By Peter Boys CAFA
The Money Coach
Every week I talk to clients who have drastically underestimated how much money they will need to retire comfortably. Here are the most common mistakes when preparing for retirement.
1) Hoping to live on your government pension
The maximum benefit paid by the Canada Pension Plan is currently about $13,400 per year if you retire at age 65. You are entitled to that amount if you’ve been paying the maximum contributions for pretty much your whole life. The Old Age Security benefit is about $7,000 for a total of just over $20,000.
2) Playing catch up later in life
Did you know that, given the same annual contributions and returns, someone who puts money into an RRSP from age 25 to age 40 (15 years of contributions) will end up richer at retirement than someone who doesn’t start contributing until age 40 but continues until they retire (25 years of contributions)? Use time wisely and you will need to put less money away and still reach your financial goals.
3) Counting on an inheritance
Do you know exactly how much you’re going to inherit? Don’t forget that your parents could live on for many years and use up “your inheritance” for their own needs. Be aware, too, that before you receive anything, taxes will have to be paid on all the investments and property other than the principal residence and TFSAs. So, RRSPs, RRIFs, capital gains on a second home or other investments are all taxed.
4) Not having adequate insurance
If you become disabled or critically ill, an insurance policy with living benefits could help you avoid draining your RRSP for health care. As well, life insurance could be used to pay the taxes owing after you die, leaving your assets intact for your loved ones to inherit. You should also consider an arrangement for them to pay some or all the premiums.
5)Not factoring in inflation down the road
If you needed an income of $50,000 a year to live 30 years ago, the increase in the cost of living means that you would need $94,000 in today’s dollars to maintain the same lifestyle. So just imagine what that number will be 20 years or more from now. It is easy to get caught up in thinking in today’s dollar costs, not the inflation-adjusted costs down the road. Here are two simple examples of how inflation has eroded one’s purchasing power over the years: 1) When I came to Canada in 1970 you could buy an average car or truck for $3,500; 2) In 1974 we bought our first home in Calgary for $32,000. Young people are dumbfounded when I tell them what we paid for things 40 plus years ago. So, have you indexed your calculations on the retirement income you will need to compensate the ever-increasing cost of everything adjusted for future inflation?
I’m not writing this to scare you but to get you thinking that retiring at 65 may not be realistic for many Canadians, especially for those who are carrying significant debt into retirement such as mortgages, lines of credit or balances on credit cards. We are living longer which may require working longer, even if only part-time to supplement government and other pension income.