Retirement Planning Mistakes in Canada | Thomas Chan
Retirement Planning

Retirement is one of the major life-changing events and it should be worry-free, right? You get to enjoy time with your grandkids, work in the garden, and finally, get to watch TV all night long without worrying about being late for work anymore. However, your peaceful retirement could be at risk! 

Unfortunately, a lot of the common retirement advice is misleading and you could be making mistakes when planning for your retirement without even knowing it.  

In this post, I’ll be going over the top three mistakes that could make your retirement uncomfortable. You might be wondering, how is it possible that so many people are making these mistakes? Did they get any advice when planning? The thing is, everyone’s retirement is DIFFERENT. We have different circumstances, goals and expectations, but most retirement advice out there follows a cookie-cutter approach. Banks and advisors want to provide strategies that fit EVERY circumstance and EVERY expectation…I’m sure you agree that this is problematic. It’s how bad advice gets spread and people keep making the common mistakes. 

If you have made these mistakes until now, it’s not your fault. 

You simply didn’t know better. 

So, let’s get into the three most common mistakes and help you set a better course for your retirement. If you want a custom assessment for your specific needs, please feel free to reach out to me for a complimentary consultation

Retirement Planning Mistake #1 – Saving Account is the Silver Bullet!

One of the most common retirement strategies is to just put everything in a savings account. Telling you that no matter how the world fluctuates, you are guaranteed a return 100% with simply no risk at all. The problem is, this strategy was great 30 years ago. Canada back then, term deposit was 15% interest rate per year but today, we are looking at 1% with most Canadian banks. 

An example to illustrate this is if you saved $10,000 30 years ago, you’d get 15%. After 5 years of saving, you would have grown an additional $10,113.57. Which is double of what you put in! Today, with the same $10,000 locked into a term deposit, when you save it for 5 years at 1% interest, you would have grown $510. Yes, it is a guaranteed return but at the same time, it’s a guaranteed loss due to fees and inflation. 

The banks, on the other hand, will take your deposit to lend to others as a mortgage with 3-6% interest rate, or they can invest the money into the market so of course it makes sense for banks to promote this. They are making money from your savings! Yet, even if you have a big savings account, no one ever teaches you how to take that money out, how to turn it into an income or how to use it. They expect you to just know what to do. 

That’s why I don’t like this approach. Now am I saying you shouldn’t have a savings account at all? No! But before you blindly follow a bank’s advice, get clear on your goals. Visualize your retirement and what you want to do. Do you want to travel? See your grandchildren? Live in a nice home? Knowing what you want helps you find the strategy that is best for you.

Mistake #2 – Relying too much on the government

This is a big one. Did you know if you put too much money into your RRSP, you could potentially earn less government benefits? It sounds crazy but here’s why: Let’s say you are still making $60,000 per year because you have rental income, pension, CPP and OAS and you have an RRSP account worth $500,000. Very feasible if you spend 40 years to build it. At age 71, by law, it will convert to a Registered Retirement Income Fund, or RRIF. By law, you are forced to take out at least 5% which means you are adding another $25,000 to your existing income. 

This also means not only you have to pay more tax, but also your OAS payment is reduced due to income clawback. With a higher retirement income, even if the income is from your own savings, the government will reduce your benefits. According to a study, for some government benefits such as OAS, the significance of the benefit payout amount vs the actual buying power is gradually losing almost 50% over the next half-century. This is slowly melting away like a polar ice cap. You might not be aware of it, but it is happening! If you rely too much on the government, you’re basically putting a handcuff on your income and giving away the key. 

It could cost you your desired lifestyle. There are strategies you can implement to maximize your retirement benefits, such as…

  • offsetting your active income with tax deductions strategies
  • transferring your taxable income into tax-free income
  • Or have a plan for a better RRSP exit strategy 

But there is no cookie-cutter approach because we are all different. The key is finding something that makes you less dependent on the government.

Mistake #3 – Thinking that nothing ever changes

This is a dangerous mistake that I see too many people make. The fact is we live in a fast-paced world and things do change. This about all that happened in 2020 and continues to change this year in 2021. Saving tactics that worked years ago are obsolete now. It’s likely that some tactics I talk about today won’t work in 10 years. 

What should we do then? Keep yourself in the loop. Continue to stay informed about what works now and the best way to do that is to subscribe to my YouTube channel so you can always get the most updated information from a financial consultant. 

Thankfully, while tactics change, the saving strategies and core principles will always stay the same. The four key principles to keep in mind:

  1. Make sure to account for your daily expenses and have easy access to a chequing account and a short term savings account
  2. Prioritize a secure and comfortable retirement that can be done by creating your own pensions, annuity and maximize government benefits
  3. Make sure your money grows and keep paying attention to inflation. You want strong diversified investments that beat inflation
  4. Always account for emergencies and health care expenses by having 3-6 months worth of emergency funds, having a line of credit pre-approved, and recheck all of your insurance policies 

Following these four principles will keep your retirement safe and secure, even if things change.

The reason so many are making these three mistakes is because of a lack of education and keeping up with updated information. Changing your actions today could help you better save for your retirement. If you want a complimentary consultation to plan your retirement, please contact me and I’d be happy to make my recommendations. Everyone has a different situation and I want to hear your story and learn about what you want for your future. 

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Thomas is an advisor with NOVELLA WEALTH

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