Avoid These 10 Retirement Planning Mistakes

When preparing for retirement there’s more to think about than days of leisure and no more alarm clocks. 

Even smart people can make financial mistakes, whether they result from errors in judgment or just fate.  

Despite their best intentions, pre-retirees tend to make these same mistakes over and over again.  Unfortunately, there are rarely do-overs.

How prepared are you.  Make sure you’re making the right choices.

Retirement just ahead

To have a successful and secure retirement, you’ll want to avoid these 10 retirement planning mistakes:

  1.  Leaving work too early

Many people make the decision to retire too soon from a financial perspective.  Every additional year of working income is a year in which you’re not supporting yourself by drawing down retirement savings balances. 

In many cases working just a few extra years can boost your income by one-third or more which will have a significant impact on the quality of your retirement for the remainder of your life.

  2.  Believing you’ll be able to work forever

It’s easy to imagine wanting to stay involved with work and be productive when you’re in your healthy fifties.  Or you may want to stay to max out your pension even if you no longer like your career and already enjoy financial security, running the numbers again and again.

Is it really worth it?  For many enthusiasm for work diminishes when health issues arise, taking your energy level with it. 

Then there are employer-related issues such as downsizing, layoffs and that new manager you can’t stand. 

Some people are happy working part-time in a second career, and it can make sense if you find it fulfilling and enjoyable – not because you have to.  The extra income is a nice bonus.

It’s a mistake to rely on having earned income in retirement.  You might not want to work as long as you think.

  3.  Underestimating your future costs of living

Many people assume that once they retire their living expenses will drastically shrink.  It’s easy to think you won’t spend that much.  But chances are that your monthly bills won’t change all that much once you’re no longer working. 

Think about the things you spend money on today, like housing, food, utilities, and clothing. These are all items you’ll continue to need whether or not you’re working.  The things you like to do before retirement you’ll still like to do after – and you’ll have more time to do them.  So, you may even come to find that some of your expenses go up, especially in the first two or three years in retirement when leisure activities increase. 

In the first phase of retirement many people tend to withdraw a lot more from their savings to fund a more lavish lifestyle.

To avoid financial struggles, map out a retirement budget and make sure the income you anticipate will be enough to support it.

  4.  Not taking longevity into account

A 65-year-old man has a 40 percent chance of living to age 85; a woman has a 53 percent chance.  There’s a 58% chance that one or both will make it to age 90.  Planning for a 20 – 30-year retirement is not unrealistic.  Don’t underestimate medical expenses in the later years as well as long-term care costs.

Don’t be too conservative with your investments.  You may run out of savings if much of it goes to pay health care and nursing home expenses.

It may make sense for you to separate your assets into pools and invest one pool a little more aggressively.

  5.  Expecting an inheritance

There will be a large transfer of wealth from the “Great Generation” and many boomers are counting on that cash for their retirement.  But the truth is, the average inheritance in Canada is about $56,000 – just about one year’s income for many retirees.

A survey done by TD Bank found that a full 20% of Canadians are counting on a lottery win or an inheritance to provide a comfortable retirement. You too may be tempted to trust your retirement to fate, but just in case the 30-million-to-1 lottery odds don’t happen to favour you, its wise to keep saving.

  6.  Counting on your home to fund your retirement

Once your mortgage is paid off and the property has appreciated substantially in value, it’s tempting for retirees who are house rich but cash poor to tap into the equity that has built up in their home. 

Think hard before applying for a reverse mortgage or taking on debt and monthly payments when you’ve stopped working and your income is fixed.

If you’re planning to downsize and use the extra equity to help pay for retirement, work out the numbers.  Often when people sell the family home and buy a smaller condo, they tend to make up for it by opting for a more upscale property with high condo fees.  As well, any profit you make can be quickly eaten up by realtor fees, moving costs, land transfer tax and lawyer fees, not to mention new furniture for your new place.

  7.  Supporting your adult children

Supporting adult children can make it difficult to replace the money when you need it the most – then they’ll be supporting you!  Don’t be overly generous if it means possibly putting your own financial security at risk.

Putting education costs before retirement savings is a mistake.  There are no financial aid and scholarship programs for retirement.  Your children have their whole financial lives ahead of them – you do not.

Sure, you want your children to have the best, and if you can afford it by all means open your wallet.  But you should never jeopardize your own retirement by withdrawing from your retirement accounts to help fund their education, home purchase, lavish wedding, car, etc.

Don’t be so overly concerned with leaving a legacy that you scrimp on living your best retirement life.

  8.  Making bad assumptions

You can’t plan for the future assuming it will be just like the past and present.  A retirement plan usually consists of cash-flow projections to determine the likelihood of success for future goals.  Because, obviously, we can’t know what will happen in the future, these projections have to make certain assumptions that can hugely affect the outcome.

Setting unrealistic expectations regarding such things as rate of return and inflation can meant facing a far different reality than what the math suggests.  It’s best to be conservative with these assumptions so you don’t sacrifice your future security.

Many pre-retirees also underestimate their future tax rate, assuming it will be much lower.  Get a realistic idea of your future tax bracket and have a tax-efficient retirement income distribution strategy.

  9.  Retiring with no plan or investment strategy

People find that once they make a detailed retirement plan that takes into account their entire financial situation they feel more prepared and confident. Things are not as dire as they may think.  A plan helps you understand all your options so you don’t end up having to make major trade-offs that upset the lifestyle you desire. It’s not knowing what you’re going to need that makes looking ahead so scary.

Without an investment strategy you may miss out on investment opportunities and tax advantages.   Acting on guidance from friends and family and making short-term investment decisions is often a mistake.  No-one has investment secrets.

Instead of fixating on higher investment returns, retirees should be looking at turning their assets into predictable income by making smart choices.

  10.  Failing to plan how you’ll spend your time

We all want to make sure we have enough money for our nonworking years and retirement planning tends to focus on the math. We crunch the numbers each year to make sure we have enough to last a lifetime. Unfortunately, staring at spreadsheets often means we forget to plan for living happy, purposeful lives. We may succeed in saving enough but still fail to actually enjoy the years we’ve spent so long preparing to live.

Plan your free time in retirement as thoroughly as you plan your finances.

Know yourself and plan accordingly.  Determine what a truly successful retirement looks like for you over and above the dollar amounts you’ll need to pay the bills.  Consider how you’ll make the transition and how you’ll spend your time.

Have a conversation with your spouse about how each of you envisions retirement. Find common ground and set specific goals.  Remember to compromise.

Don’t let your health slide.  If you have neglected your health while you were busy working, it will take time and hard work to get it back.  When you lose your health, you lose your freedom to do the things you enjoy.

The bottom line

You want to enjoy what you worked for your entire life.

The key to success is getting it right the first time because there’s no second chance once you hit retirement.

“By failing to prepare, you are preparing to fail​”~ Benjamin Franklin

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4 Responses

  1. Peter says:

    GREAT article and perfect size for a morning read…keep these coming

  2. Charlie says:

    Very appropriate Marie, well done. My wife and I are in this exact scenario, just a couple of years from retirement and dealing with all of these decisions. This article sums it up nicely! Thank you!

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