Top 5 for those saving for retirement:
1. DELAY-DELAY-DELAY. Those who retire with a 'true' pension plan (guaranteed benefit) enjoy that income because money has been put into the plan for 30+ years in many cases. We all have heard of the miracle of compounding BUT the most important aspect of compounding is TIME. Waiting to pay the mortgage off before funding your RRSP/group RRSP may get you asset rich and cash flow poor.
2. NOT HAVING ENOUGH EQUITY EXPOSURE (risk/volatile assets). The more exposure you have to 'safe' investments the lower your average return will be over a 5-10 year period. 10 year government bonds currently pay about 1.5% per year and last summer were paying close to 1%. Even At 2% money takes close to 35 years to double. A reasonable target return would be similar to many pension plans...in the 6% range (4% above inflation).
3. NOT HAVING A HIGH ENOUGH CONTRIBUTION RATE. Teachers pay close to 14% of their salary into their pension plan for 30+ years in many cases. Failure to do that means that your 'personal pension plan' will not have a similar payout. Maximizing your RRSP plan in later years does not make up for a low contribution rate in the early years.
4. OWNING INVESTMENT GRADE BONDS (paying in the 1-2% range) in a vanilla mutual fund. These funds often have a cost in the 2% range negating any returns on the fixed income. This is a NEW phenomena but one that needs to be addressed as low interest rate appear to be here for some time.
5. LACK OF PLANNING AND LACK OF TIME SPENT ON PLANNING. This should not come as a surprise as most people know what it takes to build a 'personal pension plan' and if they are not doing it there will be a hesitancy to review the situation. Some may be waiting for the 'transfer of wealth' that we hear about. However even a lump sum of capital in later years will often not make up for a low savings rate from 25 to 65. An inheritance of $100,000 at 65 will only generate an inflation protected income of $5,000 over normal life expectancy.
Top 5 for those in retirement:
1. HAVING A WITHDRAWAL RATE SUBSTANTIALLY GREATER than what can be earned on average considering what appears to be a much lower interest rate environment. Pulling out 10%+ per year starting at age 65 suggest wealth will run out a long time before health. A male age 60 has a 50-50 chance of living to about 86-87 yet often spends as if living to age 75.
2. SPENDING CAPITAL ON THE NEXT GENERATION and the generation below that when capital is scarce and there is no way to replace it. An 'emergency' is in home care at $30-45 per hour not a down payment for a grandchild's first house (unless that house includes a finished basement for the grandparents:)).
3. TAKING ON TOO MUCH RISK AT TIMES to make up for lack of capital due to a low savings rate during the working years. While the last 6-7 years have had lower volatility than the 10 before that we will experience a negative surprise or recession causing a correction of 20-30 percent in equity markets...this is normal!!! Those in retirement must be prepared for that and have an asset allocation to deal with that.
4. STAYING TO LONG IN A HOME THAT DOES NOT LINE UP WITH CURRENT PERSONAL INCOME. I often come across people living in a $800,000 home with an income that barely covers the annual costs of running that home including taxes and maintenance. There is little money left for gathering new experiences and gathering new experiences is what many people dreamed of when planning for retirement.
5. REFUSING TO ACKNOWLEDGE THAT A HIGHER LEVEL OF 'CARE' MAY BE NEEDED as their health or health of a loved one changes. Just because someone wants to live in the family home forever does not make it the right decision. My father felt that way even though my mother’s health was declining for several years. I am sure it took its toll on him and it made it almost impossible for my mother to transition into a retirement home.
The views expressed do not necessarily reflect the opinion of Argosy Securities Inc. This does not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. Please consult a professional before making an investment decision.