CANADIAN RETIREMENT PLANNING MISTAKES
KEY STRATEGIES ON HOW TO TAKE ACTION TO AVOID THEMBy GRANT W. HICKSTrafford Publishing
Copyright © 2010 Grant W. Hicks, RDB, CIM, FCSI
All right reserved.ISBN: 978-1-4269-1354-9Contents
Introduction........................................................................................................................................1Mistake 1 No Clear Written Retirement Plan; Not Taking Control of Your Financial Future............................................................6Mistake 2 Not Seeing Danger Signs in Your Portfolio................................................................................................8Mistake 3 Four Major Pitfalls of Retirement........................................................................................................10Mistake 4 Simple Money Mistakes Any Retiree Can Avoid..............................................................................................12Mistake 5 Not Managing Money Systematically........................................................................................................14Mistake 6 No System for Rebalancing Your Portfolio on a Regular Basis..............................................................................17Mistake 7 Not Managing Risk........................................................................................................................19Mistake 8 The Wrong Time Horizon...................................................................................................................21Mistake 9 Letting Emotions Drive Your Investment Decisions.........................................................................................23Mistake 10 Not Doing What the Rich Do..............................................................................................................26Mistake 11 Generating a Low Yield when You Need More Income........................................................................................29Mistake 12 Not Managing Your Retirement Nest Egg Like a Pension Plan...............................................................................31Mistake 13 Not Understanding the Most Powerful Investment Ever.....................................................................................34Mistake 14 Not Using The Services of a Deposit Broker..............................................................................................37Mistake 15 Investing in Dividend Growth Instead of Dividend Income.................................................................................41Mistake 16 Not Avoiding High-income Risks..........................................................................................................43Mistake 17 Not Diversifying Investments............................................................................................................45Mistake 18 Heeding Hysteria in the Headlines.......................................................................................................48Mistake 19 Less Diversification and More Worry.....................................................................................................52Mistake 20 Not Maximizing Your CPP Benefits........................................................................................................55Mistake 21 Just Buying a Mutual Fund When You Can Go Corporate Class...............................................................................58Mistake 22 Not Taking Advantage of Tax-efficient Monthly Cash Flow Tax Strategies..................................................................62Mistake 23 Overlooking a Powerful One-Two Tax Punch in Retirement..................................................................................66Mistake 24 Missing Pension Income-splitting Opportunities..........................................................................................67Mistake 25 Not Taking Back Your OAS Claw...........................................................................................................69Mistake 26 The Ten Biggest RRSP Mistakes...........................................................................................................71Mistake 27 Failing To Maximize Your RRIF...........................................................................................................75Mistake 28 Not Exploring Ways of Saving Thousands of Dollars through Tax Reduction.................................................................79Mistake 29 Not Buying Back Your Pension............................................................................................................81Mistake 30 Not Cutting Seniors' Tax with Prescribed Annuities......................................................................................83Mistake 31 Not Exploring Insurance Tax Shelters....................................................................................................86Mistake 32 Earning Interest Income Inside Your RRSP/RRIF Instead of Outside........................................................................88Mistake 33 Common Mistakes in Wealth Transfers.....................................................................................................92Mistake 34 The $100,000 Mistake....................................................................................................................94Mistake 35 Not Being Aware of the Risks in Joint Accounts..........................................................................................96Mistake 36 Not Being Prepared......................................................................................................................100Mistake 37 Second Marriage Mistakes................................................................................................................102Mistake 38 Thinking that Estate Planning is About Dying.............................................................................................105Mistake 39 Not Having Tax-Free Savings Accounts (If You Have Savings)..............................................................................108Mistake 40 Not Understanding the Benefits Canadian Life Insurance Company Products Can Offer in Estate and Retirement Planning.....................110Mistake 41 Not Understanding Probate or Estate Planning Costs......................................................................................118Mistake 42 For Seniors in Poor Health, Not Considering an Impaired Annuity.........................................................................121Mistake 43 Leaving Your Spouse Broke...............................................................................................................123Mistake 44 No Consideration for Long-term Health and Elder Care....................................................................................125Mistake 45 Not Having an Estate Planning Team......................................................................................................127Mistake 46 Can a RRIF Really be Guaranteed for Life?...............................................................................................130Mistake 47 Not Understanding Money.................................................................................................................132Mistake 48 Not Understanding what Professional Help Can Do.........................................................................................134Take Action Today Retirement Income Plan Worksheet.................................................................................................138Afterword...........................................................................................................................................139Book Summary........................................................................................................................................139About the Author....................................................................................................................................140Testimonials........................................................................................................................................141Author Contact and Workshops Information............................................................................................................142Bibliography........................................................................................................................................143Index...............................................................................................................................................144
Chapter One
SIMPLIFY
BUILDING A BETTER RETIREMENT INCOME PLAN FOR A BETTER RETIREMENT LIFESTYLE
GRANT HICKS
What lies behind you and what lies ahead of you pales in comparison with what lies within you. Ralph Waldo Emerson
Mistake 1 NO CLEAR WRITTEN RETIREMENT PLAN; NOT TAKING CONTROL OF YOUR FINANCIAL FUTURE
The road to financial freedom, wealth, and prosperity requires an accurate map that will let you plot a journey, monitor progress, and change direction if you venture off course. To help you get there, here are ten ideas for developing a sound financial plan with your financial professional.
1. Know where you stand-complete a net worth statement listing assets and liabilities.
2. Define your financial goals based on personal needs and wants.
3. Know how much money you need now, five and ten years from now, and in retirement-including inflation and taxes. Consider increasing your net income by reducing or deferring taxes.
4. Increase discretionary savings by decreasing your expenses.
5. Know your monthly cash flow needs and separate that from major annual expenses such as trips, cars, home renovations, etc.
6. Expand your knowledge of financial issues and economics-check out the library.
7. Reduce or defer income taxes wherever possible. Review your tax plans and make sure your financial advisor has a copy of your tax return.
8. Develop a sound plan for your estate including wills, powers of attorney, and life insurance-lower monthly life insurance costs can save you money.
9. Adjust plans and goals as your circumstances change and review your written plans at least once a year to track your progress. Simplify 7
10. Use the services of professionals (accountant, financial advisor, lawyer). These professionals usually pride themselves on keeping their clients up to date when taxes, investments, and laws change.
If you are not retired now, how much do you need to retire? We all want to retire someday. Some may be wishing it was sooner than later. Here are some ideas to help you.
First, retire to an income, not an age. How much income do you need to live on? Think in terms of monthly income. Once you have an idea of how much you need to live on per month, think of a large emergency or slush fund to spend in early retirement. For example, this money can be spent on large items, outside your monthly budget, such as extended vacations, home renovations, or vehicles.
Second, plan for where the money will come from. Factor in when pensions will kick in (for example; company pension(s), Canada Pension, and old age pensions). You can usually find this with your notice from the Canada Pension Plan statement mailed to you or you can request a copy to be mailed to you: . Then add up all of your investments, such as stocks, bonds, GICs, mutual funds, and RRSPs. Take the total amount and expect income to generate from 4% to 6% annually; however, this depends on your risk tolerance, time horizon, and how long you want the money to last. Take an average of 5%, for example, of $200,000, which will generate additional income of $10,000 per year or $833 per month. Finally, look at real estate and businesses. Do you plan to sell off real estate and downsize or generate income from rental real estate? Do you plan to sell any businesses or generate income from them? Now that you have all the sources of capital, ask yourself what percentage of capital you would like to have at the age of 85. Do you want 100% of your money, 50% of your money, or do you want it all spent by then? This will help determine your time horizon as well as your estate wishes. Remember to retire to an income and lifestyle, not an age.
You'll go out on a limb sometimes because that is where the fruit is. Will Rogers
Early to bed early to rise, work like heck and advertise. Ted Turner
Mistake 2 NOT SEEING DANGER SIGNS IN YOUR PORTFOLIO
Problem: Unless you're an asset-allocation specialist, how do you know whether your portfolio is matched to your risk tolerance?
Here's a fact for you. In a study by Brinson, Singer, and Beebower (1991) Financial Analysts Journal, asset allocation accounts for 91% of portfolio performance, with security selection and market timing factors accounting for less than 5%. Knowing this fact, most investors focus on specific securities or market timing on which to base investment decisions, yet this accounts for less than 10% of the performance. Stop wasting your time. Think about making use of asset allocation strategies to improve your performance. When an investor is frustrated with lack of performance, nine times out of ten it is based on asset allocation and a lack of diversification.
One danger sign common to most portfolios is lack of structure. To build a successful portfolio you need to have multiple asset classes (stocks, bonds, cash, alternative strategies, real estate); multiple styles (value, growth, income, and small, medium, and large capitalization); multiple geographic components (Canada, US, Europe, Asia); and multiple income components (interest-sensitive equities, Government bonds, Corporate bonds, real return bonds, high-yield bonds, mortgages, international bonds, term deposits). Let's face it, diversification is not just buying a few stocks and a few bonds. Here are the remaining nine danger signs possibly lurking in your portfolio.
1. Lack of clear investment policy statement (IPS)-a structure that is clearly defined and understood. Ask your financial advisor for your IPS for your portfolio.
2. Investments mismatched with objectives or risk tolerance-understanding risk and how it relates to your money and portfolio.
3. Under-performing investments or managers-know when to hold them and know when to fold them.
4. Style drift portfolios-that look at risk-adjusted return.
5. Overlapping investments or management styles.
6. Excessive expenses or trading activity.
7. Lack of a system or lack of regular monitoring, adjusting, and rebalancing.
8. Unclear or untimely reporting-when do you review this stuff?
9. Lack of communication and service.
Speak to your financial advisor today about potential danger signs in your portfolio. These danger signs will be discussed in more detail in this book.
Success comes to those who set goals and pursue them regardless of obstacles and disappointments. Napoleon Hill
The future depends on what we do in the present. Mahatma Ghandi
Mistake 3 FOUR MAJOR PITFALLS OF RETIREMENT
Most retirees have a plan. Miss one of the four key numbers in your calculations, and you could be headed for disaster.
Investing in retirement can be tricky, as it requires that you consider several factors of lesser concern to younger investors. Make a mistake and you could find yourself surviving on less income than you planned, paying more in taxes, or leaving a smaller legacy to your heirs.
1. Planning for the right time horizon. Longevity is the #1 risk facing retirees. Your life expectancy, if you are now 65, is at least 20 years more; but that represents an average. Many seniors live much longer. In fact, a 65-year-old male has a 25% chance of living past 92; a female has a 25% chance of living past 94. Thus that 20-year number isn't very useful when it comes to individual planning.
2. Market Risks. Retirees still need to invest a portion of their nest egg for growth yet cannot afford to take on the same level of risk as a younger person, because there is less time to make up for bad decisions.
3. Inflation. Most investors do not realize that your income must double every twenty years just to keep up with the average rate of inflation. Many pensions do not include a cost-of-living adjustment; thus your personal savings will have to either grow adequately to cover inflation, or be large enough to allow you to draw an ever-increasing amount of income.
4. Starting retirement with too large a draw-down. The amount of income you need to draw from your savings to maintain your lifestyle will increase with time. Other costs, such as medical expenses, will likely also rise as you grow older. Most retirees will need to start somewhere in the 3% to 6% range, then allow increases to that amount for inflation. Figuring out what you should take will require analysis of your life expectancy, the number of guaranteed lifetime income sources you have (such as pensions or annuities), and the composition of your portfolio.
In conclusion, when it comes to developing your financial plan for your retirement, you need to pay close attention to details that were less important when you were younger. Fortunately, it is possible to structure most portfolios to protect yourself from running out of money. Your best defense is to address your specific needs, concerns and desires, and ask for help from your financial institution or financial professional to develop a plan and portfolio that will allow you to sleep comfortably in the knowledge that your life will remain financially secure.
We are or become those things which we repeatedly do. Therefore, excellence can become not just an event but a habit. Albert Einstein
You must be the change you wish to see in the world. Mahatma Ghandi
Mistake 4 SIMPLE MONEY MISTAKES ANY RETIREE CAN AVOID
Every day newspapers carry headlines that worry retirees. The challenge is learning about the risks. While the world is changing and the markets evolve over time, learning and understanding risk and the obstacles can be a challenge. Here are some simplified ideas.
The difference between having and not having money is simple. The wealthy invest their money first and spend what is left. The people without a great deal of money spend what they have and try to save what is left. Do you have an automatic saving or investing program, or are you waiting until all your bills are paid?
What other mistakes do people make with money?
Investing without purpose. Do you just want more money, to travel more, to go to Hawaii in the winter, or to go skiing with your family?
Do you have an investment rebalancing program? Do you just invest and hope that it rides out the poor periods and grows rapidly in the good times, or do you and your portfolio manager(s) have a system for rebalancing in good times and bad for optimum interest rates? Have you ever invested in a GIC or locked into a mortgage for five years only to soon find you could have saved or gained another half to one percentage point? You shop around for the best prices in groceries and clothing, why not do the same with your investments?
Not understanding risk-perhaps the greatest mistake of the last decade. When stock markets sank and real estate skyrocketed, did you feel comfortable with your overall diversification plan? Or was it all in stocks, and forced you to learn about risk and diversification the hard way? Do you have a diversified portfolio or just a couple of big bets?
Currency risks. Hey, who knew the Canadian dollar would rise dramatically against the US dollar? Going global is great, but it is worth diversifying to avoid wiping out your gains by speculating which way the Canadian dollar will go.
Do you only dream of retirement income, or do you invest so you will have a predictable and comfortable retirement income? Knowing this can be the difference between having money or not in your retirement.
Anyone who has never made a mistake has never tried anything new. Albert Einstein
If you don't know where you are going, you'll end up some place else. Yogi Berra
Mistake 5 NOT MANAGING MONEY SYSTEMATICALLY
The new buzzword in the investment industry is "program." It seems several well-known investment companies have developed their own programs. Each company has unique names and features for its programs. Examining the differences of programs can be as confusing as picking next year's hot fund. What you need to find out is whether these investment plans are suitable for you.
Of what benefit is it to go into a plan or program with your money? There are several concerns you should have when looking at investing into these types of investment plans; but first let me explain that these are processes of managing money, not specific investments. If you want to invest into a mutual fund, the process is to examine your risk and determine your needs, such as growth or income, then choose suitable investments.
The newest way to invest is into company programs. The process can be as simple as picking a particular portfolio, or it can be tailored to your specific needs (such as tax minimization, income planning, capital preservation, or a combination of needs.) While the industry looks to gain back the confidence of investors, programs vary dramatically in costs, rebalancing, sophistication, and true benefits to you, the investor. Be careful not to just buy into a program without asking some key questions like: How does this program stack up against other programs? What types of reports will I receive? How does it measure up against benchmarks such as indexes or GICs? Who is involved in the process? How do they accommodate my specific investment needs? What are the minimums to invest? (Some companies have minimums of $25,000 to $250,000 or more.) Finally, be aware that there are several programs available in Canada today, and a one-size-fits-all solution may not accommodate your changing lifestyle or investment needs. Maybe you need two programs to make the right fit or the appropriate diversification. Examine what is important to you about money; then find out whether a program, or two, is right for you. Remember to manage your money like a system, or hire people who have a system that inspires in you confidence that your money will work as hard for you as you do for it.
Meeting Your Needs Through Diversification
Every day I am asked the same question: "Grant, why do I need to be more diversified?" I usually respond along the following lines.
Because my crystal ball is broken and I do not know what the future holds. I did not predict oil and gas going from $10 to $140 a barrel, and I sure did not predict that the Government would announce a tax on income trusts. However, this is what I know for sure. Highly diversified portfolios tend to have less volatility and less dramatic ups and downs than nondiversified portfolios. They contain as many as fifteen asset classes and are managed like pension plans, but unlike pension plans, managed asset programs are designed to match your specific goals and objectives, allowing for dynamic security selection, regular rebalancing reviews, comprehensive tax record-keeping, and client-friendly, easy-to-understand information. The process is very detailed but easy for retired investors to grasp and feel comfortable with. The multiple asset classes reduce the risk of loss due to poor performance in any given segment of the financial markets, while providing the opportunity to profit in additional areas that may be overlooked. Examples of some of these asset classes would include mid-sized global companies, global bonds, and real estate.
The bottom line is to ask your financial professional how you are diversified and how many asset classes you own. If your investments are all in Canadian stocks and you hold three balanced funds that all invest in Canadian stocks, you may consider diversifying to minimize the risk of concentration in one area.
Another question to ask is whether your investments are rebalanced on an ongoing basis to manage risk and, if so, how they are rebalanced. Ask for an example. You should receive comfort in the knowledge that your money is being rebalanced to take advantage of opportunities and to prevent over- or under-weighting in specific asset classes, which could lead to undesirable volatility or fluctuations of your money or risk. This may answer your question about how you are diversified.
Every generation laughs at the old fashions, but religiously follows the new. Henry David Thoreau
Nothing can bring you peace but yourself. Ralph Waldo Emerson
Mistake 6 NO SYSTEM FOR REBALANCING YOUR PORTFOLIO ON A REGULAR BASIS
Rebalancing Tires and Money
In Canada, we all know the importance of maintaining our vehicles for winter. Having come from Winnipeg, I have the habit of putting on the snow tires, bringing out the storm windows, and preparing for the cold weather. Living on Vancouver Island changes the need for snow tires, but we still need to regularly rotate our tires for maintenance and efficiency. How about your portfolio? How is it rebalanced?
(Continues...)
Excerpted from CANADIAN RETIREMENT PLANNING MISTAKESby GRANT W. HICKS Copyright © 2010 by Grant W. Hicks, RDB, CIM, FCSI. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
