Financial Friday #74: 5 Retirement Myths Busted

It’s natural to have uneasiness over the state of your retirement preparedness due to the sheer number of variables involved:

• Will my health or my spouse’s health fail?

• How long will I live?

• What will be the future value of my assets and investments?

• How high will inflation and interest rates go?

Variables and uncertainties are inevitable; relying on myths is easily avoidable. It’s important to separate fact from fiction and to that end, here's our take on 5 popular retirement myths.

1. There is some magic amount that everyone should be aiming for.

We often hear $1,000,000 or $500,000 because they are nice round numbers. The truth is these numbers are not grounded in facts, especially not your facts. Income streams, lifestyle choices and a lot more things come into play – not just the size of your cash pile heading into retirement. A 2018 CIBC report found the average retirement savings was just $184,000!

2.CPP and OAS will get me through.

The average draw on CPP is just over $700/month, well below the maximum of $1200/month. OAS provides another $600 month and you may qualify for the GIS if your income is low. Our advice here is to investigate these programs and figure out how much you might get before you make any assumptions.

3. I can catch up when I’m older and have more disposable income.

The problem with starting late is you miss out on the magic of compound returns. Maxing out your TFSA from age 25 to 65 with an index fund at 5% (TSX 15-year average) would yield $725,000. Catching up is always a good idea and if you have some carryover from unused TFSA or RRSP limits when you were younger, by all means play catch-up as soon as you are able.

4. Stocks are too risky for retirees.

People used to work until 65 and died younger, so the duration of retirement was shorter. They also got a lot higher rates on secure savings. Today we are retiring earlier, living longer, we have minimal interest rates, and recently we are also battling inflation.

The fact of the matter is that you will likely need the higher returns that go with more risk and hold some stocks in your retirement portfolio. There are strategies to limit the risk and you should be evaluating and adjusting your asset allocation during retirement, not just in the run-up to retirement.

5. My side hustle, spouse and/or inheritance is all I need.

All good options but they can all be easily derailed. If your spouse dies, your survivor’s pension could be considerably lower depending on your plan. Side hustles are great, but your health may fail or maybe you can’t find something – only 10 to 20% of retirees report doing some sort of work. There is a huge wealth transfer going on now and lots of inheritance. Just keep in mind your parents may live to be a 100, they may make some bad investments, or they may even get remarried.

They problem with the above is they are not the sole solution; make sure to have income from a variety of sources: pensions, savings, part-time work, investments, etc.

There is no shortage of factors to consider when trying to figure out how you are going to fund your retirement dreams. A financial advisor can crunch the numbers and offer investment alternatives, but you need to make the big decisions on your retirement lifestyle and how much you can realistically afford to sock away.

Anxiety is normal when it comes to retirement planning and the cure is having the knowledge and facts you need to make your own judgement on how much is enough.

Next week we are offering a free livestream that is going to tackle many of the issues raised in this article. It’s only an hour and will definitely get you on the right track – you can learn more about it here.

Resources

"Creative" mortgages cause for concern

More than a few mortgages these days are being approved despite some alarmingly high loan-to-income ratios. As Canadians pile on the debt to buy increasingly expensive homes, some experts are wondering if our comparatively stringent mortgage rules are enough to prevent a Canadian sub-prime mortgage crisis.

Is a side hustle worth it?

If you are a regular Financial Friday reader, you will recall that we talked about side hustles a few weeks back and how you need to justify them time-wise. This article delves deeper into that discussion and adds a few more factors to consider. Definitely worth a read if you are looking at more work as a solution to your financial issues.

Is a reverse mortgage ever a good idea?

Reverse mortgages have been called the perfect investment for people who hate their children! Borrowing your equity for daily living expenses is usually a recipe for disaster, but in an era of rising home prices, it may allow you to preserve current wealth and be an option under some retirement circumstances. A great primer if you want to learn what they are and  see how the math works out under a few different situations.

High home prices drive fractional real estate investing

There are plenty of REITs (real estate investment trusts) out there to choose from for anyone wanting to get in on the real estate boom, but some investors are now bypassing that route and buying direct with crowdfunded real estate. You could get in on an apartment building project for as little as a few hundred bucks and net a tidy return a few years down the road... IF all goes well!