A growing number of Canadians plan on working longer because they haven’t saved enough for retirement. We see it at a macro-level; Canadian households owe a record $1.69 in debt for every dollar of disposable income, meanwhile the personal savings rate in Canada stands at a paltry 3.4 percent.
There are plenty of reasons why we owe too much and save too little. The economy stinks, people get laid off, and salary increases are few and far between.
That said we’re often our own worst enemy when it comes to taking care of our finances. Here are eight bad habits that are killing your retirement dreams:
8 Habits That Are Killing Your Retirement Dreams
1. You don’t watch your spending
It’s tough to stop a money leak when you have no clue where your money is going. Small daily purchases do add up (latte factor, anyone?), but these spending categories can bust your budget much faster – big grocery bills, dining out too frequently, filling your closet full of new clothes, one-click online shopping, and expensive hobbies, to name a few.
The solution: Write down everything you spend for three months. I guarantee you’ll have an ‘a-ha’ moment at best, and at worst discover something useful about your spending habits that you’d be willing to change.
The goal of course is to spend less than you earn. It’s one of the major tenets of personal finance.
2. You want the newest ‘everything’
Fashion and décor trends change, technology constantly evolves. Staying ahead of the curve means shelling out big bucks for the latest and greatest products. The problem is your capacity to buy new things will never keep up with the pace of innovation and change. It’s an endless cycle.
The solution: Wait. Early adopters pay a hefty premium to be first. Look no further than televisions, where the latest innovations can initially go for between $5,000 and $10,000 – 10 times what they’ll cost in a year or two.
The bigger issue is the psychological need to always have the latest gadget or be at the cutting edge. Ask yourself whom are you trying to impress.
3. You have the constant need to upgrade
Fewer than half of all iPhone users hang onto their smartphones until they stop working or become obsolete. Most want to upgrade as soon as their provider allows it – usually every two years. A small percentage upgrades every year whenever a new model is released.
While spending a few hundred dollars on a new phone every other year might not hinder your retirement plans, it could be a symptom of a bigger problem. The constant need to upgrade your technology, your car, and even your home can be a big drain on your finances.
Nearly three in 10 homeowners get the urge to move every five years, and 14 percent actually want to move every year.
The solution: The same buy-and-hold approach that you take with your investments can also apply to your major purchases. The Globe and Mail’s Rob Carrick suggests a 10-year rule for homeowners to combat the odds of a housing crash and to save on transaction fees.
Extending the life of your purchases, even by a year or two, can free up cash to pay down debt or save for retirement.
4. You treat credit card debt as a fact of life instead of a hair-on-fire emergency
Life can be expensive but there is no excuse for using credit cards to support your lifestyle. Despite what your friends or coworkers might say, credit card debt is not a fact of life. This may come as a shock but you can save up in advance for a vacation or new kitchen appliances.
The solution: Nothing can ruin your finances quite like high-interest credit card debt compounding every month. Stop everything and assess your income and expenses. Cut discretionary spending, put any savings plans on hold, and throw every cent towards your highest interest debt until it’s gone.
Related: Debt avalanche vs. debt snowball (or when math trumps behaviour)
5. You use low interest rates as an excuse to finance depreciating assets
Borrowing to invest can make sense when your expected return is greater than the cost of the loan. But it’s a mistake to take out a loan – even at today’s low interest rates – to finance consumables and depreciating assets.
Common reasons to take on debt today include weddings, vacations, furniture, and vehicles. A home equity line of credit can provide flexibility to pay for big purchases, but the habit of borrowing from your future self to pay for today’s consumption is a major retirement killer.
The solution: You need a financial plan. Most of us can wrap our heads around saving for retirement but we struggle prioritizing and funding our short-term goals. A good plan helps you identify what’s important in both the immediate and distant future and steers your savings towards the appropriate goals.
Put a dollar amount and a timeline on your goals and start saving. Trust me, it’ll feel great to pay for your next vacation or big-ticket purchase in cash.
6. You’re too complacent
Doing nothing is often the best course of action when it comes to a volatile stock market, but financial inertia can cost you in other ways. Some of us can’t find $50 a month to save for retirement, yet we pay $15 a month or more in bank fees, won’t drive half-a-block to save money on gas or groceries, and don’t bother returning items of clothing that don’t fit.
Worse examples of complacency are when people don’t take advantage of their employer matching RRSP program, don’t shop around for a better rate on their mortgage, or continue to pay high fees on their investments.
The solution: Sometimes we need a wake-up call or major life event before we start taking our finances seriously. Once you see how much complacency is costing you that’s usually enough to motivate you into taking action.
7. You put off retirement savings until a later that never comes
“We’ll start saving for retirement once we’ve paid off our credit cards-line of credit-mortgage.”
There are so many priorities competing for your hard-earned dollars. Sadly, retirement savings is easy to put on the back-burner while you deal with more immediate needs like a big mortgage, two car payments, a new trailer, and some expensive seasonal hobbies. Retirement is far away and you can save later, right?
If you’re already killing your retirement dreams with the previous six habits then later might never come.
The solution: There’s a reason why ‘pay yourself first’ is such a powerful savings tool. Money is automatically whisked out of your account before you get a chance to spend it. Like some kind of magic you barely notice and are somehow able to live on the rest.
8. You keep your long-term savings in cash
You actually managed to get some money from your chequing account into your RRSP or TFSA. The problem now is that it’s sitting in cash – you actually need to take the next step and buy an investment such as a mutual fund, ETF, stock, bond, or GIC.
This is a uniquely Canadian problem as investors have nearly $75 billion in excess cash sitting in their portfolios.
The solution: Whether it’s risk-aversion or analysis paralysis, you need to take action and get your retirement savings working for you. Speak with a financial planner who can help you make sense of your investment choices and risk tolerance. Read books, blogs, and magazines to try and educate yourself about investing and how to build a portfolio.
A good place to start is with the model portfolios listed on the Canadian Couch Potato blog.
Final thoughts
It’s true, we do plenty to sabotage our own retirement dreams. The good news is that it’s never too late to take control of your finances and start saving for retirement. Start by fixing bad habits that have a negative effect on your finances.
Save enough and you can retire on your terms.
There’s wide evidence showing that wealthy families tend to lose their fortune by the third generation. One of the most famous examples of squandering generational wealth comes from the Vanderbilt family, which is chronicled in the book, Fortune’s Children: The Fall of House Vanderbilt.
The Vanderbilt story is a classic case of the old adage, “Shirtsleeves to shirtsleeves in three generations.” Cornelius Vanderbilt, known as “The Commodore”, built his fortune first as a shipping magnate in the early 1800s before turning his attention to the rapidly expanding railroad industry when he was in his 60s.
Though he had 13 children, he left 95 percent of his fortune (estimated at $100 million) to his eldest son Billy. His surviving children received much less, with his four other sons receiving a few million apiece while his daughters were given amounts up to $500,000.
Billy continued to run the railroad empire and more than doubled the family fortune (to $232 million) before his death nine years later in 1885. Despite Billy’s business success, less than forty years after his death no Vanderbilt was counted among the world’s richest people.
Fortune’s Children traces the dramatic rise and fall of this iconic American family, from the rise of “The Commodore” to the fall of his spendthrift heirs who eventually squandered a massive fortune.
Why this three generation cycle where the grandchildren blow through the wealth obtained by the grandparents and parents? As the Scottish say, “The father buys, the son builds, the grandchild sells, and his son begs.”
One explanation is that the first generation often comes from financial hardship and is willing to make sacrifices for a better life. The efforts pay off later in life, so the second generation grows up witnessing their parents’ struggle and has an appreciation for the hard work and sacrifice. By the third generation there’s no memory of that struggle, they only know a life of plenty and lack the understanding of what went into building the family fortune.
Of course, this is an oversimplification. The Commodore had 13 children, and Billy had eight children. The fortune gets divided up, there are family squabbles, philanthropic gifts (the Vanderbilts were very charitable), divorces, bad investments, and the like.
When it comes to leaving an inheritance, perhaps Warren Buffett said it best:
“The perfect amount to leave to your kids is enough money so that they would feel they could do anything, but not so much that they could do nothing.”
This Week’s Recap:
Earlier this week I started a new series called the Money Bag, where I’ll answer reader questions about personal finance, investing, and retirement. This week’s Money Bag featured questions about expected future investment returns, as well as an investing strategy known as the Smith Manoeuvre.
Thanks so much for your questions and comments. I’ve got plenty of material to turn the Money Bag feature into an ongoing series.
Next week I’ll look to piece together the retirement income puzzle and show how various income streams fit into your retirement plans.
Promo of the Week:
Travel rewards collectors should take a look at the CIBC Aventura Visa Infinite Card. Apply now and you’ll get 15,000 Aventura points, a $100 travel credit, plus a first year annual fee rebate. That ticks all the boxes for me when it comes to new credit card promotions. I applied and received this card last week.
Weekend Reading:
Michael James answers a reader question about how to manage a GIC ladder in retirement. I like that he shares how he handles the cash and GICs in his own portfolio, and lets the readers decide if that approach works for them.
Preston McSwain calls on investment firms to stop promoting private equity investments as a superior investment to public markets. Although some private equity investments do outperform, individual investors are rarely compensated for the extreme risk they take.
Retired actuary Fred Vettese says the extinction of defined benefit pension plans is almost upon us.
Incredibly, mutual-fund investors still aren’t clear on how much they pay for advice:
“The vast majority of investors haven’t noticed any changes in their reports since CRM2 came out. Just because information is provided, doesn’t mean people will actually pay attention to it … and it also doesn’t necessarily mean they understand it.”
Ellen Roseman explains how mutual funds grew to be a $1.5-trillion industry in Canada.
Gordon Pape takes a shot at Ontario finance minister Vic Fedeli with this piece on how the Ontario government betrayed investors.
Check out Rob Carrick’s three-part “retirementality” podcast called Looking Ahead:
- Episode 1: Young and Careless w/ Shannon Lee Simmons
- Episode 2: The School of Hard Knocks w/ Dan Bortolotti
- Episode 3: Walking the Plank into Retirement w/ Rona Birenbaum
How much money should you have left when you die? The experts agree, you can’t take it with you.
What if stocks don’t crash … for a while? Ben Carlson says the stock market can go long stretches without an enormous market crash.
Nick Maggiulli from Of Dollars and Data neatly explains why you shouldn’t let your investments be defined by exceptions.
Frugal Trader from Million Dollar Journey updated this post on the best provinces to retire early on dividend income.
Finally, Barry Choi set up his frugal parents with a new Endy mattress – the online mattress in a box company. I reviewed the Endy, Casper, and Bear mattresses a while ago and thought Endy was the most comfortable of the three.
Happy Thanksgiving, and have a great weekend everyone!
Today I’m reaching into the mail bag for a new feature I’m calling the Money Bag. I’ll answer questions and address comments from readers on a wide range of money topics, myths, and perceptions about money. No question is off limits, so hit me up in the comments section or send me an email about all the money things you’re dying to know.
To start, we’ve got two questions from reader Kevin, who asked about expected future investment returns and also why I haven’t done the Smith Manoeuvre. Take it away, Kevin:
Expected Investment Returns
“I read an article in your weekly reading that spoke about how good stock market returns have been over the last few years and that we shouldn’t expect the same results going forward. The author said we should expect 4-5 percent returns going forward.
I was wondering if that is the case, why not pay off your mortgage faster instead of putting that money into an ETF portfolio.
The money put into your home would be a safer short term investment, plus the added “mortgage freedom” benefit. Then if you REALLY wanted you could borrow against the equity later when expected investment returns are higher?”
Hi Kevin, thanks for your email. I believe the best long-term investment is in the stock market, but with mortgage interest rates creeping up it certainly makes that decision more complicated.
Expected future returns are just that…projections. Nobody knows where the stock market is headed tomorrow or next week, let alone for the next two decades or more.
There’s an opportunity cost with every decision. The risk you take by putting all your extra cashflow against your mortgage is that you could miss out on better returns if markets rise higher than expected. That’s why I think it’s best to stick with a regular contribution schedule for your investments and balance that with responsible debt pay down (including mortgage).
Kevin, without knowing your age, employment situation, family situation, debt situation, and investment goals it’s impossible to say what you should do. All I know is if you base your investment strategy on market timing and looking at crystal balls, you’ll end up disappointed more often than not.
Perhaps a blended approach of additional mortgage payments along with your regular investment contributions will scratch both of those itches for the time being until something changes in your personal situation that warrants a new approach?
Smith Manoeuvre
Here’s Kevin again with a follow up reply:
“Have you looked into doing the Smith Manoeuvre yourself? Why did you decide to do it or not do it?
I’m young professional with a 100k plus salary and wife that stays at home with our new baby. I have been researching [the Smith Manoeuvre] and I’m considering doing it with index ETFs, or borrowing to buy another home.
I’d like to know why you did it or not, and hopefully gain some understanding from your experience.”
Ahh, the Smith Manoeuvre. This was all the rage back in 2007 when I started following financial blogs. It was made famous in that circle by Frugal Trader at Million Dollar Journey, among others.
The Smith Manoeuvre is a leveraged investment strategy where an investor obtains a readvanceable mortgage to borrow against their home and invest in the stock market. While turning your mortgage into a tax-deductible loan sounds appealing, it’s not without risk.
Unfortunately, I know of several bloggers and blog readers who didn’t stick with the strategy through the financial crisis in 2008/09. Looking back it was the worst time to be setting up a leveraged investment portfolio. That’s because it’s hard to stomach watching your portfolio get cut in half in just a few months. And sure, many companies kept their dividends intact, but that’s little solace for some investors who were staring at a $200,000 loan balance and a $120,000 investment portfolio.
Okay, so let’s fast forward 10 years and now we’re in an unprecedented bull market for stocks, while home valuations are also sky high in many areas. While I never advocate market timing, it just doesn’t feel like a good time to be setting up a leveraged portfolio if you’ve never lived through a crash of that magnitude and know for certain how you’d react…or how your significant other would react for that matter.
Personally, we have many competing financial priorities and I believe maxing out our RRSPs and TFSAs, plus RESPs for the kids and a little bit extra on the mortgage is good enough to meet our financial goals. If I get to the point where our mortgage is paid off and all other accounts are maxed out AND there’s still money left over, then I’d consider opening a non-registered account and looking at some different investment strategies (including the Smith Manoeuvre). But at this point I have no plans to consider this strategy anytime soon.
Finally, you mentioned indexing, which of course I’m all for, but the Smith Manoeuvre likely* works best with Canadian dividend stocks. Not only is the loan tax-deductible but there’s also the dividend tax credit to consider. The point is to have the dividends pay the interest, and while index funds pay distributions they are likely too small to cover the loan interest.
*Note: I’m not a Smith Manoeuvre expert at all
Final thoughts
I hope you enjoyed the first edition of the Money Bag. Please feel free to share your thoughts on expected returns or the Smith Manoeuvre with me and Kevin in the comments section. We’d love to hear a different perspective.
And send me an email with your money questions and I might include it in a future Money Bag segment.