Retirement Planning in Canada — 5 Mistakes You Need to Avoid

by Misbaudeen Adeshina

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Retirement Planning in Canada — 5 Mistakes You Need to Avoid

Retirement planning in Canada requires effort, discipline, and preparation. By planning early, you can save yourself a lot of money when you are older.

Retirement planning can involve doing frequent financial and asset assessments, evaluating your current investments, setting up a retirement income target, researching your past investments, identifying areas where you might want to make changes, and figuring out where your funds should head next.

Retirement should be a time when you forget about stress — but getting to that point involves making a lot of wise choices, such as where to store your savings or how much to stash away.

One of the biggest mistakes you could make is to not save any money at all, with an earlier CIBC poll showing that 32% of Canadians don’t have any funds set aside at all for retirement.

The poll also discovered that Canadians have on average $184,000 in retirement savings, while 19% only have less than $50,000. Experts recommend saving at least $756,000, so these findings are extremely alarming.

To help you plan for a better future, here are five mistakes you need to avoid making to maximize your retirement.



Having Unrealistic Expectations

One of the mistakes you need to avoid when it comes to retirement planning in Canada is having unrealistic expectations.

Whether your vision is to travel around the world, find a new place in the world to settle down, or spoil your grandkids, you need to have an idea of how much it will all cost.

Given the results of the CIBC poll, you need to reconsider your cash flow now and plan for your cash flow later. What are your plans for income in retirement?

Will you downsize to cut down on costs? Do you have a sizeable investment fund as a safety net or assets to sell? These are all details you need to account for now to manage your expectations later.



Putting Everything in a Savings Account

Although saving for the sake of having money in the bank seems like an easy and no-risk way to go, most Canadian banks only offer around a 1% interest rate for savings accounts.

To put that into perspective, if you save $10,000 at a 1% interest, that will only grow $510 for you in five years. Putting your money into an institution with a 15% interest rate on the other hand will grant you an additional $10,113.57 in five years.

Instead, consider RRSPs and TFSAs as some of the other retirement savings options at your disposal, which have their own tax and investment advantages.

Early, Unnecessary Withdrawals

The third mistake that you need to avoid when it comes to retirement planning in Canada is early and unnecessary withdrawals.

That said, for your TFSA, withdrawals are tax-free and aren’t counted as income, so they won’t affect your MTR or your eligibility for income-tested government benefits such as OAS.

RRSP withdrawals on the other hand must be declared as income the year you withdraw funds, which can result in a hefty tax bill. Early withdrawals will also make you lose out on the power of compounding, which basically means the larger your investment, the bigger your interest can grow.

Additionally, you won’t be able to get your contribution room back. This is why it’s so important that you don’t withdraw any money from it until you retire.



Not Accounting for Healthcare Expenses

The older you get, the more issues you will have to deal with when it comes to your health. And after leaving the workforce, the cost of private healthcare may no longer be covered by an employment-based benefits plan.

The government does offer to cover the cost of medication for seniors, but it’s always better to be prepared. Have an emergency fund, have a line of credit pre-approved, and always recheck your insurance policies.

Neglecting to Plan for Inflation

Inflation in Canada has been near record lows for the past few years. Canada’s annual consumer price index was found to be at 1.9% in 2019 — but that doesn’t guarantee that the cost of living 10 years from now will be as manageable as it is now, especially with a fixed income.

Groceries that cost $120 now could cost more than $310 in 10 years if inflation were ever to rise above 12%.

This is why in our article on ‘How Do You Prepare for a Recession, we highlight how unpredictable life can be, which only goes to show that taking the appropriate measures is absolutely crucial.

So it is always important that you consult a financial advisor, build a solid emergency fund, and even look into liquid investments.

The key to all investment decisions is to start early and make sound financial decisions. So make sure to keep all of these factors in mind as you go about planning for your retirement.

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4 comments

Jeannel KALAMBA September 18, 2021 - 9:25 am

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