Enjoying decades of living post-retirement without worrying about finances means planning, saving and investing well before the day you call it quits. While there are many ways to reach your retirement goals, you’ll want to consider steering clear of these seven mistakes in order to avoid potentially sabotaging your plans for an enjoyable retirement.
1. Failing to save toward retirement
When planning for retirement, the odds for success favour the young. So, you should start saving as soon as possible. People entering the workforce after high school or post-secondary school often focus on climbing the corporate ladder, starting a family, buying a home or other priorities. That’s great, but it’s also important to start retirement planning. The sooner, the better.
The earlier you start, the more you’ll benefit. You’ll give compound interest more time to work in your favour. If you need help saving money and gaining traction, set up automatic deposits and transfer a set amount weekly, monthly or quarterly to an investment account.
Compound interest is one of the best things that ever happened to investors. For example, let’s say you invested $100,000 on January 1 at a 2.5% interest rate.
The principal amount invested on January 1 — $100,000 — grows to $102,500 (up $2,500) by December 31. After 10 years, what started as an initial $100,000 investment would be worth $128,008.45, and after 25 years, the investment would be worth $185,394.41 (these numbers are based on interest that’s compounded on a yearly basis).
You can save for retirement in various ways, such as with a retirement plan at work, an RRSP or Tax-Free Savings Accounts (TFSAs). If you’re unsure about where to begin, speak to a financial advisor. In fact, whether you’re a novice or an expert, sitting down with a professional makes sense..
2. Accumulating too much debt
Many Canadians are overburdened with debt. That spells bad news if you’re trying to build a nice nest egg ahead of retirement.
According to Equifax, consumer debt across Canada increased to $2.5 trillion in the second quarter of 2024. That’s up 4.2% year-over-year, and the primary contributor to rising debt is credit card debt. Cardholders carried north of $4,300 in credit card balances, on average (the highest amount since 2007).
According to Equifax, the second quarter of 2024 saw vehicle loan delinquency rates for non-bank auto lenders reach an all-time high.
Meanwhile, bank loan delinquencies were at their highest levels since 2019.
When planning for retirement, you can’t afford to get distracted by a debt albatross. It can be hard enough to invest on a consistent basis when you’re being financially responsible. But it can be even more difficult if you’re swimming in, sinking in or weighed down by debt.
Making any headway will be hard if your spending and debt accumulation are sabotaging your retirement plans.
3. Being unprepared for emergencies
A Statistics Canada survey shows that 25% of Canadians — one in four — wouldn’t be able to afford an emergency expense of $500.
No matter how you look at it, emergencies will come. When they do rear their ugly heads, you’re better off if you have money stashed away for a rainy day. Otherwise, you’ll have to use a credit card or line of credit to deal with unexpected expenses.
A good rule of thumb is to build an emergency fund that can cover three to six months of your expenses. It might take time to accumulate that amount, but devise a strategy to save toward it. You don’t want every emergency — whether to repair a roof or get a new furnace — to be a crisis.
A well-funded account to handle emergencies means you won’t need to withdraw money from your retirement savings accounts, use your credit card or access your line of credit.
4. Failing to budget
Failing to budget is another way you could be sabotaging your retirement planning efforts. A recent study shows that only 35% of Canadians have a budget, while 24% don’t budget because of lack of time, and 32% don’t budget because they say it’s not necessary.
Failing to budget is one way to land yourself in financial trouble. If an emergency situation arises and you don’t budget, you’ll perhaps make the wrong financial moves. Budgeting will help you determine your needs and wants, as well as how much money you have to work with.
One rule of thumb is to follow the 50-30-20 principle, which says 50% of your income should be earmarked for necessities, 30% should be used for entertainment, and 20% should be reserved for savings and debt reduction.
Unfortunately, too many Canadians don’t budget. Whether they didn’t get the memo or received it and discarded it, they go from month to month with no game plan for their hard-earned money.
How do you start a budget? Begin by writing down all monthly income sources, expenses, investments and other financial commitments. The next steps are to consider your financial goals, assess your spending and saving behaviours, monitor your budget and change or tweak your budget as necessary until it’s realistic.
5. Cashing out investments prematurely
A big mistake some people make is prematurely withdrawing money out of their retirement investments. That’s one way to start sabotaging your plans of saving enough for a comfortable life in retirement.
Remember how compound interest works? Well, cashing out your retirement investments fritters away the positive impact of compound interest. That’s why you should have an emergency fund.
If you have savings beyond your retirement fund, you won’t have to cash out your RRSP.
6. Retiring too soon
You might have dreams of a comfy life after retiring on your mind. But don’t get ahead of yourself. Retiring too early might feel good initially, but you’ll feel the pinch sooner rather than later if you jump the gun.
Retiring years or even decades before you should is not a wise decision. You’ll leave money on the table since you won’t benefit from the wonders of compound interest for as long as you otherwise would. It might be the difference between having a comfortable retirement and living hand to mouth
7. Investing too conservatively
If you have a low tolerance for risk, don’t allow anyone to pressure you into investments with a higher risk profile. And consider that if you start investing early, you’ll do okay by the time you retire, even if you invest conservatively.
This is where sitting down with a financial advisor can help. The professional will listen to your goals and objectives, and help you build an effective investment strategy, with the appropriate risk level. You can revisit the strategy annually or whenever you have questions or want to change directions.
Whether you’re nearing retirement or still have some way to go, don’t allow any of these errors to start sabotaging your plans. Retirement is a time to enjoy life, have fun and try new things. But if you don’t plan properly, your golden years won’t be so golden.
This article was written by Deanna Ritchie from Due and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.
