Retirement mistakes

“Too often, clients look at retirement from a short-term perspective,” says Prem Malik, financial advisor with Queensbury Securities Inc. in Toronto. “And they tend to overlook the fact that they may live during retirement for as long as they have saved.”

Often, clients make the mistake of ignoring the need for a long-term plan, suggests Jeannette Brox, senior financial planner with Investors Group Inc. in Toronto.

The following are five common retirement mistakes that you can help your clients avoid:

1. not taking a balanced approach to risk

“As clients get close to retirement, they become more aware of risk and start to take a narrow view of the market,” says Brox. “This is the wrong inclination, and there is a price to pay for being afraid.”

Because average longevity has increased, Brox advises that clients have a balanced portfolio that includes some exposure to equities for long-term growth.

Malik recommends putting measures in place to protect your clients’ wealth. But, he cautions, clients must recognize that retirement can last for 20 or more years.

He suggests using a tiered investment approach. Assets required to meet financial needs for the first five years should be in short-term investments; those to be cashed out in the next five years should be in equities and fixed income; those not needed for 10 years should be in equities.

2. retiring with too much debt

The best scenario regarding debt is to head into retirement with no debt, Malik says, because the cost of debt servicing can erode clients’ retirement income. That’s why clients need to take a serious look at their income and expenses prior to retirement. Malik suggests “paying off all debt, including the mortgage.”

But in certain circumstances, going into retirement with some debt might be unavoidable. For such cases, Brox advises that clients “consolidate their debt to bring it under control.”

3. not having sufficient insurance

“The older we get,” Malik says, “the higher the probability of disability and critical illness, and the need for long-term care.”

Insurance can help offset the cost of these potential life events and prevent your clients from having to dip into their retirement savings.

Brox contends that clients typically live in denial when it comes to acquiring insurance such as long-term care and critical illness insurance, in the belief that “it’s not going to happen to me.”

Adds Brox: “It’s not a matter of ‘if’ but ‘when’ they would need long-term care, for instance.”

(See other story on page B8.)

4. falling behind inflation

Inflation can erode your clients’ retirement savings. Clients need to earn a rate of return that’s higher than the inflation rate, Brox says, in order to avoid outliving their money.

“There is a big opportunity cost,” Brox says, “to having a guaranteed investment certificate that pays only 2%.”

Malik agrees that clients need to invest in assets that have the potential to grow.

5. not paying attention to taxes

Clients often forget about tax strategies during retirement. Says Brox: “They do not look at the far-reaching hand of the CRA [Canada Revenue Agency].”

She suggests paying particular attention to estate taxes to prevent your clients’ heirs having to liquidate their estates in order to pay the CRA.

One solution, she adds, is to have life insurance, which is paid out to the beneficiary, tax-free.

Malik suggests investing in tax-efficient assets, such as corporate-class funds.

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