by savings. The more you owe, the more savings you need.
3.) Not considering the impact of investment returns and inflation
Most will fund a large portion of their retirement through their investment portfolio. The longer that portfolio needs to last you, the greater the impact changes in rates of return will have.
Consider, for example, $100,000 invested for 30 years at 4% versus 5%:
With a 4% return, the portfolio will be worth $324,300.
With a 5% return, the portfolio will be worth $432,200.
In this example, a difference of 1% in the rate of return translates into a portfolio that quadruples versus triples! Or, a difference of 1% in the rate of return translates into a difference of over $100,000 in the value of the portfolio.
Inflation works in much the same way. The higher the rate of inflation, the more your expenses will rise every year, and the more you will need to withdraw from your portfolio to fund those expenses. So pay attention to the returns you’re achieving after investing costs, how those stack up against the benchmark and if they are adequate when compared to the rising cost of living.
4.) Not balancing wants versus needs
There is a lot of pressure these days to “keep up with the Joneses.” Do you have the latest gadget, car or phone? Succumbing to this pressure to buy could derail your ability to achieve financial independence.
I’m not saying you shouldn’t enjoy life today and should save everything for tomorrow. What you should do though is create a balance so you can continue to enjoy life through all of its stages – instead of sacrificing one for the other. Consider your future savings as another fixed expense; or in other words, follow the old adage of “pay yourself first.”
5.) Failing to plan
This, by far, is the biggest mistake people make. If you have no plan, there’s no way you can know if you’re on track. Set your plan in place; then stick to it.
The sooner you put a plan in place, the better. If you wait too long, you may not have enough time to make the adjustments needed to achieve your goals. That being said, the best laid plans often encounter bumps in the road. If this happens, reevaluate how you will meet your goals. Review, revise and redeploy to get back on track.
Everyone has an idea of what they imagine life will be like when they stop working. Achieving financial independence begins with understanding your finances, and what you need to do to make that dream a reality. So I encourage you to take the first steps towards making your dream come true.
Matthew Ardrey is a Certified Financial Planner with T. E. Wealth. He can be reached at its Toronto offices here. He is also on Twitter as @MattArdreyCFP.
