Failure fanatics like to say mistakes are essential to growth. Tell that to the recently retired couple who discovers their mistakes may cost them tens of thousands of dollars. When it comes to investing, it’s better to be aware of the mistakes that others have made and avoid repeating them yourself—which is why we’ve written this quick article. Here are four common retirement mistakes and one simple way to avoid making them yourself.
MISTAKE #1: Ignoring the big picture.
Any retirement strategies that lack a detailed financial plan don’t deserve to be called strategies. Your goals, expenses, time horizon, insurance needs and tax implications will influence strategic decisions such as what investments to withdraw from, how to allocate assets in your portfolio and when to start receiving CPP and OAS. Understanding the big picture will also let you know ahead of time whether some lifestyle changes will be required to allow you to manage well in retirement.
MISTAKE #2: Withdrawing too much from your investments.
A common misperception about equities is that you’re safe to withdraw an amount each year equivalent to historical average returns while still protecting your principal. Not so. Historical averages are just that: averages. Your return in any given year could be higher or lower. If you withdraw too much during a year when an investment is performing poorly, you may never recoup the loss to your principal.
To avoid this mistake, consider only withdrawing your investment income annually. (This is why our Dividend Growth strategy is ideal for investors living off their nest egg.)
MISTAKE #3: Over-investing in bonds.
Lower volatility and predictable yield make bonds very attractive in retirement, especially to those losing sleep over the money running out. The reality, however, is that bonds have a markedly lower return than equities when your time horizon is longer than five years. The value of bonds is also negatively impacted by an increase in interest rates. Add in inflation, and your bonds could actually have less purchasing power when you sell them than when you purchased them. If that’s not enough, consider that when your bonds mature, you’ll have to reinvest them, and will be stuck with whatever the market is offering at that time. Find out what we recommend for income investing in retirement.
MISTAKE #4: Not using your registered accounts properly.
When it comes to maximizing your retirement income, where you’re holding your investments is almost as important as the investments themselves. That’s because investments are taxed according to the type of income they generate (dividends, capital gains or interest).
It may be advantageous to use your tax-free savings account (TFSA) for low-risk interest-bearing investments, which are dinged heavily by the tax man. You may wish to keep a large stock portfolio that earns capital gains in a non-registered account, rather than your RRSP, because only 50% of capital gains are taxable in a non-registered account, as opposed to 100% of anything you draw from your RRSP. There are many individual factors to consider when deciding which investments to hold in your registered accounts—just make sure you take the time to think it through. Learn more tax tips for retirement.
RECOMMENDATION #1: Work with a financial planner.
It’s hard to do both big picture planning and day-to-day investment decisions on your own. Money, health, family, dreams—all these retirement topics are highly emotional and it can be difficult to find and maintain perspective. A skilled financial advisor can be an important ally here, offering unbiased advice that’s rooted in an understanding of who you are and what you require in terms of tax planning, structuring your registered and non-registered accounts, and investment choices. You’ll be able to count on a good financial planner to bring you ideas and to keep you from straying from your chosen path—because a plan isn’t worth much if you don’t stick to it.
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