Estimating how much money you’ll need in retirement can be a complex task, especially if you fall into one or more of the following traps.
If we don’t take certain factors into account, we can significantly underestimate the amount we need to save for a comfortable old age. Here are eight pitfalls to avoid in your calculations.
1. Neglect inflation
Due to inflation, prices increase over time. Logically, in 10, 20 or 30 years you will have to pay more for food, accommodation, transport or clothing. An element that you should not forget in your calculations. “The forecasts typically made by planners assume inflation of 2%. We are currently also preparing alternative scenarios with a slightly higher interest rate,” says Émile Khayat, financial planner and senior regional director at TD Wealth Management. Even if it doesn’t happen, it’s best to plan ahead.
2. Underestimate life expectancy
You could be retired for a lot longer than you think! According to the Quebec Institute of Financial Planning (IQPF), we should actually plan a withdrawal schedule starting at age 65, spanning 29 years for a man and 31 years for a woman, for an average of 25 years. Therefore, your assets may need to last for two or three decades. “The planners are based on scenarios that extend up to the age of 95,” explains Émile Khayat.
3. Forget about healthcare costs
As you get older, the risk that health care costs will skyrocket increases, especially if you have to rely on private services. “It is preferable to plan a provision of $5,000 to $10,000 per year after age 80,” recommends Émile Khayat. Don’t forget to also consider your health and heredity, as these can have a big impact on the scale.
4. Apply for your pension at the wrong time
It is possible to claim your Quebec Pension Plan (QPP) benefit from the age of 60. But be careful, because if you choose this strategy you will reduce the amount you are entitled to until the end of your days. Please note that you can now postpone retirement until you are 72, which will increase the amount of your pension. The same applies to the old-age security pension (PSV), which can be postponed until the age of 70. “As a rule, it is more advantageous to apply for your state pension later. “You can stay on the job market longer or, for example, opt for a part-time job,” says Émile Khayat. If our health allows, we can not only stay active but also reduce financial stress.
5. Follow the 70% rule
It used to be said that upon retirement, amounts equal to 70% of the expenses incurred over the course of one’s working life had to be paid in. This rule no longer applies. “Pensioners are healthy for longer and want to stay active, travel, etc. The best thing to do is to calculate 90% of the expenses,” assures Émile Khayat.
6. Making withdrawals in an incorrect order
The order in which you withdraw your assets (RRSP, TFSA, etc.) in retirement should be carefully planned. This could make a big difference in how long these amounts last, but also in the amounts you leave to your heirs. A good withdrawal order aims to smooth out the tax burden so you have money for longer. Be careful because the same recipe does not apply to everyone in this area.
7. Expect an inheritance
Some of us rely on our parents’ inheritance to secure our old age. This is a mistake, believes Émile Khayat. “Not only are people living longer, but we are also seeing that very old people may need significant amounts of money for health care,” he says. Result: You could end up with a lot less left than you imagined, or even nothing at all!
8. Recognize your losses
When markets are very turbulent and volatile, as has been the case in 2022, we may be tempted to change the composition of our portfolio and seek refuge in investments that seem safer to us. This will materialize our losses, which will prevent us from benefiting from the market recovery that we could have benefited from. “This can have an impact on the entire retirement plan,” warns Émile Khayat.
ADVICE
- When we retire, we often want to treat ourselves because we have worked hard throughout our lives and “deserve it.” Buying a boat or a luxury car, for example, are spur-of-the-moment expenses that could impact your long-term retirement savings.
- One of the best ways to estimate how much you should save is to consult a financial planner. It will prepare financial forecasts based on the assumptions recommended by the IQPF.