Are you planning to retire soon? Everyone is concerned about ensuring a good income in retirement, but, according to many surveys, very few are really doing much about it.
Here are some popular misconceptions about retirement planning that will give you something to think about.
You can get by on government pensions
Yes, you probably can, but you might not enjoy life very much.
According to Service Canada, the maximum CPP benefit (2013) is $1,012.50 per month, with the average being $528.49.
Related: Do We Need To Beef Up Our CPP?
Combine this with the maximum OAS payment of $546 per month, GIS of $165 per month (single, income under $16,560) and you’ll be provided with little more than subsistence income.
You need less money in retirement
Financial professionals always bandy about the statement that you’ll need 70% of your pre-retirement income – but this may give a false sense of security.
The only way to know with some degree of certainty what you’ll need is to go through your own spending patterns and plans.
It’s true that employment and child raising expenses may decrease, but what are your plans?
Do you hope to travel? Do you intend to play more golf, and does that entail a local club membership, or a condo in the South? What about future medical needs?
Related: Create A Retirement Income Plan
Your future lifestyle (and its cost) might surprise you.
A paid-off home is a good source of retirement capital
A principal residence is likely a substantial investment, but it may not be a good source of future cash flow.
Consider the strong sentimental attachment most people have to their homes. Having to move out to raise capital would be a major step.
Household expenses can be high and many people think to lower them by purchasing a smaller residence and investing the remaining sale proceeds.
However, your home’s value and saleability will fluctuate. Most recently, the general price trend in many areas has been on the down side.
Related: Should You Sell The Family Home?
Consider realtor’s fees, closing costs and moving expenses and your anticipated nest egg may not be as big as you think.
Your new home may come with additional unexpected expenses, such as condo fees or higher travel costs.
Other strategies such as taking out a Home Equity Line of Credit or a Reverse Mortgage may give you the cash flow you need, but they need to be researched carefully.
Retirees don’t need insurance
Insurance is not just for the young these days. It can be used for many purposes in addition to protecting dependents from the untimely demise of the family breadwinner.
Many wise investors use life insurance to provide cash on death to pay for capital gains tax liabilities. Other seniors use insurance products to draw tax-efficient income and then leave a substantial estate. Insurance can have a role in charitable giving.
Related: Understanding No Medical Exam Life Insurance
Finally, newer products such as long-term care and critical care insurance may be appropriate.
Retirees should not invest in equities
This old chestnut needs to be put out of its misery. In the ‘60s, a retiree needed to plan on providing retirement income for say, 10 to 15 years.
He or she likely had a company pension plan and good savings habits. GICs and other fixed income investments providing secure income but limited growth opportunities were just fine.
Related: Can You Succeed With An All-GIC Portfolio?
Today, life expectancies have grown dramatically. Moreover, retirees are living healthier, more active lives – which is likely to cost more money.
Financial advisors warn about the danger of outliving your assets. To offset this danger, a common planning horizon for retirement income now is to age 90.
Continued growth of assets to meet this challenge is important and the prudent use of equities is an excellent way to provide it. No other financial asset has historically matched the performance of stocks.
Short-term volatility should not be overemphasized, even in an income program for seniors, especially when your total time horizon may be as long as 30 years or more.
