Retirement planning used to be a lot easier. You worked your whole life for the same company and retired at age 65 with a gold watch and a company pension.
Today it’s more complicated. Most people will change employers many times over the course of their career or work for themselves at some point.
At the same time, life expectancy is increasing. On one hand, that means more retirement years to enjoy. But the flipside is that you also have more retirement years to fund.
So just how do you plan for retirement? A good place to start is to know what not to do. Here are seven common retirement planning mistakes along with tips on how to avoid them.
1. Expecting the government to look after you
If you’ve lived and worked most of your life in Canada, you’re probably counting on getting government benefits in your golden years. There are three different pensions you may be eligible for: Old Age Security (OAS), Canada/Quebec Pension Plan (CPP/QPP) and the Guaranteed Income Supplement (GIS). The problem is that even if you qualify for all three, the benefits amount to less than $24,000 per person per year.
Depending on where you live, that might not be enough to cover your expenses for housing and food.
Retirement planning considerations: So what can you do to beef up your income in retirement? It’s simple, really. Start saving. Now. Understand what you already have — in your company pension, Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs) and personal savings. Will that be enough to retire when and how you want?
If the answer is no, then you may want to make some adjustments. Saving a little bit more each month will help beef up your retirement nest egg. You might also choose to postpone your retirement date by a year or two or consider partial retirement where you still earn a bit.
2. Counting on an inheritance
We’ve all seen the headlines talking about the “trillion-dollar wealth transfer” from the baby-boom generation to their children and grandchildren. And maybe you have parents or in-laws who are older, who own their own home and maybe a family cottage, along with bank accounts, investments and more.
To trot out an old cliché, don’t count your chickens before they’re hatched. If your parents are comfortable financially, that’s great. But you may or may not get an inheritance in the future. Your parents may need most or all of their money for themselves, especially if their health declines and they need assistance at home or in a care facility. Remember, too, that family dynamics are more complicated today than in the past. Your parents may direct that their belongings be used to support children from a previous union, a former spouse or their favourite charity.
Retirement planning considerations: First, don’t factor in any inheritance into your retirement planning calculations. If you do get one, that’s great, Just don’t count on it.
Second, talk to your parents about their situation. This can be an uncomfortable conversation. Many families find it more difficult to talk about money than they do about personal relationships. But you need to know that they’ve thought about the future and have a plan for at least meeting their own needs. Otherwise, you might find them relying on you just when you’re looking forward to your own well-earned retirement.
3. Not having an estate plan
It’s not just your parents who need to think about the “what-ifs” of the future — so do you. In particular, you’ll want to take steps to preserve and protect everything that you’ve worked hard to build for yourself and your family. For that, you need a will along with powers of attorney for property and healthcare. Together, these form the foundation of your estate plan.
Retirement planning considerations: You don’t have to be rich to need an estate plan. At the very least, you should have a will outlining who inherits your belongings and naming an executor (the person you choose to administer your estate). Your will is a powerful tool for helping to safeguard the future for your loved ones.
If you don’t already have an estate plan, reach out to a legal professional for guidance on writing your will, choosing an executor and putting together an effective plan. The same applies if you have a will but haven’t updated it in a long time. Things change over time, and you may want to add beneficiaries or choose a different executor if the person you originally selected is no longer available or appropriate.
4. Not accounting for healthcare costs
Once you leave the workforce, the cost of prescriptions, eyeglasses, physiotherapy and so on may no longer be covered by an employment-based group benefits plan. And while the government does cover the cost of some medications for seniors, there’s a lot more that isn’t covered.
Retirement planning considerations: If you have group benefits at work that cover healthcare, you can often take them with you when you retire, by switching to a standalone policy. Manulife’s FollowMeTM Health and Dental Insurance, for example, offers guaranteed acceptance provided you apply within 90 days of the end of your group benefits.* The coverage may not be exactly the same as you had before, and you’ll need to pay the premiums out of your own pocket, but it can be a cost-effective way to help ensure you can afford the healthcare you need.
5. Forgetting about inflation
For many years, inflation in Canada has been near record lows. In 2019, it stood at 1.9% for the year. But it hasn’t always been that way. The average annual rate of inflation in 1981, for example, was more than 12%. At that rate, a cart of groceries costing $120 today would cost more than $370 in 10 years.
The bottom line is that when you’re living on a fixed income, any increase in the cost of living can be very serious.
Retirement planning considerations: Of course, there’s not much you can do on your own to control inflation. But you can take steps to protect yourself, and the first one is to put your money to work. At today’s low interest rates, money that’s sitting in a bank account may not be earning enough to see you through your retirement. Talk to an investment advisor about where to invest your cash so that it has the potential to earn higher returns at a risk level that you’re comfortable with.
6. Paying more tax than you need to
The very foundation of retirement planning is setting aside money today to support yourself in the future. But sources of retirement income are subject to different taxation. Strategically planning how and when to make withdrawals can help minimize the tax bite and maximize your cash flow.
Retirement planning considerations: When it comes to retirement planning in Canada, the two most important savings options are the RRSP and the TFSA. Both plans allow your contributions to grow tax-free within the plan, but there’s a big difference between the two when it comes to getting your money out.
Withdrawals from your RRSP or Registered Retirement Income Fund (RRIF) are taxable at your marginal tax rate (MTR). That’s because contributions to your RRSP are made with pre-tax income and you get a tax deduction in the year of contribution. How much tax you pay on these withrawals will depend on your total income from all sources. The higher your MTR, the less you keep of your withdrawal. If your MTR is 35%, for example, and you take $20,000 out of your RRSP or RRIF, $7,000 will go to the government in taxes.
Withdrawals from your TFSA, on the other hand, are tax-free. That’s because your contributions are made with after-tax income and don’t give you a tax deduction. If you take out $20,000, you keep all of it. In addition, TFSA withdrawals don’t count as income, so they won’t affect your MTR or eligibiliy for income-tested government benefits like OAS.
7. Not being realistic
What’s your retirement vision — sailing around the world? Spending winters in the Caribbean? If you have high-ticket items like this in mind, you also need to know just how much they’ll cost and how much you need to save now to fulfil your vision.
Most of us probably have a retirement vision that’s not so grand. Perhaps your goal is simply to hang out at home, spend time with the grandkids and maybe do a little golfing.
Retirement planning considerations: A lot of the retirement calculators you find online assume that you’ll be spending less in retirement so you’ll need less income than you do today. But that isn’t always the case. It’s up to you to decide what your retirement will be. Look at your current budget and think — realistically — about what will change when you retire. Some costs may go down, but others might go up.
Whatever your vision, there is a cost associated with it. You need to understand what that cost is today and estimate what it’s likely to be when you retire. If there’s a gap between what you want and what you’ll be able to afford, you have two choices: You can either dial back what you want or dial up your savings so you can afford it.
Embrace your future
Retirement is the next great stage in your life, and it can be just as fulfilling and exciting as your younger years. It’s your opportunity to do what you want when you want, whether that means relaxing at home, travelling the world or reinventing yourself in a new career. By focusing on retirement planning now, you can feel more confident about fulfiling your vision, whatever it may be.
* FollowMe™ Health Plans are not intended to – and will not – provide the exact same coverage that you may have had under your group or existing health insurance plan. Guaranteed acceptance upon meeting the eligibility criteria and receipt of first premium payment. See full policy for details.
The information in this article is not to be relied upon as legal, tax, financial, investment advice for specific situations. Please seek advice from a tax professional.
Sources:
Statistics Canada “Life expectancy”
Government of Canada “ CPP retirement pension: How much you could receive”
MoneySense “Plannin for retirement with little or no savings to draw on”