The 5 Biggest Mistakes to Avoid in Retirement

Retirement is the stage of life you leave work priorities behind and partake in the things you enjoy most. However, financial stress can place a large roadblock in many retirement plans. To help you get the most out of your golden years, we have outlined some of the financial mistakes we believe are crucial to avoid during your retirement.

1) Having a Large Spending Spike

When beginning retirement it can be very easy to change spending habits and mindsets. A person goes from a position of building up savings and living off employment income, to spending savings and having no career obligation to fill their time.

In the early stages of retirement, there are (or should be) fewer expenses to pay. Retirement is a point in life where most have paid off consumer debt and mortgages, decreasing the amount of money needed on a monthly basis.

The rule of thumb for expected annual retirement income is roughly 80% of a person’s income from their final years of employment. This is a good thing to keep in mind when budgeting during your retirement.

If the retiree succumbs to the urge to spend more during retirement it can have many negative consequences,  including but not limited to; potentially depleting their savings faster than expected requiring a reduction in retirement income and lifestyle, not having enough savings for unanticipated expenditures (like medical expenses, which isn’t as big of a concern in Canada), and not being able to cover final expenses or leave a legacy.

2) Maintaining the Same Investment Strategy

There are 5 general stages of the human life cycle as it relates to income; Early Earning Years, Family Commitment Years, Mature Earning Years, Preparing for Retirement, and Retirement. The investment strategy at each stage can differ significantly.

For instance, in your early earning years, you are just starting to think about and save for retirement. Since retirement is far off, you won’t need access to those funds right away. Therefore, your investment strategy could be riskier than someone nearing retirement who needs to be assured that sufficient funds will be there for withdrawal in a few short years.

It is a good idea to sit down with your investment advisor on a regular basis to ensure you are still on the right track. In our office, we meet with our clients at least once a year to make sure that our investment and financial planning strategies are still suitable for their phase of life.

3) Not Withdrawing Savings Tax Efficiently

During retirement, your income will generally come from 2 sources: savings, and government benefits (Canada Pension Plan & Old Age Security). Depending on the type of savings you have (RRSP, TFSA, LIF, RIF, etc.), the tax consequences can differ.

When withdrawing money (at any time, especially during retirement) it is important to do it in the most tax efficient manner. Many people are unaware of the tax consequences associated with different investment accounts. For more information on how to withdraw money in the most tax-efficient way, talk to your financial advisor.

4) Carrying Debt

Going into retirement carrying debt can cause a lot of unwanted stress. As mentioned earlier your income during retirement is often slightly lower, and you are generally using up what you have saved. Carrying debt increases your expenses and cash flow constraints during retirement.

You might be able to afford the debt now, but what if interest rates rise by 1 or 2 percent or more? In your working years, you could handle that scenario with ease. For example, you could have just decreased how much you were putting into savings to cover the increase in interest payments. However, during retirement, it becomes more worrisome, because you are living off those savings and may have to withdraw more.

If you are able, it is always best to try and have all debt paid off before entering into retirement.

5) Not Planning Your Estate

This not only can hurt the financial legacy that you leave for your loved ones but can also cause a lot of undue stress for those left after your passing. No one wants to have the hard conversation of what happens when you are gone, but not having those conversations will only make it harder when that time comes.

It is important to have a will in place and to have all your investment accounts set up with appropriate beneficiary designations. Having a will and a proper estate plan eases stress, lowers the emotional aspects of financial conversations with loved ones, and can have financial benefits such as flowing proceeds to your surviving spouse or beneficiaries tax-free. Read more about the importance of talking money from one of our previous blog posts.

For more information on estate planning and financial planning, you can visit our website , or call us and make an appointment.

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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy.