Top 10 retirement mistakes and how to avoid them

Hope to win the lottery? Plan to work until age 70? There are many ways retirement planning can go wrong. Here are the top 10.

1. Counting on selling your home to fund your retirement
It sounds like a sure thing: buy a house, watch its value rocket up, then downsize when you retire to tap into your valuable real estate for funds. Given that real estate represents 42% of Canadian families’ total assets, it’s no wonder that 28% of those over 50 plan on using the wealth that’s locked up in their homes to help pay for retirement.

The problem is, says Ottawa financial planner Marc Lamontagne, once you’re used to a certain standard of living, it’s harder than you think to trade down. Even when people do sell the family home to downsize to a smaller townhouse or condo, they tend to make up for it by opting for a more upscale property with high condo fees. “The question is whether there are really any cost savings,” Lamontagne says, “and usually the answer is no.”

Judy Robinson, who runs Ottawa downsizing consultancy Senior Moves with her husband, adds that many don’t take into account the fact that selling their home can be emotionally traumatizing. “It’s hard for seniors to give up the family home where they raised their kids and imagined their grandchildren,” she says. “It’s even harder if they have to move out alone.”

Worst of all, the profit you make from downsizing can be quickly eaten up by moving costs, real estate agent fees, land transfer tax and the lawyers fees. “And then there’s the highest cost,” says Lamontagne, “which my wife had to explain to me. Apparently when you move, you have to buy all new furniture!”

2. Investing too much in your career
Loving your job is a great thing, but studies have found that if you invest everything you have in your career, you could find yourself aimless and depressed when you retire from the workplace.

One defence industry executive found himself in just that position when he retired last year. He was used to working 24 hours a day when on deployment, and at least 50 hours a week toward the end of his career marketing military vehicles. “You are going hard, and all of a sudden you have the luxury of time,” he says. “You need to plan constructively on how to use it, or you’ll be lost.”

A year ago, he moved to Prague where his wife landed a job as a diplomat, and found he had far too much time on his hands. To keep himself busy, he put his organizational skills to use as vice-president of the Diplomatic Spouses Association, which raises money for local charities. His new role restored the sense of being valued that he missed from working.

Penelope Trunk, the New York City-based author of Brazen Careerist: The New Rules for Success, says the key is to keep putting your best qualities to work. “Some people are incredible with details. Others are great leaders,” she says. “Those are skills you can hang your hat on and leverage in all parts of life, not just your career.”

Trunk says if you’re feeling isolated, the Internet is a useful first stop when looking to find others in the same situation. “It used to be that life transitions were lonely and scary,” she says. “Now they are documented by bloggers and online communities. The best thing to do is identity what you’re feeling awkward about and find other people feeling the same way.”

3. Getting divorced
No one plans on getting divorced, but most of us underestimate the financial devastation it can cause. Even couples who split amicably may find their legal fees spiralling out of control as they work to divvy up their nest egg. One American study found that divorced respondents experienced a 77% average drop in wealth, while their married counterparts saw their wealth increase, on average, by 16% for every year of their marriage.

Sheree Walder, a family lawyer in Winnipeg, says that divorce can wreck retirement plans because the pool of money that was set aside to support one couple in a single dwelling is now being stretched to run two separate homes. That financial fallout can be exacerbated by the intense emotions at play, which can cause people to make rash decisions they regret later on.

When Erin Harris got divorced in 1981, she says she quickly went from a life of privilege to one of working four part-time jobs just to make ends meet. After she and her former husband sold their home and paid all the sales costs, there was little left. Now aged 65, she reflects that she should have set up her own bank account before the split, so that she could have spent less time recovering financially. “Keep an eye on your marriage and look at it like a business,” says Harris. “There’s a romantic side, but there’s also a business side.”

4. Paying too much for your investments
Most of us are more focused on what we invest in than the fees we pay, but that’s a big mistake. It turns out that large, well-run balanced mutual funds tend to get about the same return over long periods of time — so the biggest factor when it comes to how fast your nest egg grows is often the fees.

For example, a couple nearing retirement with a $750,000 retirement portfolio would pay about $18,000 a year in fees if they were completely invested in typical mutual funds. By switching to a similar portfolio made up of low-cost index funds, they could save $14,000 a year. Over the next 20 years, that could mean an extra $400,000 in retirement savings, just by choosing investments with lower fees.

“A lot of my job is ensuring clients don’t pay too much for investments,” says David Christianson, a financial adviser at Winnipeg-based private financial services firm Wellington West. “We’re extremely fee conscience. I’m so tight I squeak when I walk.”

Even if you want active portfolio management, Christianson says there are many options to keep your fees down, especially once you have $500,000 or more to invest. While most mutual funds charge an annual fee of 2% or 3% of the money in the account, you can get the same active management in pooled funds that charge just 1.25% a year. “In my practice, there’s no justification for paying 2.5%,” Christianson says, “because no one charging that is providing consistently better performance than something you get with a smaller management fee.”

5. Planning on working in retirement
It’s the last refuge of the unprepared when it comes to funding your retirement — but planning to work until you’re 70 really isn’t the solution. Sure, you love your job and can’t imagine a day when you don’t wake up with a smile and bound into the office, but trust us, that day will come, and it will come long before you’re 70.

People who plan to work beyond 64 or 65 often don’t factor in the fact that as you get older you get tired more easily, and unforeseen health problems can make working in your golden years impossible. “When I plan for clients, I don’t go past the age of 70,” says Andray Domise, a Toronto-based independent financial planner. “The chances of working and not having health problems become small at that age.”

Domise says there are cases when healthy people can excel in their old age in jobs, but no one should make working late in life part of their retirement plan, because you just can’t count on having the physical ability and get-up-and-go to do it. He adds the hardest clients to talk into retirement are people who work in physical labour. “They always work with their hands and can’t imagine not doing it. But the conversation still needs to be had. It’s not a matter of ‘I think you’ll become enfeebled.’ It’s ‘We don’t know what the future will bring, and if you can work, more power to you.’ ”

6. Planning on not working in retirement
While you shouldn’t count on working until you’re 70, you shouldn’t rule it out either. If you are on the cusp of retirement but you’re worried about having enough cash, taking on a part-time job can really take the pressure off.

If you’re a typical middle-class Canadian couple, a retirement nest egg of between $250,000 and $750,000 should be enough, at least after you add in the government help you get from the Canada Pension Plan and Old Age Security. But don’t panic if you only have $190,000 saved up at age 65. Just take on a part-time job teaching at the local college or working weekends at a garden centre. If you earn $20,000 a year, that will allow you to live out your retirement years as if you had retired with $250,000 in the bank. You just use half of your income for living expenses while you’re working and save the other half.

Johanne Ouellette found she got a surprisingly large lift from taking on a part-time job as an occasional teacher when she retired from running her own insurance business at age 53. “I’m 54 now, and I still want to be doing things,” she says. “Besides, I have a long time to live on my retirement investments. I have to make sure I’ll have enough for a nice old-age retirement.”

7. Underestimating the high cost of kids
Everyone knows kids are expensive, but once they turn 18 you’re off the hook, right? At one time, that may have been true, but it sure isn’t any more.

Financial planner David Christianson says underestimating how long they’ll have to support their kids is the No. 1 mistake his clients make in their retirement plans. “In my recent experience, it’s the single biggest drain on people’s financial independenceand security.”

These days, you should count on supporting your offspring in some manner until they are at least 25, financial planner Andray Domise says. After all, a bachelor’s degree is the bare minimum they’ll need to be successful. To help pay for school, he recommends setting up a Registered Education Savings Plan (RESP) early on, which lets you contribute up to $50,000 toward your child’s education. Once you open an RESP account, you can take advantage of the Canadian Education Savings Grant, which gives you a 20% top-up from the government for every dollar you contribute, up to $2,500 a year per child.

If you asked Mary Ann Jenkins, a division director with Investors Group in B.C., when she’d be retiring 10 years ago, she would have said 60. But she and her husband have since had to postpone their retirement by a couple of years to help support their 21-year-old daughter, who’s now going off to university, and their 27-year-old son, who’s moving back home to pursue culinary school. “We started saving for them years ago like good little planners, but apparently it wasn’t enough,” says the 56-year-old. “It’s not just the tuition. It’s all the other stuff like rent and cars.”

Christianson adds that he’s heard horror stories about kids hitting their parents up for money or asking them to guarantee their mortgages later in life. If that happens to you, he advises extreme caution, especially as you get closer to retirement. Go ahead and give your kids cash gifts to help them buy a home if you’re sure you can afford it. But “don’t guarantee loans just because they’re your kids,” he says. “Exercise some tough love.”

8. Underestimating your lifespan
You would think that everyone hopes to live to 100, but the truth is, many financial plans assume you’ll only make it to 85. This is the one factor in your retirement plan where you want to be as optimistic as possible.

There’s good reason to plan for a long life. The Society of Actuaries reported in 2000 that there is an 81% chance that one or both members of a 65-year-old couple will live to age 85, and a 58% chance that one or both will make it to age 90. If you don’t make provisions for that possibility in your retirement planning, you might run out of cash.

“That’s never a fun conversation,” says Robert Hurdman, a Calgary financial planner, “telling them their money’s going to run out at age 85.” The good news is that by doing a few simple things, such as planning to withdraw no more than 4% of your portfolio each year, you can lower your risk significantly.

If you want to make absolutely sure you’ll never run out, many planners suggest you buy annuities. These are financial products that provide you with a series of monthly payments in exchange for one lump-sum purchase, and some of them promise that regular income for life. The payback rates aren’t great right now because interest rates are so low, but you may want to consider plunking some cash into an annuity around age 65 or 70. That way, you’ll never have to worry about running out of money again.

9. Expecting an inheritance
Canada’s boomers are preparing to leave almost $1 trillion dollars to their kids over the next decade or two, so it’s understandable that many Canadians are banking on that cash for retirement. But the truth is, the average inheritance in Canada is only $56,000 — just one year’s income for many retirees — and counting on receiving that money can be as dangerous as it is tempting.

Financial planners get nervous when they see clients banking on inheritance cash to see them through their retirement years, but it happens frequently. “I have one client whom I had to sit down and say, ‘Look, this is the money you’ve got, this is what you’re spending, and it won’t work. What aren’t you telling me?’ ” says Robert Hurdman, a financial planner in Calgary. The client confessed that he knew he would be inheriting over $500,000 from his parents, so why not spend like there’s no tomorrow? “Because his parents might live a long time,” Hurdman says. “When he turns 65, his parents will be only about 85 or 90. They could still be alive.”

A survey done by TD Bank in February found that a full 20% of Canadians are counting on a lottery win, an inheritance or government payments to provide a comfortable retirement — rather than money saved in an RRSP. You too may be tempted to trust your retirement to the whims of fate, but just in case the 30-million-to-1 lottery odds don’t happen to favour you, it may be wise to start saving.

10. Assuming you’ll need a million bucks
Many financial advisers will tell you it’s impossible to retire without a million dollars in the bank, but the truth is that most Canadians retire on much less. The financial industry frequently touts 70% as the percentage of your working income that you’ll need to replace, but most middle-class Canadians replace only about 50% to 60% of their working income in their golden years, and they say that’s just fine.

Former B.C. government worker Marilyn Clark discovered why, when she retired 11 years ago. She found she had more time to cook. She wasn’t buying coffee on the way to work, and didn’t need to cough up fare for the daily commute. “People usually retire without a mortgage, and unless they’re doing a lot of travelling, it’s remarkable how much less things cost.”

Keep in mind that the typical Canadian gets about $11,900 a year from Old Age Security and CPP, too. So unless you want to leave a windfall for your kids, forget about saving a million — live a little during your working years instead.