Life has many unforeseen opportunities and challenges, and while it is easy to focus on day-to-day costs, an ounce of preparation can go a long way. Here are some financial planning mistakes to avoid when planning your future:
1. Assuming You Can Put Off Retirement Planning
It is important to realistically think about your retirement income sooner rather than later in order to determine the lifestyle it will enable you to have. The average retirement pension for new CPP beneficiaries in 2017 was $7,839.24, with a maximum payout of $13,370.04, per year, with the full OAS pension at $6,764.88 a year. Equaling approximately $14,500 – $20,000 per year for the average to above-average pensioner. This is quite a significant amount, but it is not enough to live on for most. Ensuring that other income sources will be available to you is crucial for maintaining your quality of living into retirement.
2. Not Diversifying Investments
When your stocks are steadily climbing, or a certain investment is doing well, it is tempting to spend all your savings on one type of investment. However, this is metaphorically putting all your eggs in one basket. Investments are always a sort of gamble – the market is so hard to predict it may as well be random. A well-diversified portfolio hedges risk, where unusual spikes in an individual investment are smoothed out and significantly less dramatic, making it easier to plan for your future.
3. Underestimating the Impact of Taxes
As Canadians we practice this every day in our routine purchases: It is important to know the impact of tax whenever dollar values are mentioned. We have come to expect that taxes affect a lot of what we do, however an understandable natural aversion exists to finding out how much tax is owed.
A financial planner can help you, not just with the important basics such as your actual earning power after taxes, or how much your investments will be taxed, but with more nuanced tax optimization.
Consider whether special circumstances are coming up that need careful planning with regards to tax.. For example, the OAS pension, granted for all individuals above 65 can be deferred for 5 years. If you are working past the age of 65, deferring the OAS can be the difference between getting the full amount, or having it simply lost by the special OAS “claw–back” tax for high earning individuals.
4. Being Unrealistic About When You Will Retire
A found that working Americans expect to retire at age 66, but found the average age of retirees to be 62. When you retire before the age of 65 you face a reduced pension and have less assets saved for retirement. However, retiring too late can result in you working in the years where you should be focusing on your health and happiness. It is important to have a realistic plan to retire at a time that is right for you.
Financial planning can be intimidating. It is important to remember that everyone’s situation is unique and there is no one perfect answer for everyone. It is never too early to start to save and plan for the rest of your life. Speak with your financial advisor to see what you can start doing today!