Tag Archives: retirement planning

13 common and costly Retirement Planning Mistakes

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What is one common and costly retirement planning mistake to avoid? 

To help you avoid common and costly retirement planning mistakes, we asked financial planners and business leaders this question for their best advice. From not saving early on in life to poor tax planning, there are several retirement planning mistakes that you should be careful to avoid in order to build healthy financial security for your retirement.

Here are 13 common and costly retirement planning mistakes these leaders are mindful of:

  • Not Saving Early On in Life
  • Investing in Actively-Managed Funds With High Fees
  • Not Working a 401K to Your Full Advantage
  • Not Investing Your Savings
  • Not Planning for Health Care Cost
  • Investing Too Conservatively
  • Relying Only on 401K Savings
  • Retiring Too Soon
  • Carrying Debt into Retirement
  • Underestimating the Years You Live
  • Cashing Out Your 401K When Changing Employers
  • Withdrawing Early from Your 401k is a Major No-no
  • Poor Tax Planning

Not saving early on in Life

Your first dollar saved is your most important one. And whether you save that first dollar at 20 years old or 35 makes a huge difference because of compound interest. When compound interest is working FOR you, time is your best friend. Consider that with a 5% annual return, $1,000 grows to $5,516 in 35 years. Sounds pretty good, right? Well it gets better. That same $1,000 becomes $11,467 in 50, more than doubling in those last 15 years. So not saving early on in your life is a very costly mistake. — Paw Vej, Chief Operating Officer, Financer.com

Investing in Actively-Managed Funds with High Fees

Most people have good intentions when it comes to retirement. They put money into their 401K or IRA and don’t get cute with how they invest it, sensing that the diversification of mutual funds and ETFs is better than individual stocks and risky assets. However, one thing that is often overlooked is the drag that high management fees can have on a portfolio’s performance.

Actively-managed funds, including popular target date funds, have very high management fees, especially in comparison to low-cost index funds. And while the difference in fees may seem minuscule (often less than 1%), they can really add up. For example, for a normal retirement portfolio earning 4% per year, over the course of 20 years, when a fund has a 1% management fee versus no management fee, the total portfolio can be worth $50,000 less in the end. Just based on the drag of high fees! So make sure to watch for funds with hefty expense ratios – it’s a common trap. — John Ross,  Chief Executive Officer, Test Prep Insight

Not working a 401K to your Full Advantage

It’s unfortunate that many workers who participate in 401(k) plans either don’t take full advantage of an employer’s matching contributions or don’t increase their contributions when their income increases. The reticence to increase contributions is understandable given inflation putting stress on short-term purchasing needs, and making it even more difficult to pay attention to long-term goals. But not bringing your 401(k) up to the percentage of your employer’s matching contribution means you’re missing out on free money. And instead of falling victim to lifestyle creep whenever you get a raise, allocate the increase or a portion of it to your 401(k) to better secure your future. 

There are several ways you can save on short-term purchases so you have the funds to increase your 401(k). This includes curtailing or eliminating unnecessary expenses from your budget, comparison-shopping on large outlays such as car and home insurance, and lobbying creditors for a lower interest rate. –– Karen Condor, Insurance Copywriter, ExpertInsuranceReviews.com

Not Investing your Savings

Don’t keep your money sitting in a savings account. Instead, the best way to manage your savings and plan for retirement is to invest this money in an index fund that tracks the S&P 500. You’ll earn interest on your money in the market, whereas when your money sits stagnant in a savings account, you’re actually losing out on money due to inflation. — Cesar Cruz, Co-Founder, Sebastian Cruz Couture

Withdrawing Early from your 401k

Cashing out your savings early. If you have money in a retirement plan like a 401K, taking out cash can have a major impact on your long-term savings. In addition to the penalties, taxes and fees you’ll pay for the withdrawal, you also lose out on compounding interest. Depending on how old you are, how much you withdraw and various market factors, this could end up costing you big time. Whenever possible, avoid withdrawing from your retirement savings unless you have a true need that you can’t cover in other ways.

— Vimla Black Gupta, Co-Founder & CEO, Ourself

Not Planning for Health Care Cost

There is an old saying “Disasters and diseases come without asking.” Therefore, health care costs are a huge expense that increases as you age. And it’s almost impossible to calculate, but if you want to live in peace for the rest of your life, this expense has to be saved separately. And consider it important in your retirement planning. But many people think that as healthy as they are now, they will remain the same in the future, and do not pay attention to the health care cost. With the passage of time, they realize how important it is to include health care costs in retirement planning. But at that time, they can’t do anything. Therefore, avoiding all these difficulties, including health care costs, is important in your retirement planning. — Kenny Kline, President & Financial Lead, BarBend

Investing too Conservatively

Investing too conservatively is a common retirement planning mistake. Many people are afraid of losing money, so they invest only in low-risk options, such as savings accounts or government bonds. While these investments are safe, they don’t offer the potential for high returns that you will need to reach your retirement goals. To reach your goals, you need to invest in a mixed bag of assets, including stocks, which have the potential for higher returns but also come with more risk. Working with a financial advisor can help you create an investment portfolio that meets your needs and helps you reach your goals. — Danielle Bedford, Head of Marketing, Coople

Relying only on 401K Savings

People who sign up for 401K benefits think they’re doing all they can to prepare for retirement. Don’t be too reliant on such a thing because that income stream can come to a screeching halt as a result of being laid off — or worse, as a result of nefarious business practices. It may seem like an extreme example, but ask any former Enron employee how their 401K investments turned out. You need more than what your company offers as far as retirement preparation, so seek out additional ways to save money for your future retirement. Find low-risk investments. Turn to random rewards banking. Own a rental property and set aside that income stream for your distant future. Don’t just rely on one source for retirement savings, because if it dries up or explodes on you, you’ll have nothing. — Trevor Ford, Head of Growth, Yotta

Retiring too Soon

Retiring too soon is a common and costly retirement planning mistake to avoid. Continuing to work for a few more years can increase your retirement income by up to one-third. The average retirement age for most people, according to the Social Security Administration, is between 66 and 67, but many Americans don’t wait that long. Working until your full retirement age will help you avoid the Social Security benefit reductions for early filing. You can continue to make contributions to your retirement savings plan at the same time, creating additional balances that can be used to make market investments. 

Retirement entails leaving a full-time job or career that a person has held for a long time. There are numerous options, such as working part-time in your current job or career; beginning a new job or career, part-time or full-time; working as a bridge job for a few years until full-time retirement; working for yourself or owning a business; or volunteering for a cause you care about. — Raviraj Hegde, Head of Growth, Donorbox

Continue Reading…

Is it ever too early to start thinking about Retirement Income Planning?

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By Ian Moyer,

Co-founder & President of Cascades

(Sponsor Content)

We normally think about it in the few years leading up to the “Retirement Date,” but should we be crunching the numbers at other times?

The short answer is yes and here is when: preceding a change in career or a shift to part time, following a large increase or decrease in annual income. You may also wish to take the measure of a move from salary to self-employment, or upon the death of a spouse or following a divorce.

It is important to keep in mind the difference between Retirement Planning — the amount of money you will have accumulated by a specific retirement date — and Retirement Income Planning, which is the income that you will derive from that accumulated cash. Those are the numbers that really matter and represent the income you will want to live on (and sustainably so) for the rest of your life.

The following commentary is from a user of Cascades software and highlights her specific number-crunching situation:

I am currently in my early fifties, but I had already been worrying for several years about how much I needed for my retirement and how best to plan for it. As academics, we often assume our pension is sufficient: if we are even tenured, as many of us are not; if we have been working at a decent salary for many years, as many of us have not; and if we have been taught to think about or plan for retirement, as most of us have not.

As I spoke to my colleagues, I began to realize that the problem of not planning was widespread. One colleague (and friend) told me she did not even know what an RRSP was. Another colleague and friend revealed she never considered saving money in a TFSA. Still another had no idea what her pension was because she had worked at four different Universities, and so her pensionable earnings were scattered across these institutions.

Going to the bank to gain some insight and assistance was not much better. The bank, one of the largest in Canada and the one with which I have dealt since I was eighteen years of age, could not have been more disappointing. Most institutions are comfortable taking your money to invest it, but they are considerably less interested in helping you plan what to do with it. It’s not just an egregious oversight, it’s bad customer service. So, the bank with which I work did some preliminary planning, but it was largely unsatisfactory. How would I know how much I would have upon retirement? What were the sources of income I could rely on? How long would the money I saved support me? I still had no idea. Continue Reading…

Retirement Planning for Gen Xers: Build Wealth and Retire Happy

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Image Lowrie Financial

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Are you a Gen Xer? Not quite a baby boomer, but too, ahem, mature to be a millennial? If you are in your 40s to mid-50s, your family financial planning has probably been on a wild ride lately. You may be wondering if you’ll ever get to retire with any wealth left to spend.

As we covered in “Retirement Planning for Baby Boomers”, you should also be incorporating retirement planning into your holistic financial planning. And, no, “I’ll just work forever” doesn’t count for peace of mind planning. Let’s take a look at what Gen X retirement planning looks like for many families.

Gen X Retirement Planning Essentials: Saving, Spending, and Investing

Whether you’re planning to fund your retirement or any other major life goal, the essentials aren’t so complicated. I’m reminded of a joke I heard a while back:

There was this guy, Joe, who dreamed of winning the lottery, so he prayed every day that he would. As time passed with no luck, his prayers grew more fervent. One day, he finally asked, “God, can you even hear me?” Lo, the heavens parted and he received his reply: “Joe, help me out here … Buy a lottery ticket!”

So it goes with planning for retirement, or any other short-term or long-term financial goals. Skip the obvious, and you’re unlikely to get very far.

Many Gen X families I meet come to me anxious to learn how to best invest their savings and make money in the market. This is important, and we can definitely help with that, as I’ll touch on below. But first, consider this from “The Psychology of Money” author Morgan Housel:

“Since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.”

In other words, despite all the speculative, FOMO (fear of missing out) investing hype you may be tempted to follow in the popular financial press, don’t lose sight of FIRST setting aside money today to build wealth for tomorrow. Consistently spending less than you’re earning (without piling up high-interest debt to do so) goes hand in hand with saving. THEN comes investing.

Gen X Retirement Planning Challenges

These retirement planning essentials aren’t complicated. But they’re often much easier said than done, given the hurdles that often stand in the way. You probably don’t need me to tell you about the Gen X-style financial challenges you and your family are grappling with. But I will anyway. You’re welcome. 😊

When you were new to adulthood, financial planning was simple. You were single, no dependents. Your job didn’t pay much, but you figured you were destined for greatness. Other than college debt, you had few demands on your income. Maybe your parents were even pitching in. If you decided to move, you and a few buddies could transport everything you owned in a rental van, and still have time left for pizza and brew at the end of the day.

That doesn’t seem so long ago. But now you’re in your 40s or 50s, and “simple” has become a distant memory. These days, you’re juggling your own short-term and long-term financial goals; your parents’ needs; your kids’ wants; Toronto-area housing challenges; and, oh yes, that little career-crushing pandemic. Plus, your youthful vigor isn’t quite what it used to be. As the late, great comedienne Joan Rivers once said, “You know you’ve reached middle age when you’re cautioned to slow down by your doctor, instead of by the police.”

I get that it’s hard to incorporate retirement planning into all of the above. Relative to your here-and-now financial needs, retirement probably feels too distant and too daunting to tackle today.

But take heart. You can actually use that distance between now and retirement as a force for good … your good. If you can include even a few retirement planning best practices into your life, they should have a larger-than-life impact on your family financial planning.

What are some of your power moves? Read on.

A Gen X Edge: The Power of Compound Returns

As a Gen X family, you should still have decades between you and your ideal retirement. So, perhaps counterintuitively, you get to routinely set aside less if you start saving more right away.

The extra time you’ve got gives you the luxury of benefiting from compounding returns. That means you can snowball more returns on the returns you’re already receiving—and so on, and so forth. Bottom line, the more you manage to save, and the sooner you get started, the more likely your investment portfolio will have what it takes to come through for you in retirement. Continue Reading…

Retirement Planning for Baby Boomers: Getting ready to Retire comfortably

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Lowrie Financial/Unsplash

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Are you a baby boomer with retirement planning on your mind? If you’re among the surge of citizens born in a large urban center like Toronto and across North America during the 20ish years after World War II, you may be noticing a different sort of booming sound lately. Can you hear it? It’s the drum beat of your retirement, fast approaching … or arrived.

Search the Internet for “Retirement Planning Toronto” and you’re likely to see a lot of fear out there, along with plenty of headline-grabbing stats on how ill-prepared many boomers are to retire. Before you let consumer-wide stats consume you, remember: Numbers don’t necessarily lie, but they can deceive.

As a personal financial advisor, I help families successfully prepare for retirement and other life transitions by emphasizing the planning part of retirement planning. Following are some of the most frequent topics of conversation I’ve found key to achieving your short- and long-term financial goals in retirement.

Family Retirement Planning: What Will It Really Cost?

If you’re like most folks getting serious about retirement planning, it may feel like a huge, angry gorilla is standing between you and your ideal lifestyle over the next 20–30+ years. One way to take on a hairy obstacle is to state the obvious about it, and consider your options from there:

Steve’s Retirement Planning Observations

Before you retire: In a perfect world, you’ve been earning an amazing income, spending well within your means, and maxing out your registered investment accounts your entire life. But let’s get real. Most of us have earned some income, avoided most debt, and accumulated some assets along the way.

After you retire: You no longer have a salary to draw on. Even if you continue to tinker part-time, any earned income is likely to be greatly reduced (and should probably be positioned to avoid unpleasant OAS clawbacks).

Time travel: No matter what you’ve accomplished so far, there’s no going back to seize any past, passed-up opportunities.

Peace of Mind Planning

So, what can we do about your personal retirement realities? Robust retirement planning helps you quantify what you’re facing and qualify how we’re going to address it. In this sense, retirement planning may be better described as peace of mind planning. At least half the battle is getting your mind wrapped around the nature of the beast, so you can make informed decisions about how to tame it.

A financial needs analysis quantifies what your retirement might look like:

Income expectations: How much can you expect to receive from which outside sources? Possibilities include government or corporate pensions and benefits, proceeds from selling your business, a spouse’s continued salary, part-time employment, etc.

Spending goals: How much do you expect to spend in retirement? Estimate numbers for early retirement, when you may still be more active and independent, as well as for once you may be slowing down and requiring more care. Organize your expenses by needs and then wants.

The gap: Usually, you’ll discover a gap between your income and spending expectations. As long as it’s a manageable amount, you’ll bridge it by taking a “salary” from your taxable and registered investment accounts. After all, that’s what they’re there for. The goal is to draw a tax-efficient income stream from your total portfolio, while leaving the rest to grow as planned for funding future needs. (Hint: A personal financial advisor can add a lot of value here.)

Balancing Spending/Earning Trade-Offs

Has your initial financial needs analysis revealed ample accumulated wealth to bridge any savings/spending gap? Congratulations, you’re retirement-ready! You may even be able to add more “wants” to your spending plans.

But what if the financial needs analysis has demonstrated that your gap is too wide to leap? We can usually help families identify a combination of trade-offs they can mix and match to shore up their retirement funding. While belt-tightening is never fun — and, alas, there is no magic money wand to wave around — these no-nonsense steps can pack a lot more power than you might think:

Working more: You may be able to transition out of the workforce more gradually than planned, seek a higher-paying position, or consider a second source of income such as consulting or participating in the gig economy.

Spending less: Can you vacation closer to home, dine out less lavishly, or downsize to more modest quarters? Maybe you wouldn’t mind selling that cottage you rarely visit, ditching that second car, or canceling a languishing membership or two. If you’ve not yet got a household budget, create one; take a month or so to watch your spending: all of it. This will help you identify excess expenses you may not even miss once they’re gone.

Digging out of debt: If you’ve been spending beyond your means, you may have accumulated high-interest debt over the years, or you may be considering doing so to bridge that widening gap. Unfortunately, this form of “bad” debt only aggravates the issue. If you’re carrying heavy debt, work with a reputable personal financial advisor or debt counselor to lighten the load.

Saving/investing more: Even as you approach or enter retirement, the more money you can direct into your investment accounts, the more leverage you’ll have over time. Depending on your time horizon, you may also be able to restructure your investment portfolio to take on more market risk in pursuit of higher expected long-term returns. Or you might consider converting a portion of your wealth into the equivalent of a personalized pension plan to reliably fund your retirement lifestyle. (An important trade-off here is you’re likely leaving less legacy for your heirs. Perhaps you could offset this by considering long-term care coverage, to minimize the chance you’ll be a financial burden as you age.)

What About Real Estate?

With today’s red-hot real estate market (especially in Toronto and other major hubs in Canada), most retirement planning ends up including a conversation about housing. So, let’s talk about that before we wrap. Continue Reading…

RRSP holdings on the rise even as investor knowledge about them falls

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A seemingly contradictory finding about RRSP trends was uncovered by BMO Financial Group’s latest  (its 11th) annual RRSP survey, released Wednesday. While the average RRSP balance rose to $112,295 — up 3.3% over $111,929 in 2019 and 41% more than $79,492 in 2015 — at the same time Canadians’ knowledge of the benefits and features of RRSPs has fallen since 2015. And women are 18% less likely to know how much they’ll need to retire.

This comes after a pandemic year in which 12% did not contribute at all, resulting in a a 15.5% decrease in overall contribution amounts since 2019; even so contribution amounts for this year are 15.8% higher than the survey found in 2018.

The BMO RRSP Survey was conducted by Pollara Strategic Insights via an online survey of 1,500 adult Canadians  between Nov. 17th and 23rd, 2020.

Robert Armstrong

In a press release, BMO Global Asset Management Director Robert Armstrong said investors need to consider long-term factors like increasing cost of living and longer average life expectancies when planning for retirement: “With these challenges in mind, it’s encouraging to see a national increase in RRSP holding amounts.”

What’s discouraging is that while most regard RRSPs as effective retirement planning vehicles, knowledge about them has steadily declined over the last five years:

  • 71% know how to contribute to an RRSP, an 8% decrease from 2015
  • 61% know the RRSP contribution limit, but the percentage who know this has fallen 12% since 2015. (The RRSP contribution limit for 2020 is $27,230, or 18% of investors’ annual income: whichever is less. Any unused contribution room from previous years is also carried forward.)
  • Only half are aware of what investments are eligible to be held in RRSPs, a 10% decrease from 2015 and only 44%  are aware that RRSPs can hold ETFs, while 79% know that RRSPs can hold mutual fund. (Holdings can include: mutual funds, cash, GICs, stocks, bonds and ETFs.)

Because of the inherent complexities of RRSPs, Armstrong suggests professional advice is valuable to help investors meet their long-term financial goals.

Gender gap

 The study also found a gender gap in retirement planning and RRSP knowledge:

  • Among those surveyed, women are 9%  less likely to know how to contribute to an RRSP and 10%  less likely to know the difference between RRSPs and TFSAs compared to men
  • Only 62% of women know the RRSP contribution deadline (the deadline for this year is March 1, 2021) and 55% know how much they can contribute to the account, compared to 70% and 67% of men, respectively
  • Only 41% of women know which investments can be held within an RRSP
  • Women are 18% less confident than men in their retirement plans, and 18% less likely to know how much money they will need for retirement
  • Women were more likely than men not to be contributing to their RRSPs this year because of pandemic-related reasons (15% versus 9%)
  • Women are less likely to have withdrawn funds from their RRSPs before the age of 71, with 25% having done so compared to 31% of men

BMO has several programs aimed at helping women build their investing confidence:

  • BMOforWomen.com is regularly updated with content to help inspire financial confidence
  • The podcast Bold(h)er podcast features inspiring stories of women making bold moves in their careers and businesses
  • BMO investment professionals provided access to online training to promote and engage women investors and business owners in tailored, goals-based conversations

For personalized advice on meeting financial goals in general, see www.bmo.com/myplan. For RRSP information in particular, visit www.bmo.com/rrsp/.