The worst retirement planning mistakes you should avoid, according to an expert

As you chart the course toward your golden years, it’s important to steer clear of retirement planning pitfalls.

From underestimating retirement expenses to failing to diversify your investments, avoiding these mistakes will help you achieve the lifestyle you’ve worked hard for.

Below, I’ll explain how to avoid some of the worst (and most common) retirement mistakes so that your retirement is as financially secure and comfortable as possible.

GETTING OLDER, LIVING LONGER

One in four Canadians will be age 65 or older by the year 2043, according to a recent analysis performed by Environics Analytics and reported by CTV News.

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The country is also home to an increasing number of centenarians (those 100 or older) as well. In 2018, Statistics Canada reported that there were 9,457 centenarians living in the country. By 2022, that number had jumped to 13,485 -- a 42.5 per cent increase.

Thanks to advances in medical and health sciences, Canada’s senior population is growing larger and living longer.

While this is great news, it also means that the younger generations need to pay more attention to retirement planning.

In 1990, the average life expectancy in Canada was 77. Today, it’s 83. This means that today’s generation of retirees needs to budget for at least six more years worth of retirement savings compared to those retiring in 1990.

MISTAKES TO AVOID

When most people envision their retirement, they’re looking forward to a time when they can finally slow down.

Whether it’s making time for hobbies and interests, spending quality time with loved ones, or taking the opportunity to travel, maintaining a good quality of life is one of the top priorities for those approaching retirement.

These are some of the top retirement mistakes to avoid to ensure that you can truly enjoy your golden years.

1. Starting too late

One of the biggest retirement missteps is failing to plan ahead and starting too late.

If you want to build a substantial retirement fund, time is your greatest ally. The longer your retirement savings have to grow and earn compounding interest, the more you’ll have when it’s time to step back and start your retirement.

To give you an idea of how important time is when it comes to compound interest, consider the following scenario:

• Person A opens a retirement investment account at age 25. He deposits $1,000 in the account and contributes $500 per month.
• Person B waits longer to start saving for retirement but has a larger deposit and plans to contribute more each month. He opens his retirement investment account at age 45, deposits $10,000 and contributes $1,000 per month.

Let’s assume that their investments earn an average 5 per cent interest rate that compounds annually.

Can you guess who will have more saved by the time they retire?

By the time these individuals turn 65, Person A will have $731,838.63 and Person B will have just $423,324.43.

Even though Person B’s initial investment was ten times larger and they contributed twice as much as Person A per month, they will have 42 per cent less than the person who started with a smaller investment, committed to a lower contribution, and simply had more time.

Both contributed exactly $240,000 in total deposits, but Person A has way more money at the end due to the magic of compounding returns.

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2. Failing to diversify your investments

Putting all your retirement eggs in one basket can be a risky game. Diversification is key to balancing the risk and returns in your investment portfolio. Failing to diversify can expose your retirement savings to market volatility and specific sector risks, potentially derailing your long-term plans.

To avoid this mistake:

• Spread your investments across different asset classes such as stocks, bonds, and cash equivalents
• Regularly review and adjust your portfolio to align with your changing risk tolerance and retirement timeline
• Stay informed about market trends, but avoid making impulsive decisions based on short-term market movements

3. Underestimating your retirement expenses

Another common oversight in retirement planning is underestimating the long-term cost of your retirement.

Retirement often brings its own set of financial demands, ranging from healthcare costs to leisure activities. Underestimating these can lead to financial strain, potentially forcing you to dip into savings faster than you anticipated.

To avoid this mistake:

• Create a realistic budget that factors in all potential retirement expenses, including healthcare, travel, and hobbies
• Plan for unexpected costs, like home repairs or health emergencies
• Consider the impact of inflation on your future expenses

4. Not having a clear plan for your retirement

Without a defined strategy and vision for your retirement, you risk running out of funds, missing out on investment opportunities, or failing to account for expenses. A clear retirement plan helps you stay focused and make informed decisions.

To create a solid retirement plan:

• Clearly define what your ideal retirement lifestyle looks like
• Calculate the funds you’ll need to achieve these goals, considering inflation and potential healthcare costs
• Develop a savings and investment strategy that aligns with your risk tolerance and timeline

Here, it can be very helpful to speak with a financial advisor who can help you calculate long-term costs and work with your current income level to create a plan that fits your goals.

5. Not accounting for inflation

Failing to account for the gradual increase in prices over time can significantly impact the purchasing power of your retirement savings. What seems like a sufficient nest egg today might fall short in the future, especially with the rising costs of living.

NEVER TOO EARLY TO PLAN

If you’re young and just starting your career, retirement may be the last thing on your mind. However, as the saying goes, “time flies.” It’s never too early to start planning for your future -- whether it’s 10 years down the line or decades later. Your future self will thank you for the preparations and plans you make today.

Opening a Tax-Free Savings Account (TFSA) is a great way to start saving money for your retirement. These registered accounts are excellent investment vehicles that allow your funds to grow and compound over time, without any tax obligations.

• Investing tips:  Learn how to get the most out of your TFSA!

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.

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