6 common mistakes Canadians make when planning their retirement

6 retirement planning mistakes to avoid

To ensure you arrive at retirement ready and prepared, make sure you avoid these common retirement planning mistakes:

1. Not having a plan

The biggest misnomer about retirement is that it’s an age. Many people assume that retirement begins automatically at the age of 65. You need to keep in mind that retirement is a number. It’s the amount of money that you need to sustain you through the remaining years of your life. Driving to retirement with no plan is like a trip to a mystery location with no map. You have no idea where you will end up. What will the weather be like? Are there restaurants, or should you pack some groceries? If you don’t have a plan, how can you know how you are going to fund your retirement? With taxes and inflation rising fast, it's hard to know your standard of living without a plan. A plan shows if you’re investing enough to be ready at your desired retirement age. The more time and clarity you have, the easier it is to reach your goals.

2. You can’t eat your house in retirement

Many Canadians focus so much on buying a house in their early working years, that they put off investing for retirement until their 40s and 50s.

People see their house as an investment. They expect to use its equity in retirement. But, you can't access your home's equity if you live in it without borrowing your equity from the bank (for the second time).

Additionally, some think they can “downsize” in retirement to unlock equity. Unless you're willing to move to a smaller or farther community with a much lower cost of living, or you're okay with renting, the juice won't be worth the squeeze. After paying land transfer tax, real estate and lawyer fees, you'll be left with less equity than you need for a worry-free retirement. It's also unlikely you'll want to rent at 75 years old if you didn't want to consider it at 30. When deciding if you can afford a downsized home, Canadians should remember to factor in their RRSP and TFSA contributions.

3. Taking too much debt into retirement

Debt is debilitating at any stage of life, but especially in retirement. It will quickly erode your retirement income. Plus, it will also prevent you from doing what you dreamed of in retirement. Consider delaying your retirement until the debt is paid off. Then, you can retire without worries. Isn’t that why you worked so hard?

4. Retirement income is tax-free, right?

If it was as easy as taking your RRSP balance and dividing by 30 years to get to an annual income in retirement, I wouldn’t have a job as a financial planner. It’s essential that you factor in taxes when planning your retirement income. Many people don't realise that your RRSP is taxable in retirement. So are pension, CPP and Old Age Security benefits. The only tax-free income in retirement is withdrawals from your TFSA. So, make sure this account is maxed out.

5. Relying too much on CPP and Old Age Security

You’re not going to like this one, but the government isn’t saving you in retirement. The maximum monthly CPP payment is $1,364 (in 2024). The maximum monthly Old Age Security is $713. That's a monthly total of $2,077. These are pre-tax figures and are subject to income tax. I’m not sure how many cruises and golf games you’ll be playing on that amount a month in this country! These benefits aim to supplement, not replace, your income. So, it's best to plan ahead.

6. $75,000 per year isn’t what it used to be

Many Canadians underestimate the impact of inflation in retirement. Things are getting more expensive. Our dollar is losing value faster than ever. Don't assume you can live off your current income. It's safe to say you’ll need a higher income in the future to maintain your current standard of living.

Retirement is meant to be a relaxing time in our lives, where we can slow down and enjoy the rewards of decades of hard work. We often imagine ourselves playing bridge and exploring the world. However, it can sneak up on you, so it's crucial to have a clear plan in place as early as possible to achieve it. Be aware of the potential pitfalls that could delay retirement and cause years of financial stress. With some advance planning, these mistakes can be easily avoided. If creating a retirement plan feels hard, find a trusted financial planner to help you.

Sources

1. Healthcare of Ontario Pension Plan: 2024 Canadian Retirement Survey