Four critical retirement investing mistakes to avoid
From failing to plan to ‘extreme’ investing, these financial missteps are standing in the way of Canadians’ retirement goals.
By: PAUL BRENT
Date: July 30, 2015
It can be a challenging time to guide Canadians to a secure and successful retirement. Defined benefit pensions are becoming a relic of the past, rock-bottom interest rates have crimped fixed income returns and tepid global growth has made equity markets unpredictable and unstable.
When you add in record personal indebtedness, a weak Canadian economy and an aging population, it becomes clear that for financial advisors and their clients, the stakes are higher than ever before.
To keep retirement goals on track, it is critical to identify and avoid the common investment and retirement planning errors that typically trip up Canadians.
1. Absence of a financial plan
Perhaps surprisingly, the weakness that continues to crop up most often is the absence of a well-thought-out financial plan, says Kari Holdsworth, vice-president of individual wealth at Sun Life Financial in Waterloo, Ont.
“People don’t plan to fail, but they often fail to plan,” she says.
The 2015 Sun Life Canadian Unretirement Index, a poll conducted by Ipsos Reid that tracks Canadians’ attitudes and expectations about retirement, reported that just 33 per cent of people work with a financial advisor and just 22 per cent have a written financial plan.
“People without a financial plan potentially don’t have the assets they need to achieve their goals,” says Ms. Holdsworth. “But more importantly, they don’t have a crisp understanding of what their goals are and whether there is a gap for them to achieve them or not.”
2. Not planning for longevity
As Canadians live longer, retirement gets longer and more expensive, meaning that a significant percentage of Canadians are in danger of outliving their nest egg.
“That is fairly unappreciated,” says Ms. Holdsworth, noting that the Canadian Institute of Actuaries forecasts among those aged 65 today, one-quarter of women and 17 per cent of men will live beyond 95, a startling prediction. “Among Canadians with retirement plans, many target their assets to last only until age 85, and under-appreciate that the final decade is often lived in ill health with higher than planned for expenses.”
As the Canadian Heart and Stroke Foundation revealed in their 2013 Report on the Health of Canadians, heart attack, stroke and other chronic conditions will cause many Canadians to live their final decade in sickness, disability and immobility, putting further pressure on their retirement income and savings.
That decade-long shortfall will appear in a future in which healthcare costs are expected to be higher and governments cannot be counted on to bridge the gap, putting further pressure on investment portfolios. “The combination of volatility, low interest rates and living longer are putting significant headwinds into their ability to meet their goals,” she adds.
To meet this rising need, Sun Life and other financial institutions have created a range of Guaranteed Investment Fund (GIF) financial products. All of these products promise maturity and death benefit guarantees, and some offer guaranteed income over the life of the product.
“These GIF products were created based on research we did with Canadians about what they are concerned about in the five or 10 years before retirement,” says Ms. Holdsworth. “We developed products that give them the opportunity to stay invested in the market but we wrap guarantees and opportunities for upside. So if markets do well, with some GIF products, income sees the upside, protected from the downside.”
3. Extremes in investing
Sterling Rempel, a certified financial planner and principal advisor of Future Values Estate & Financial Planning in Calgary, has found that investors often err to the extremes when it comes to the reward-risk curve of stock market investing: either reckless or overly cautious.
“It is both ends of the spectrum, either being too aggressive or too conservative,” says Mr. Rempel. The downside of being too aggressive should be obvious, but the dangers of being too conservative are more subtle and go back to the problems of a longer, more costly retirement.
“If they are conservative, if they are [only] in GICs, how will their retirement portfolio keep up?” says Mr. Rempel, who currently plans for age 90 with his clients.
He sees conservative portfolios regularly that are larded up with bonds, GICs and even large amounts of cash. A common refrain from these investors is that now is not the time to jump back into the stock market.
“People say, ‘I will wait until the market settles down,’” says Mr. Rempel. “Well, it never settles down, it settles up and it is too late. Recently I have started to hear any number of reasons why they don’t want to invest in equities, whether it is Greece, China or the U.S.”
4. Not planning for unwelcome surprises
Many Canadian families’ financial plans fail to protect against a potential financial catastrophe, says Ms. Holdsworth. There are setbacks such as job loss or divorce, but a lengthy illness or even death could represent the greatest threat to financial well-being.
“Especially in the case of young families, if one of the wage earners dies you are losing that income,” says Ms. Holdsworth. “Having life insurance can replace it. Job loss can disrupt (finances), but it wouldn’t typically be as significant as a health event.” For example, a major health event within the family can bring with it significant expenses that extend beyond the medical costs covered by government or employer plans and can impact the household budget and ability to earn an income during recovery.
Canadians like to consider themselves a conservative bunch, but that isn’t the case when it comes to insurance, adds Ms. Holdsworth.
“There are very significant parts of the population that are either not insured or under-insured. I don’t think the population in large part understands the financial costs of a critical illness or a long-term need for personal care and assistance. Insurance can help them take ownership of covering these risks,” she says.
According to the 2014 Sun Life Canadian Health Index, which surveyed 2800 Canadians between 18 and 80 years of age, fewer than one in five Canadians own disability and/or critical illness insurance. Less than one in 10 have long-term care insurance.
“Insurance is not as utilized as the population could or should be looking at it,” says Ms. Holdsworth. “Selecting the right insurance is something that you need to plan for, not react to.”
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