The road to retirement is paved with hard work, financial sacrifices, and discipline through difficulty, and many people who get past those obstacles and achieve their desired wealth levels tend to think that it’s all smooth sailing from there. But in reality, people can still make critical mistakes in retirement that could put their nest egg at risk.
A recent Wall Street Journal report noted that while taking a conservative approach in retirement can be good, it must be balanced against other factors. “It’s important to build a portfolio that incorporates an appropriate mix of fixed income and equities based on their other assets … their spending requirements and their life expectancy,” David Savir, chief executive of Element Pointe Advisors, told the Journal.
The average life expectancy in Canada is 79 years for men and 83 years for women; that’s not counting differences that may arise from one’s personal life circumstances, family history of health, and level of wealth. The Financial Planning Standards Council and the Institut québécois de planification financière prescribe 94 years old as the minimum age of capital depletion to be used in retirement plans.
Another financial error is shelling out large amounts of money early in retirement. This doesn’t apply just to leisure spending or buying a second home; Tim Sullivan, chief executive of Strategic Wealth Advisors Group, told the Journal that eliminating debt through large cash outlays may be harmful. This is particularly true when a retiree’s investment returns far exceed the interest they have to pay on their debts.
But Alison Hutchinson, senior vice president of private wealth management at Brown Brothers Harriman, called for balance by advising retirees against being too tight-fisted. Aside from leaving themselves open to regrets later on, people who have too much wealth upon their death could go over federal or provincial estate-tax exemption limits.
Aside from spending too much early on, retirees may also fail to account for the impact of healthcare and periodic (non-regular) expenses on their budget. Leslie Thompson, managing principal at Spectrum Management Group, advises near-retirees to track their expenses for one to three years. By cutting expenses that they will no longer have and adding ones they expect to take on in retirement, they can make a rough forecast of their retirement spending. Retirees with adult children may also want to consider incorporating financial support into their plans.
Another risk for retirees comes from unnecessary tax expenses. One example, according to Optima Asset Management President Paul Lightfoot, is when retirees let their tax-sheltered accounts grow too much; once required minimum distributions kick in, it could push them into a higher tax bracket. For that reason, he recommends doing yearly assessments based on different tax scenarios to determine the most optimal way to withdraw from their taxable and non-taxable accounts.
And like people from many other age groups and demographics, retirees can fall for too-good-to-be-true investment pitches. The promise of high-return investments with little to no risk can be tempting, but more often than not, people end up buying complicated products that they don’t understand and that aren’t appropriate for their risk profile.
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