Top 10 Retirement Mistakes – My Own Advisor

Top 10 Retirement Mistakes

A few years ago, an article in the Financial Post caught my eye: mistakes retirees make when it comes to their investments.

More recently, the great folks at Visual Capitalist put together a graphic about the Top 10 Retirement Mistakes investors make. I thought for today’s post I’d review each one in that Top 10 list and highlight how I’m trying to navigate each potential issue (or not!), including what I’ve learned to date from other successful retirees that have been there, done that before me. 

Read on and feel free to compare notes in the comments section!

Top 10 Retirement Mistakes

Based on some survey data from the 2022 Natixis Global Survey, which polled 2,700 financial professionals across 16 countries between March and April 2022, here are the top retirement mistakes folks make:

Charted: Top 10 Retirement Planning Mistakes

And…

This is what I’m doing about them, in my own personal financial projections work. 

1. Underestimating the impact of inflation

According to 49% of financial planners, the largest mistake investors make is underestimating the sizable impact that inflation has on the value of retirement savings.

In Beat the Bank, author Larry Bates also hinted at the same wealth-killer to avoid (among other subjects). 

Larry suggested we need to understand and embrace three key wealth builders during our investing career: 

1. amount,
2. time, and
3. rate of return. 

And…we need to steer far away from wealth killers: 

1. fees,
2. taxation, and last but not least,
3. inflation. 

When it comes to our own financial projections, I include 3% sustained inflation. You can see how that 3% inflation is factored into our cashflow projections below; just as an example. 

Image: from Cashflows & Portfolios projections work. 

We review our anticipated cashflow needs every few months while working full-time and I anticipate the same frequency will need to occur when part-time work begins too.

Based on what I’ve learned from every successful retiree, they know sustainable cashflow is king in retirement. 

What inflation estimate do you use for your retirement income planning needs?

2. Underestimating how long you will live

Yes, you do not want to outlive your money. Ha.

Just a quick reminder that FU money is not 3-6 months of your living expenses. Thank you and good luck out there.

— Douglas A. Boneparth (@dougboneparth) February 6, 2024

From the survey, 46% of advisors see the underestimating of life spans as the second-most-common retirement mistake. Makes sense: the longer you live, the more retirement savings you’ll need.

My wife and I run our projections to age 95.

Will we both live that long?

No idea. Probably not.

In Retirement Income for Life by Fred Vettese, he wrote:

“Drawing down one’s savings in retirement is something very few retirees do well, even with the help of professional advisors.”

This is because smart decumulation strategies are difficult to employ because retirees have, for the most part, conflicting goals. Retirees ideally want to have enough money to last a lifetime but at the same time, they want to enjoy the wealth they’ve worked so hard for.

Here are some things that Vettese suggests to optimize asset decumulation:

1. Invest in passively managed funds to lower your investment costs and fees over time – keeping more of money working for you (versus in the hands of advisors of financial companies).
2. Start your Canada Pension Plan (CPP) later in life – something I wrote about here.
3. Use some (not all), maybe between 25-50% or so of your RRIF assets to purchase a non-indexed annuity (depending on your income needs).
4. Make adjustments to your spending habits: consider variable withdrawals. In “good times” consider spending more. In bad times, when the market declines for a couple of years or remains flat, consider spending less.
5. Consider the “nuclear” option of using a reverse mortgage, later in life.

Our personal “nuclear” option does not include a reverse mortgage that Vettese suggests but it does include home ownership or lack thereof – selling our home if/when we need to later in life and using up our Tax Free Savings Account (TFSAs) assets later in life as well.

This means we are likely keep our TFSA assets intact for the coming 10-20 years preferring to use and draw down other assets such as all RRSP/RRIF money and non-registered assets first. I’ll come back to this point later on. 

What age do you use for your retirement income planning needs?

3. Overestimating investment income

Maybe after mistake #2, it’s not surprising to read that some retirees (not all!) overestimate the income they need to retire on. 

I dunno. I mean, I would rather “have enough” than too little, to age 95 or otherwise. 

That said, we don’t want a large estate. That’s not a goal of ours. 

Based on our most recent Financial Independence Update we’ve assumed we’ll need about ~ $6,000 per month to fulfill our retirement income needs and wants, on average. Some months will require more spending. Some months could be less. We’ve assumed for now that spending will increase by inflation year-over-year (3%).

This also assumes we remain out of debt once we hit full retirement. We own our home now and are mortgage-free.

I’ve prepared a few free retirement income case studies on this site and if you want to spend about $6,000 per month on average like we do, I know roughly what you’ll need to have saved up.

Here is that case study.

How much do you need to retire on $6,000 per month?

It’s a lot of money for sure to have saved up…

The good news is, you don’t need to save that much. We haven’t. Time and compounding will do most of the work for you if save early and often, even in small amounts. 

To support our cashflow needs in retirement, while we are likely to “live off dividends” to some degree we will absolutely spend the investment capital over time since this approach doesn’t make sense for us in perpetuity.

Living off our investment income has always been more of a near-term mindset – to ensure we have some cashflow to supplement part-time work in our 50s that is greater than our expenses.

Here is my fun lil’ graphic:

Have we overestimated the investment income we need to support our semi-retirement years?

I don’t think so but everyone needs to figure out their income needs and wants and find ways to fund it accordingly.

What assumptions have you made or did you make about your investment income sources?

4. Investing too conservatively

I’ll keep my reply more short and sweet on this one since I’ll explain more under point #5.

I’ve learned from other successful retirees that some of them:

1. totally ignore the expert advice related to matching your age with your bond allocation %.
2. ignore diversification principles that suggest you must invest in a % of international stocks.
3. ignore 4% safe withdrawal rates. 

Instead, many retirees are just as aggressive by holding lots of equities in their retirement years as in their asset accumulation years. They keep a bias to U.S. stocks or U.S.-listed ETFs in particular that invest in the U.S. stock market for growth. They ignore any suggestions of safe withdrawal rates and instead use some form of variable percentage withdrawals over time.

In doing so, they’ve spent more money to enjoy a fulfilling retirement and in some cases, even with variable spending, their portfolio value is now higher in retirement than it was the day they retired!

Is your investing approach too conservative?

5. Setting unrealistic return expectations

In our personal projections, we’ve assumed between 5.5%-6% annualized long-term equity returns from our investment portfolio. 

That portfolio is mostly equities, although we do hold some cash and/or cash-alternative ETFs.

Are Cash-Alternative ETFs Right for You?

We don’t own any bonds. We don’t own any GICs. We don’t own any preferred shares. We have no plans to own any of these asset classes or products for the coming decade at least.

Based on our historical returns, including those from our moaty stocks, we have been exceeding 6% returns across all accounts in our portfolio but the financial future is always very cloudy. 

What investing return expectations do you have over time? Are they aligned to your objectives?

6. Forgetting healthcare costs

Like I mentioned above, healthcare in this country is a huge wildcard. I believe we are in a major healthcare crisis that needs to be resolved…

I started looking into healthcare benefits for retirees a few years ago, just to see what the costs might be down the line. 

I hope to update this post or related posts soon. 

Healthcare Insurance Benefits for Retirees in Canada

While we are not yet in retirement let alone semi-retirement, we anticipate we’ll spend a bit more money in our ‘go-go years’ vs. the ‘slower-go years’. To combat healthcare costs in the future, we’re actually going to keep TFSA assets intact until our 70s or 80s, and use those tax-free assets as needed for long-term care expenses. This way, there are no tax consequences involved and our money will go further if and when we need it as part of any “nuclear” retirement income option beyond our home.

Have you budgeted for long-term healthcare expenses?

7. Failing to understand income sources

I’ve probably exhausted this point by now but we intend to have the following key personal income sources to tap in our retirement income plan, beyond government benefits, when we’re no longer working at all. Your mileage may vary:

1. Personal assets (RRSPs, TFSAs, Non-Reg. Accounts).
2. My small workplace defined benefit pension.
3. My wife’s defined contribution pension. 

Any successful retirement income plan I’ve seen from those older than me, who have been there, done that per se, put a focus on personal retirement income planning over and above what any government benefits might provide.

This means, while successful retirees don’t discount the (eventual) income they will earn from Old Age Security (OAS) or our Canada Pension Plan (CPP) in particular, they don’t fully depend on these benefits either. 

Have you tallied your retirement income sources?

8. Relying too heavily on public benefits

Aligned to point #7, while we will rely on our government benefits, we will do so mostly from a position of inflation protection.

Given both government benefits include some inflation protection (CPI), I personally consider CPP and OAS very bond-like. For this reason, I have a tilt towards equities in our personal portfolio and likely always will. This tilt exposes me/us to more market volatility but it should also provide us with better (higher) returns over time than fixed income.

I believe the more you can tilt your portfolio to hold more equities during retirement, including those that pay dividends or distributions, the more retirement income you could potentially generate. At least, this is our plan…

How much are you leaning on CPP or OAS benefits? 

9. Underestimating real estate costs

I’ll also keep my reply more short and sweet on this one: we intend to remain mortgage-free and we don’t intend to use our home as a retirement nest egg.

Are you going to use your home to fund your retirement?

10. Investing too aggressively

While some investors might argue I have too much of a bias to dividend paying stocks, this approach along with some growth-oriented ETFs is helping us meet our income objectives. 

January 2024 Dividend Income Update

To ensure we shield ourselves from any major market calamity, since stock markets can and will correct from time to time, we will keep a modest cash wedge as we enter semi-retirement. 

How long do stock market corrections last?

How much cash or cash equivalents you need to keep in your portfolio can vary of course but we feel this is a decent starting point. 

How much cash should you keep?

Are you going to employ some sort of cash wedge or fixed-income % in your retirement income plan? 

Top 10 Retirement Mistakes Summary

I don’t have all the answers but I’d like to believe we’ve done more good things than not over our DIY investing years to get ourselves organized for what might lie ahead.

There is always more work to do.

As we approach some semi-retirement considerstions that I will write about next month (!) we simply hope to mitigate any retirement planning mistakes along the way. I’ll keep you posted…

Thanks for reading and I hope you got something out of this post that might be of value to your tailored plan or financial projections.

Mark