5 Misconceptions About Retirement Planning

Are you planning to retire soon?  Everyone is concerned about ensuring a good income in retirement, but, according to many surveys, very few are really doing much about it.

Here are some popular misconceptions about retirement planning that will give you something to think about.

You can get by on government pensions

Yes, you probably can, but you might not enjoy life very much.

According to Service Canada, the maximum CPP benefit (2013) is $1,012.50 per month, with the average being $528.49.

Related: Do We Need To Beef Up Our CPP?

Combine this with the maximum OAS payment of $546 per month, GIS of $165 per month (single, income under $16,560) and you’ll be provided with little more than subsistence income.

You need less money in retirement

Financial professionals always bandy about the statement that you’ll need 70% of your pre-retirement income – but this may give a false sense of security.

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?

Do you hope to travel?  Do you intend to play more golf, and does that entail a local club membership, or a condo in the South?  What about future medical needs?

Related: Create A Retirement Income Plan

Your future lifestyle (and its cost) might surprise you.

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.

However, your home’s value and saleability will fluctuate.  Most recently, the general price trend in many areas has been on the down side.

Related: Should You Sell The Family Home?

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.

Retirees don’t need insurance

Insurance is not just for the young these days.  It can be used for many purposes in addition to protecting dependents from the untimely demise of the family breadwinner.

Many wise investors use life insurance to provide cash on death to pay for capital gains tax liabilities.  Other seniors use insurance products to draw tax-efficient income and then leave a substantial estate.  Insurance can have a role in charitable giving.

Related: Understanding No Medical Exam Life Insurance

Finally, newer products such as long-term care and critical care insurance may be appropriate.

Retirees should not invest in equities

This old chestnut needs to be put out of its misery.  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 but limited growth opportunities were just fine.

Related: Can You Succeed With An All-GIC Portfolio?

Today, life expectancies have grown dramatically.  Moreover, retirees are living healthier, more active lives – which is likely to cost more money.

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.

Continued growth of assets to meet this challenge is important and the prudent use of equities is an excellent way to provide it.  No other financial asset has historically matched the performance of stocks.

Short-term volatility should not be overemphasized, even in an income program for seniors, especially when your total time horizon may be as long as 30 years or more.


11 Responses to 5 Misconceptions About Retirement Planning

  1. THANK YOU for this article.

    I’ve noticed the uptrend in advisors and financial writers trying to reassure people they don’t need to save as much as they think they do for retirement.

    Yeah, maybe… if they have a government pension with 25 to 35 years of service. Even then, that only provides 50-70% of pre-retirement income.

    I see a lot of people in debt even on 100% of their pre-retirement income.

    People would do well to think about the financial equivalent of “Pascal’s Wager.”

  2. I am in my late 40’s and I wonder how much will be available from the government when I reach retirement age.

    The government has already increased the age to receive OAS to 67 from 65 and I wonder if that will rise again or if amount that people will receive will be lower.

    • @Jane Savers: You could be right. While CPP amounts will always depend on what was contributed, other income assistance programs will likely be replaced by a fully means-tested Seniors Benefit which will be geared strictly to the needy.

      All the more reason to take matters into your own hands.

  3. While I understand insurance makes sense for some retirees, it bothers me immensely that during the business hours of the day the news channels run a steady stream of ads aimed at instilling fear and guilt into older viewers. These ads say things like “The CPP death benefit is only $2500. You OWE it to your loved ones to buy more insurance.” Having helped nurse an elderly relative through his last days, I often felt like throwing a brick at the TV. If it could have hit the advertiser, not just the screen I would have. It’s bad enough to be elderly, ill and dying without someone trying to make you feel guilty about it, too!

    • @Bet Crooks: While it makes sense to purchase some insurance if there aren’t enough assets to at least cover burial costs, people do not have an obligation to leave money to their adult children or provide their grandchildren with education funds, which is what these ads imply.

  4. @ CJ

    I am going to have to respectfully disagree with you on the point regarding savings. The pressure to get people to save is very high… especially with the huge spreads ALL financial institutions and intermediaries make on money… The investment choice of how to do so is what is suspect IMO. Save for retirement with this 3 yr 1.25% GIC…. very nice….

  5. I think the best advice I got was that a home shouldn’t be treated as an investment in your retirement portfolio unless you plan on selling it and down sizing and therefore being able to keep a sizeable amount of proceeds.

    • @Janine: It’s become very hard to downsize and still keep enough of the sales proceeds to make a sizable investment. It’s possible only if your home is considerably larger than your new residence, or if you move to a less expensive area.

  6. Great post! One of the things I plan on doing is trying out the reduced income prior to full retirement as a “test retirement”. You start living on what you think you will need during retirement for a year or so before you leave to make sure your expected living expenses are fairly accurate. I don’t know how you can fully test it until you do fully retire, but trying to get pretty close for a period of time could really prove helpful.

    Also, love your points about insurance. I hear people all the time say you never need permanent insurance. I think that it is important to remember that life expectancies are longer now, and that maybe you might want part of your insurance to be permanent. Maybe not for everyone, but for some this makes sense.

  7. Your post brings up some good points. The reason most financial planners recommend a shift away from equities is to preserve principle and generate income via bonds and annuities. I agree though that 4+% yielding large cap stocks like T and VZ should be part of a portfolio at any age.

  8. Our retirement financial planning could be broken down into three aspects. The first was determining what we required in after tax income to have the retirement that we desired. That was followed by the question how to get from here to there.

    Step one for us was understanding our current financial situation and maximizing the return on that. How much was in registered accounts vs unregistered accounts-and in whose name? I did an very quick audit on my company DB pension plan, only to find out that after 2 mergers the employer had not made a small matching contribution to a DB enhancement account for a number of years. It took me 15 minutes to do the audit (I had kept all of the yearly account documentation). For that 15 minutes I was able to recover just under $8K for my account-an amount that has since grown substantially.

    The next part was to understand our bank investments, mutual funds, RSP’s, etc. What we found…lower than average returns, high MER’s (hidden mutual fund management fees that significantly reduct your long term returns), and what I would have to call naive advice from so called bank financial planners. Did the same with our stock brokerage account. Upshot was that we moved away from the bank to a fee for service advisor (very happy) and moved from the stock broker to a on line brokerage account. Moved our daily interest savings accounts from our bank to two high interest esavings accounts. With the click of a mouse we get 1.9 percent vs. 1.2 percent.

    The third step was understanding our current spending and the impact that change would have. We realized savings on car insurance and house insurance (kept the same insurance just managed it better), cell phone, etc. We looked at every monthly expense to determine if we were getting good value. We made a decision to review these expenditures every year.

    Once we got our environment under control so to speak, we started planning for the actual retirement. We had good advice from our investment advisor but we also purchased a software package that enabled us to better understand the financial impact of the variables. It enabled us to do lots of what ifs and to truly understand the impact of tax and inflation on our net retirement income-as well as the impact of our desired lifestyle changes in retirement. Well worth the 60 or 70 dollars that we paid for it. We used it as the basis or reviewing our financialsituation/preparedness for retirement on a semi annual basis.

    After all that, the financial requirement for retirement became very straightforward. The knowledge that we gained and the reshuffle of our assets and expenses made a very positive impact on our financial planning and our ability to retire. The only person who really cares about our money is us. No one else has the same degree of interest or will take the same degree of care.

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