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by Mark P. Cussen,
Investopedia.com
There’s much more to retirement planning than accumulating retirement savings. Although a plethora of websites, books, magazines, advisors and other financial information and services are available for retirees, unfortunately there’s a lot of room for mistakes and there will always be a contingent of people who fail to make their retirement savings last for the rest of their lives.
There are many ways to avoid this situation, some of which are more proactive while others are reactive in nature. But none of them are particularly difficult; all any of them really require is discipline and common sense.
Here are a few ways you might be endangering your retirement.
1. Too Much Risk
You worked and sweated for years to accumulate enough money to be able to live a comfortable retirement. Therefore, this is probably not money that you want to use to start trading commodities futures contracts unless you are very experienced with them. Derivatives, small cap stocks and other high-risk ventures should be approached with caution and used judiciously as part of a well-thought out investment strategy.
2. Too Little Risk
This mistake can be every bit as costly as the previous one; those who invest their portfolios too conservatively may find that their expenses are outgrowing their income. Treasury securities and CDs can be great foundations for any retirement portfolio, but virtually all retirees need to have at least a small portion of their assets invested in either equities or real estate in order to provide themselves a hedge against inflation.
3. Retiring Too Early
Early retirement has become something of a status symbol among the upper-middle class. However, early retirement can be disastrous for those who are not adequately prepared for it. For every five years that one wishes to retire early, at least $100,000 of additional assets should be saved (assuming a payout of $2,000 per month and a rate of 6%).
Those who choose this path should therefore be prepared to accept a reduced payout and a smaller government pension check every month if they have not done this.
4. Failure to Plan for Long-Term Care
Nothing can destroy a retirement portfolio like having to pay for the cost of a nursing home or other long-term care without any kind of insurance protection. Nursing home care can easily cost up to $60,000 a year, depending upon various factors such as the level of care needed and your geographic location. Medicare seldom if ever pays for long-term care expenses and Medicaid is not a reliable source of aid for this either.
There are “spend down” plans available for those who wish to follow their rules, but these plans can be substantially disruptive to daily living in most cases. Purchasing a long-term care insurance policy is usually the preferable alternative for those who can afford it. Other alternatives include annuities and cash-value life insurance policies with long-term care riders.
5. Retiring All at Once
For some people, the radical adjustments that come from retirement are too much to absorb all at one time. It may be necessary to work another, lesser job for a time, such as a part-time job with an employer in a field in which you have an interest. A few years of this type of work may allow you to “gear down” sufficiently to total retirement at some point. This strategy can also help to stretch an insufficient retirement portfolio a long way.
6. Living beyond Your Means
As obvious as this is, those who spend more than they have in retirement will find themselves in dire straits at some point. Run the numbers carefully before you buy that 54-foot yacht or that vacation home. These items often fail to fetch their purchase prices if you have to sell them, so think twice before you plunge into a major pleasure purchase that will eat up a material chunk of your savings.
See also:
Canadians prefer instant gratification to deferred rewards
Canadians prefer to spend their money on instant gratification, such as buying cars and taking vacations, rather than saving for their retirement, a Bank of Montreal survey found.
The report, Retirement Planning: Can I Get Back To You On That?, based on a survey conducted by The Strategic Counsel, is unlike other recent retirement studies, which tend to focus on whether Canadians are saving enough. Instead, this report explores the psychology and competing priorities that stand in the way of effectively saving for retirement and finds a disconnect between Canadians’ beliefs and behaviours.
Drawing on behavioural finance research, the report examines the concepts that affect decision making, including:
- Immediate Gratification – i.e., placing less value on a reward in the future than a benefit in the present, often encouraging procrastination. Although 82 per cent of respondents acknowledge the importance of saving early for retirement, more than eight in 10 non-retirees (81 per cent) who have not set aside any savings said they were more concerned about current needs.
- Paralysis of Choice – i.e., when one is faced with an over-abundance of information, resulting in the inability to choose at all. According to the report, more than one-third (36 per cent) of non-retirees stated that they are overwhelmed by too much information, and this has been an obstacle to their retirement saving plans.
BMO found a disconnect between attitudes toward saving and retirement and what actually happens in practice. About 90% of respondents believed that saving for when they leave the workforce should begin early, but in reality 40% of them had done little or nothing to prepare.
More than eight in 10 of those who aren’t saving said they’re more concerned with satisfying current needs, rather than putting away money for the future.
“We’re not practicing what we preach,” Tina Di Vito, head of the BMO Retirement Institute said in an interview. “We place a higher value on the immediate reward than putting aside rewards for the future.”
Repeated surveys have shown that Canadians are not saving enough for their retirement, despite products such as RRSP’s offering relatively generous tax benefits.
The government has launched a financial literacy campaign designed to improve education about finance and is seeking to revamp the pension system on concern about the potential economic impact of poor retirement planning as the population ages.
The BMO study pointed to a number of other psychological, or behavioural reasons, as to why Canadians aren’t saving.
One factor was an over-abundance of information. When faced with too much choice, consumers tended not to choose at all, with more than one- third of respondents saying they were overwhelmed by the number of products on the market.
It also found that having children had an impact on retirement saving, with 42% less likely to view it as an immediate priority. Canadians between the ages of 35 to 44 are the most likely to have debt, with 88% owing money. Of those 44% are unhappy with the amount they have saved.
BMO, which is using the findings to help tailor its approach to retirement planning, said the survey has shown that people should take small steps at a time.
“You should set small objectives, rather than having aspirations looking out over a 20 to 30 year time horizon,” Di Vito said. “That’s much more effective to get people to take on a plan and stick to it.”
BMO also suggests creating a strict budget to control your spending, signing up for your company’s pension plan if it has one and setting up an automatic savings plan.
The survey polled 2,034 Canadians aged 35 or older between May 26 and June 2.
The report, Retirement Planning: Can I Get Back To You On That?, based on a survey conducted by The Strategic Counsel, is unlike other recent retirement studies, which tend to focus on whether Canadians are saving enough. Instead, this report explores the psychology and competing priorities that stand in the way of effectively saving for retirement and finds a disconnect between Canadians’ beliefs and behaviours.
Drawing on behavioural finance research, the report examines the concepts that affect decision making, including:
- Immediate Gratification – i.e., placing less value on a reward in the future than a benefit in the present, often encouraging procrastination. Although 82 per cent of respondents acknowledge the importance of saving early for retirement, more than eight in 10 non-retirees (81 per cent) who have not set aside any savings said they were more concerned about current needs
- Paralysis of Choice – i.e., when one is faced with an over-abundance of information, resulting in the inability to choose at all. According to the report, more than one-third (36 per cent) of non-retirees stated that they are overwhelmed by too much information, and this has been an obstacle to their retirement saving plans.
Statistics Canada has published a 2006 study labeled “Impact of home equity on incomes of retirement-age households”, that shows how the equity that homeowners have built up through a lifetime of investment in their homes makes an important contribution to household finances as they enter retirement.
By retirement age, 75% of households are homeowners, and of those, 74% own their homes without a mortgage.
The economic benefit of owning a home is equivalent to the rent that does not have to be paid.
In 2006, when the value of this benefit was taken into account for households headed by individuals in the age group 60 to 69, it increased incomes by $5,500 or 10%.
For households headed by those in the age group 70 and over, incomes rose by $5,400 or 12%.
For households in the age group 70 and over whose household income was ranked in the bottom 20%, home ownership raised incomes, on average, by about $4,200 or 20%.
For households in the same age group whose income ranked in the top 20%, income increased by $10,400, but, in proportional terms, by a more modest 7%.
Note to readers
Recently, concerns have been raised as to whether Canadians are prepared for retirement.
Using data from the 2006 Survey of Household Spending and the 2006 Census of Population, this study estimates the contribution to household finances generated by the home equity of working-age and retirement-age households.
Net income is defined as gross income less income taxes and payments made for Employment Insurance, life insurance, annuities, and public and private pension plans. The benefit of home ownership is defined as the value of housing services provided by home equity. The value of housing services is based on estimates of the financing costs of owning a home and the rents paid for housing.
The research paper “Incomes of Retirement-age and Working-age Canadians: Accounting for Home Ownership,” is now available as part of the Economic Analysis (EA) Research Paper Series (11F0027M2010064, free) from the Key resource module of our website under Publications.
Time for a mortgage checkup?
While about 80% of Canadians visit a doctor at least once a year to help ensure they remain physically healthy, the number of people who check their financial health by regularly reviewing their mortgage is far less.
Plenty can change in someone’s life in a year, never mind during the standard five-year mortgage a lot of Canadians sign up for. A career change, kids, retirement or new-found money or it could be that such a major event is on the horizon. All can affect the type of mortgage that fits just right.
Canadian consumers tend to become complacent about their mortgage payments when they could be saving a lot of money. For example, the more adverse you become to risk, the less likely a variable mortgage will be right for you. Using online tools, such as a mortgage calculator and a mortgage penalty calculator , you will know how much you can expect to pay to break your existing mortgage.
Even though banks are in the business of getting as much interest from you as they can, many will allow people to pay a lump sum of the principal on the mortgage’s anniversary and increase their monthly payments. An extra $100 a month on a standard $200,000 mortgage could save almost $18,000 in interest and shorten the amortization period by about four years.
Paying down your mortgage faster may seemingly put a crimp into your future finances if something happens and you need the money — unlike, say, putting it into a tax-free savings account or other low-risk liquid investment. But many financial institutions have a re-advance clause that allows you to retrieve some of the money spent accelerating mortgage payments, says Peter Veselinovich, vice-president of banking and mortgage operations at Winnipeg-based Investors Group.
Of course, it may become more difficult to get those funds back if there is a dramatic downward change in housing values and you haven’t built up enough equity. But that’s where understanding your entire financial situation, not just your mortgage, can help. “Most of us don’t like to think about debt, says Veselinovich. “It’s just something that somehow comes up and ends up as part of our personal balance sheet and we make payments.”
Even something simple such as making renovations could affect the type of mortgage desired. For example, topping up or refinancing an existing mortgage can pay for renovations, providing you’re comfortable with a blended interest rate. If you’re buying a new home, you may be able to port your current mortgage. Or maybe you just want to consolidate higher-interest unsecured debt into your mortgage.
A mortgage can also help you become more tax efficient if you’re thinking of investing in a business, buying a rental property or putting some money into mutual funds or the stock market. That’s because the interest paid on money borrowed on a principal property can be written off against revenue from those investments.
But the biggest reason for making changes to your mortgage mid-stream may be because it could be a lot easier to do something before your situation changes, such as going into a new venture or before retirement.
Read more: http://www.financialpost.com/