5 Myths About Retirement Planning
Retirement is a big concern to almost everyone. Just look at all the information you can find in the media about when to retire, being prepared, where to live, what type of portfolio you need, and the art of efficiently drawing income.
Even so, there are still some popular misconceptions about retirement planning that you should give some thought to.
Here are 5 common myths.
1. I’ll get by just fine on my government pensions
The Canada Pension Plan is currently designed to replace 25% of your pensionable earnings ($55,900 for 2018). It makes a nice supplement but as an only source of income, it needs careful planning.
The maximum CPP benefit (2018) is $1,134.17 and the maximum OAS is $600.85 at age 65, for a total annual amount of $20,820.24. Double that for a couple. However, it’s not often that both will receive the maximum.
According to Service Canada the average CPP amount is $673.10. Add in GIS (intended for those with a low income) and an average couple would receive $32,552.88 annually. ($673.10+$600.85 for both + GIS of $164.84 X 12).
Presuming the same CPP amount, a single person would receive a mere $20,512.44 ($673.10+$600.85+$435.42 X 12).
These amounts cover bare bones needs and not much spare cash for treats.
Go to your Service Canada account to do your own calculations.
2. You need less money in retirement
A common rule of thumb is that you’ll need 70% of your pre-retirement income – but this may give a false sense of security.
The amount you spend is unique to each individual or couple. The only way to know with some degree of certainty what you’ll need is to go through your own spending patterns and plans.
It’s true that employment and child raising expenses may decrease, but what are your plans? Your actual spending needs may be as low as 50% or up to 100% or more.
Spending will vary depending on what age you choose to retire at, what your interest are, where you live and other lifestyle choices.
Related: Designing Your Retirement Lifestyle
What about future medical needs? It’s not unusual for the percentage to change over the course of your retirement years.
The cost of your future lifestyle might surprise you.
3. A paid-off home is a good source of retirement capital
A principal residence is likely a substantial investment, but it may not be a good source of future cash flow.
Consider the strong sentimental attachment most people have to their homes. Having to move out to raise capital would be a major step.
Household expenses can be high, and many people think to lower them by purchasing a smaller residence and investing the remaining sale proceeds. This may be possible if your home is considerably larger than your new residence, or you move to a less expensive area.
However, your home’s value and saleability will fluctuate. Most recently, the general price trend in many areas has been on the down side.
Consider realtor’s fees, closing costs and moving expenses and your anticipated nest egg may not be as big as you think.
Your new home may come with additional unexpected expenses, such as condo fees or higher travel costs.
Other strategies such as taking out a Home Equity Line of Credit or a Reverse Mortgage may give you the cash flow you need, but they need to be researched carefully.
4. Retirees don’t need insurance
Insurance is not just for the young these days. You may no longer need to protect dependents from the untimely demise of the family breadwinner, but insurance can be used for other purposes.
Life insurance can offset costs of probate fees, income taxes and other expenses.
Some seniors use insurance products to draw tax-efficient income and then leave a substantial estate.
Insurance can also have a role in charitable giving.
5. Retirees should not invest in equities
This old chestnut – as well as your percentage of fixed income should equal your age – needs to be put to rest. In the ‘60s, a retiree needed to plan on providing retirement income for say, 10 to 15 years.
He or she likely had a company pension plan and good savings habits. GICs and other fixed income investments providing secure income, and limited growth opportunities were just fine. The old standard was to preserve capital.
Today, life expectancies have grown dramatically. Moreover, retirees are living healthier, more active lives – which is likely to cost more money. Not to mention inflation eating away at their purchasing power.
Financial advisors warn about the danger of outliving your assets. To offset this danger, a common planning horizon for retirement income now is to age 90, or even 100.
Include a portion of equities for long term growth if you want to generate sufficient income to meet expenses at various stages of your retirement.
Short-term volatility should not be overemphasized, even in an income program for seniors, especially when your total time horizon may still be as long as 30 years or more.
Bonus myth: You’ll be bored silly
Some retirees have waited for years to finally be able to follow their dream, whether it’s starting their own business, going to live in South America, or getting involved with their favourite charity. But plenty of others only want to relax and take it easy. There’s nothing wrong with that. If you’ve worked for 30 or 40 years, you deserve it!
But many retirees find their relaxing days begin to fill up with random activities. They get crowded with lunch dates or loaded up with community service, and before they know it, they’re booked solid. (I’ve often heard people say they don’t know how they had time to work previously.)