Retirement planning mistakes- part 2

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In part 1, we examined 5 common retirement planning mistakes. Here are a few more:

mistake # 6: not investing

Saving is not enough. The most you can earn by leaving your money in a Canadian high interest savings account is 2%. Most savings accounts barely pay 0.5%.

Inflation is the biggest money eater. $ 1 000 today will not buy the same amount of goods 5 years from now, let alone 30.

Historically, the stock market has always recovered and outperformed anything else. From 1900 to 1999, the average return was a little over 10%. This number does not account for inflation and taxes, but it is definitely better than 0.5%.

mistake # 7: paying too much for your investments

A 2% MER charged annually on a mutual fund can eat up almost a third of you have invested in said mutual fund over a 20 year period.

Beware of how much your investments cost you. Do not rely on your financial adviser to be upfront about this. Look for deferred sale charges as well as redemption fees and the likes.

mistake # 8: not taking advantage of tax minimization opportunities

In Canada, the RRSP and TFSA are your two best friends when it comes to retirement planning.

The RRSP is a tax-deferral mechanism, whereas the TFSA does not levy tax on dividends, capital gains and interests received from your investments.

mistake # 9: counting on an inheritance

This is banking on money that you don’t have, and that you may never receive. If you are an actual beneficiary, the amount you receive could be smaller than you think after probate.

MISTAKE # 10: THINKING YOU WILL NEVER RETIRE

No matter how much you love your career, your business or your job, there will be a point in time you will no longer be able to do it. Aging is real!

Retirement planning mistakes- Part 1

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Planning for retirement is a very complex task. For many, including myself, it can be daunting. The road to retirement can also be paved with traps. Let’s look at a few of them.

Mistake # 1: not having a (retirement) plan

What makes retirement planning so daunting and difficult is that we have to think about a future that does not exist.

But, in order to plan for your retirement, you need to think about what you would like it to look like: when, what, where. If you want to travel or live in an upscale retirement community, you will need more money than if you plan to live in a condo and spend time with your children and grand-children.

If you are a couple, communication is crucial, as your retirement goals and dates may be different. Both of you need to be involved in the process.

Once you have an idea of what you want your retirement to be, you can start planning financially.

mistake # 2: assuming the process will be linear

Unfortunately, times have changed. Gone are the golden days of steady employment, regular salary increases and generous company pension plans. Today, only 20% of Canadians have a pension plan through their employers. Job hopping is the norm and wages are stagnant.

Be realistic and ready to adjust your plan a few times over the course of your life. There will be times you won’t be able to save anything, perhaps due to a job loss or an illness. Other times, you will be able to save more.

mistake # 3: solely relying on the federal government

The average monthly CPP pension amount Canadians receive is $600.00. Both the OAS and GIS are subject to claw-back and income threshold, i.e. if you make more than a certain amount of money, you either have to reimburse the government (OAS), or no longer qualify for the benefit (GIS).

Want to take your CPP pension before 65? It will be minored. Retiring overseas? Your GIS payment will be suspended after 6 months. Spend less than 40 years in Canada? Your OAS amount will also be minored.

Beyond the paltry amounts, there is no way to know for how long the system will be viable.

mistake # 4: underestimating longevity and healthcare costs

With progress in medicine and living conditions, a lot of people live well into their nineties, if not 100. In my humble opinion, longevity is what you should focus on when planning your retirement. You should assume income needs of at least 35 years post-retirement if you retire in your sixties. If you retire early, you need to increase that number.

Contrary to popular belief, you will still have expenses when you retire, including big ones such as a new car and home repairs if you own. You will also need some new clothes and shoes from time to time.

One of the expenses that is guaranteed to increase is healthcare. Even if you eat healthy and exercise daily, aging will result in various health issues. The older you become, the higher your insurance premiums will be. As a reminder, many items are not covered by provincial health plans, such as vision and dental.

mistake # 5: waiting for too long to start saving

The best time to start saving for your retirement is in your twenties. If you start young, you actually don’t need to save that much on a monthly basis, as time is definitely on your side. You can also take more risks with investing and earn higher returns.

The longer you wait, the more you will need to save in a reduced time frame. You may not be able to do it. You will have to take on more risks, which could result in greater losses you may not be able to recover from, if the markets tank.

final word

Stay tuned for part 2!

TFSA vs RRSP for retirement planning

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This debate has been pretty heated since the introduction of the TFSA back in 2009. What is the best investment tool? Which account should you contribute to?

To see what makes the most sense, you need to look at a number of factors in your current situation, but also at what your future situation might be like.

First, here is a quick recap of the characteristics of both accounts:

TFSA RRSP
Age requirement & limit Need to be 18; can keep the account for lifetime Can keep the account until 71
Income requirement No Yes, need to have filled a tax return to open an account
Contributions $ 5 500.00 for 2015 plus any unused contributions from previous years 18% of your income up to $ 24 930.00 for 2015 plus any unused contributions from previous years
Tax deductible No Yes
Tax on withdrawals No Yes, except for Home Buyer Plan & Lifelong Learning Plan
Impact on government benefits No Yes, withdrawals are considered as income. Could trigger claw-back  on O.A.S. and/or cancel G.I.S.

 

If you are currently not earning much money and are expected not to throughout your career, you might be better off contributing to a TFSA. Since you are in a lower tax bracket, you won’t benefit that much from the tax deduction of RRSP contributions. When you retire, you won’t jeopardize government benefits and minimize your tax liability by withdrawing money from your TFSA.

On the other hand, if you are a high earner and/or have a company or government pension plan, contributing to an RRSP makes more sense, as you will benefit the most from the tax deduction. However, when you retire, your tax liability will most likely remain the same as when you were working. With the O.A.S. claw-back, it could actually even be higher.

That’s why you may not want to invest all your retirement money into an RRSP.

If you are in the Middle Class, it won’t make much of a difference if you contribute to a TFSA or an RRSP.

An RRSP will usually earn you more interests in the long run but it is important to remember that withdrawals are taxable and that they can trigger claw-backs on government benefits.

It is not the case with a TFSA.

As you can see, answering this question is actually not that easy, and there is no “right” or “wrong” answer. Both accounts have distinct advantages and disadvantages.

Personally, I tend to lean more towards the TFSA because right now, the withdrawals are not taxable and have no impact on government benefits. But I also contribute to my RRSP to get some tax relief….