Looking forward to retiring? Here are 5 things most people think are true, that aren’t!
It is crucial to have a good retirement plan and you must undo these false beliefs. We all need to have peace of mind and trust that our money will last throughout our retired life, while giving us the standard of living we want and need.
In order to get there, it’s very important to have a solid financial plan as well as dependable advice. Myths about retirement planning can have a negative impact on your retired life. Here are the most popular ones and the reality that lies behind them.
When I retire, my cost of living will be lower
Most people believe that their income needs will be much lower once they stop working. It’s true that they won’t have those commuting costs or need to make mortgage payments. Really? Are you sure about that?
It is suggested to plan to have as much as 80% of your working income during your retired life. In fact, more if you want to travel the world, go out more, take up an expensive hobby, etc. Remember that now, everyday will be the weekend!
Other factors can also have an impact on your retirement money. For example, plenty of Canadians have debt in retirement. According to Stats Canada 14% still have a mortgage and 42% have some kind of debt. Managing debt in retirement will have an impact on your disposable income.
Also, if you have any, how old are your kids? Are they still living at home? Are you putting them through university? Are you helping them make a down payment on their first house? Are you going through a divorce/separation and have to split the family income?
Then, you have higher life expectancy. As we grow older, we are more likely to develop health problems. Depending where you live, you might not have easy access to prescription drugs, medical equipment, hospitalization, dental treatment, physiotherapy, osteopathy, etc. And that’s not counting for significant costs if you need in-home care or have to move to a care home. Or even renovations to make your home more accessible if you end up having mobility issues!
I only need RRSPs in my retirement plan
This is a potentially harmful retirement myth. While RRSPs undoubtedly provide a very tax-efficient way of investing for retirement, they are only one piece of the puzzle. A comprehensive retirement plan will also consider numerous income sources, such as:
- Canada Pension Plan/Quebec Pension Plan (CPP/QPP)
- Old Age Security (OAS)
- Company pensions
- Tax-Free Savings Accounts (TFSAs)
- Dividends and other income from non-registered investments
- Rental income from investment properties
Most people will count on several of these income sources, not only to give them a comfortable retirement but also to provide the flexibility to be as tax efficient as possible when withdrawing the money.
TFSAs, for example, are a particularly flexible and tax-efficient way of saving for retirement. All the returns made over time are tax free, and they can be used in retirement to help you maintain a consistent income at the lowest tax bracket possible.
Last but not least, an investment plan is not a retirement plan. RRSPs are one part of an investment plan, but a real retirement plan also includes estate planning, life insurance and tax efficiencies.
I can retire comfortably with $1,000,000
This has been a looooong-running myth about retirement. The magic number to secure my retirement. However, everybody is different and has different needs and means!
If you withdraw 4% of that million per year in retirement (a commonly used percentage to ensure you don’t run out of money) you’ll have $40,000 annually. When combined with other sources of income, this number can be too much or too little for different people.
Key issues you need to take into account
- When will you retire? An income of $40,000 may be enough if you retired today, but how much would that buy if you retire in 2046 or 2063? Millennials and Generation Z may need to save considerably more than $1 million. That’s because of inflation, especially since 2023 when it soared all over the world.
- Do you expect to inherit money and how much? A large inheritance could considerably reduce the amount you need to save for retirement.
- What kind of retirement do you want? Like mentioned before, will you be travelling the world? In that case you’ll need more money than someone who wants to stay home, watch TV and spend time with the grandkids.
- What other retirement income can you rely on? CPP/QPP and OAS? If you’re lucky, company pension? If you don’t have much in other retirement income, you need to save more.
- At what age do you plan to retire? If you retire early you will need more in savings. Also, the later you wait to collect CPP/QPP and OAS, the higher the amount you’ll get (up to 42% more).
- Will you be debt-free, or will you be carrying a mortgage or other long-term debts? https://credit2go.ca/2022/11/why-its-important-to-pay-off-your-debts/And how much do you owe? The more you owe, the more savings you’ll need.
As you can see, knowing how much you’ll need for a comfortable retirement is very complex. To get your personal figure, you should consider working with a financial advisor and setting up a comprehensive retirement plan.
Retirement plan portfolios should be conservative
This retirement myth may have been true several decades ago, when people had much shorter retirements and lifespans. Today, we can realistically expect our retired life to last 25 years or more! Portfolios that need to support you for this many years aren’t going to experience significant growth if they’re too conservative. Such a portfolio will most likely run out of money.
Complete and comprehensive retirement plans are designed to bring you the retirement income you need. However, they also have to deliver sufficient growth to protect against inflation and provide protection against market volatility. It’s a tricky juggling act, but it can be done by a good financial advisor and discipline on your part.
Never carry debt into retirement
While this feels like common sense (no debts = less retirement income needed), it is also a myth. It’s not realistic nor practical. As we’ve seen, close to half of retirees carry some debt into retirement.
It’s important to differentiate between good and bad debt. Obviously, you don’t want tens of thousands of dollars’ of high-interest credit card debt when you’re retired. Payments and high interest will swallow your income.
A home equity line of credit (HELOC), on the other hand, can be a very useful financial tool in retirement. It typically has lower interest than other types of loans (besides mortgages) and is extremely flexible. You can pay it back over a long period of time, and when needed you can pay only the monthly interests. HELOCs can be really useful for paying for big-ticket items, such as home renovations or foreign travel.
Balancing with your investments that are making good returns (such as 7% or above), then it makes sense to continue paying a mortgage at 5% or use some of your HELOC to invest, if its interest rate is much lower.
As you see, it’s important to keep yourself well informed about financial matters. After all, we might live to be 100!
Source: https://www.ig.ca/en/insights