Since my 1980 start in the financial industry, I have had many clients retire only to realize a big disconnect between how they envisioned their retirement versus the assets that they have accumulated.
For most people, it is not just one mistake made over the years, but rather a multitude of poor financial decisions, many of which were implemented mid-life (from age 35 to 55).
The 15 most common reasons that financial health was negatively impacted:
#1 – Failing to make a plan or roadmap on how you will get to retirement
- While Gov’t Benefits like CPP & OAS provide a stable stream of pension income, unless you have an employer-sponsored retirement program, you better maximize RRSPs & TFSAs during your prime earning years!
#2 – Investing too little or too much in the wrong financial product
- If you are in the lowest tax bracket, maximizing your RRSP is of little value and may increase your tax liability in retirement.
#3 – Ignoring the Estate Planning Process
- Ensure proper beneficiary designation is on your RRSPs, TFSAs, and life insurance policies. Update your Will and include a Power of Attorney and Representation Agreement.
#4 – Thinking that inflation will always be in the 2% range through your retirement
- Ask anyone who lived through the late 1970s and early 1980s, inflation can be in the double digits.
#5 – Not having a traditional Disability Insurance or Critical Illness policy if you don’t have Group Benefits through your employer
- The risks of a long-term disability through accident, sickness, or a mental health condition are higher than the risks of premature death. This is even more important if you are self-employed.
#6 – Not locking in life insurance rates while you are young & healthy
- Unless you have zero debt and no future Capital Gains tax liability on your other investments, locking a rate in your ‘30’s or ‘40’s is a wise move. Every year I have clients in their 50’s & 60’s denied coverage because their health has changed.
#7 – Withdrawing RRSPs too early in life
- If you withdraw funds under the RRSP Home Buyer’s Plan or Lifelong Learning Program, ensure that you pay the money back, as by not doing so, your total portfolio at retirement may be negatively impacted.
#8 – Starting Gov’t Benefits like CPP & OAS too early
- While it is tempting to start CPP at age 60, if you are still working full time, you will pay a steep price in extra taxes plus the benefits are reduced for your lifetime.
#9 – Buying too many high-ticket items for your kids
- We all want what is best for our children but ensure that your purchases are within your budget. What kids need and what they want are entirely different subjects.
#10 – Avoiding having the “financial talk” with your parents
- Annually I have conversations with couples whose primary retirement plan is the inheritance they feel is around the corner. But what happens if the parent has major medical needs later in life or requires assisted living and the funds are now depleted?
- Another shocker for younger adults is when their parent remarries after the death or divorce of their spouse, and the new spouse is closer in age to them than the parent who remarried! That early inheritance may now be delayed by a few decades!
#11 – Not starting an RESP or “In Trust Account” for your children
- With the 20% free CESG grant money or the favourable tax treatment on In Trust Accounts, parents of young children miss out on a golden opportunity to create an education vehicle for them.
#12 – Being too passive with career changes and employment upgrades
- No one in life is going to advocate more for your career advancement than yourself. If you have the opportunity to upgrade your skills, knowledge, and career, take the time to think through the risk & reward scenario it offers.
#13 – Confusing Gambling with Investing
- Yes, I understand a friend of a friend of yours made thousands buying Bitcoin and other cryptocurrencies, but this is not investing – it’s gambling, and in all games of chance, the odds are against you!
#14 – Not understanding the tax advantages of Capital Gains & Dividend Income vs. interest income
- Passive fixed income returns from bonds, GICs, and mortgages are taxed more heavily than investments earning capital gains and dividend income.
#15 – Being “forced” into early retirement
- While it is natural to think we can pick our time for early retirement, the reality is many people are forced into retirement because of job loss.
- Another factor forcing one’s hand into early retirement is declining mental and physical health.
- Even with a healthy, active lifestyle, our age 65-year-old bodies are not the same as the ones we had in our 40’s.