While almost everyone has put some thought into retirement before the typical retirement age of 65, not all retirement plans are equal. Regardless of the wealth you have generated during your lifetime and how much you have put away, saving for retirement is a long-term endeavour that requires detailed calculations of your needs and realistic consideration of your goals as you age.
Many do-it-yourself retirement planners get caught up in the pursuit of a few aspects of retirement planning and are often unaware of other vital factors to consider. The most common mistakes often include:
- Miscalculating the rate at which you’ll be taxed in your retirement,
- Miscalculating how much your investments will grow,
- Not planning for a long enough retirement, and;
- Forgetting to consider how downsizing will impact your finances.
Let’s look at each of these common retirement planning mistakes in closer detail so you can avoid them in your retirement planning.
Miscalculating Your Tax Rates During Retirement
When people begin to look at their finances for retirement, they tend to apply their current financial factors, such as the rate of tax they are currently paying, to their future financial plans. For most people, this is misleading because your tax rate during retirement will often be lower than the tax you pay while employed. If you’re a pre-retiree making $100,000 annually, you will generally pay between 25 and 30 percent income tax, depending on which province or territory you live in. Once you retire, your income will also likely be lower, resulting in a lower tax rate. For example, a retiree with a $50,000 annual income will only pay between 15 and 20 percent in income tax. When calculating the total amount of money needed for retirement, the difference between tax rates will significantly impact your calculations.
Forgetting to Account for Investment Growth
Another factor that many pre-retirees forget about is the rate at which their investments or savings will grow. They focus on the total target dollar they need to reach and the amount they must contribute annually, without factoring in the income generated by their investments. With interest growing on top of the amount put away, most retirees will have funds that support them well beyond their planned number of years. Projecting investment income can be complex because it relies on many factors, which is why many people choose to rely on Private Wealth advisors to create and update those calculations as life changes.
Underestimating How Long They’ll Live
Estimating how long you’ll live may sound like gazing into a crystal ball for answers, but there are reliable statistics to lean on when planning for retirement. In Canada, the average age men live to is 80, and for women, it’s 84. But more and more Canadians are living into their nineties, creating a 50% chance that men who reach 65 might live to be 89, and women who reach 65 may live to be 91. Many pre-retirees don’t realize that they should be planning for 30 years of retirement, not the typical 20 or 25. The difference is significant; for an individual planning to retire at 65 with $50,000 to live off annually, his or her retirement goal might be closer to $1.5M rather than $1M.
Not Considering Downsizing
Finally, many pre-retirees calculate their average monthly expenses based on their current expenses. This fails to account for changes in expenses, primarily decreased expenses as their children become financially independent, their mortgage is paid off, or they’ve decided to downsize. Many retirees choose to downsize their homes because they don’t need the extra space anymore and want to save money on bills and utilities. Many do-it-yourself financial planners find that their expenses decrease in retirement, leaving them with additional funds.
Get Professional Financial Advice for Retirement
Planning for retirement is never easy. Different factors, including health, family situations, income levels, disabilities, and lifestyles, can significantly impact your financial plan. Even if you’re detail-oriented or skilled at math, it’s worth having a financial professional look over your plan and account for factors you may have missed or forgotten. The Private Wealth Advisors at Regan Schiller & Associates will take the time to review your retirement plan and provide sound advice to help you achieve your goals. Contact us to arrange an appointment today.
This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Regan Schiller is solely responsible for its content. For more information on this topic or any other financial matter, please contact a Consultant from Regan Schiller & Associates Private Wealth Management.