There are many different risks when it comes to retirement, but one risk that isn’t talked about very often is the risk of living a long and healthy life. It may seem odd to call this a risk, but from a financial planning perspective a long and health life increases the risk of running out of money in retirement.
According to the guidelines from the Financial Planning Standards Council of Canada, for a couple who is currently 55, there is a 25% chance that either partner in a couple will live to age 98 and there is a 10% chance that either will live to age 101.
Living a long and healthy life isn’t some obscure risk… for pre-retirees the chance of living to age 100 is around 1 in 10.
This risk becomes even greater for those aiming for early retirement in their 50’s or even 40’s. Retiring at age 55 could mean a 43+year retirement period for 1 in 4 couples and a 46+ year retirement period for 1 in 10 couples.
With such a long retirement period, and such a high possibility of reaching age 90+, we want to ensure that we’re taking steps within our financial plans to avoid the risk of a long life.
There are a few things that anyone can do to avoid this risk…
When we do our own financial planning we’re often too close to our own situation to have an objective perspective. We may focus on the wrong problems… or take a narrow view of the potential solutions… or miss potential issues entirely.
One of the benefits of working with a financial planner is that they provide a second set of eyes for your financial plan. Most people are already on the right path, but there are common issues that may end up working against you. A financial planner can help find these common mistakes that may otherwise go unnoticed.
Financial planning isn’t rocket science, it’s something that can be done on your own. The math itself isn’t terribly difficult, and there are tools available online to help, but one of the major downfalls of the DIY approach is that we can be somewhat oblivious to our own personal biases.
Basically, we’re too close to our own financial situation to be entirely unbiased (This goes for financial planners too!) There are certain financial planning mistakes that we all tend to make if we’re not careful.
These mistakes can lead to potential issues over time. These issues can create more risk, or decrease investment return, or increase taxes, or create a higher risk of running out of money in retirement.
These mistakes are quite common and identifying these potential issues is the first step to creating a stronger financial plan.
What is your risk profile? This is a key question for every investor, yet I suspect it doesn’t get the attention it deserves.
Everyone sees risk differently. Some people don’t worry about risk at all, it doesn’t keep them up at night, it doesn’t cause them any stress. To them, not taking risks seems like a waste of time and resources. They’re risk seekers.
On the other hand, some people are deeply affected by risk. It causes them to worry, to always focus on the negatives, to think about all the things that could go wrong. For them, risk causes stress and sleepless nights. They’re risk averse.
Then there is everyone in-between. People who aren’t risk seekers, but who aren’t risk averse either. They see the benefit of risk, but it makes them a bit uneasy.
Choosing the right risk profile isn’t easy. There are a lot of factors to consider. Going too far one way or their other can cause issues over the long-term. But sometimes it takes some real-world experience before you can safely say what you’re risk profile truly is.
Managing money is an important life skill. Whether you’re a few years into your first job, or a few years away from retirement, do it well and your financial stress will disappear. Do it poorly and you’ll probably find yourself in a difficult situation more often than not.
The problem is we were never taught how to do this! We were never told how to manage our money. We were never told how to budget, how to pay bills, how to invest, or how to save.
We were never taught about best practices like emergency funds or automated investment plans.
Some of us may have been lucky enough to have a parent or older sibling who was good with money. We were able to learn by watching them manage their money. But because money is so secretive, its often hard to see what they were actually doing on a day-to-day basis.
This post will cover a few of the best practices, the best money management tips, and the best ways to manage your money.
If you’re reading this post my guess is that you’re probably already doing some of these things, or maybe all of them! But you might find something new to add to your financial routine. Something to make it stronger and easier to manage in the future.
Paying off the mortgage early can be a fantastic financial goal. In the last post, we looked at the different ways to pay off a mortgage early, how to make a mortgage payoff plan, and talked a little bit about the benefit of paying off the mortgage early.
In this post, we’re going to look at some considerations when deciding to pay off the mortgage early vs investing. This is a common dilemma for many people in Canada. Where should they put extra cash? Against the mortgage? Or in non-registered investments?
Generally, it’s better to invest inside an TFSA or RRSP before choosing to pay off the mortgage early. There is no annual tax impact when investing inside either of these two accounts. Investments can grow tax free. This can make it more attractive to invest inside an tax advantaged account before paying off the mortgage early. But not always…
RRSPs can be counterproductive at certain income levels and in certain situations. Investing inside an RRSP for someone expecting a very low income in retirement might not be the best use of those extra funds. They may experience large GIS claw backs on RRSP withdrawals in retirement. In those cases, it may make sense to pay off the mortgage early before maximizing RRSP contribution room.
As always, when making a financial decision, like paying off the mortgage early vs investing, it’s important to look at the whole financial picture and not just one aspect. If you’re struggling with this decision then it might be helpful to get a custom financial plan from an advice-only planner.
Deciding to pay off the mortgage or invest isn’t just about taxes and investment returns… there are also a bunch of soft benefits to consider. These aren’t pure financial benefits but they can still be “worth” a lot depending on how much you value them. Make sure you consider the financial benefit of paying off the mortgage early but also the soft benefits as well.
To decide between paying off the mortgage or investing we absolutely need to look at the after-tax rates of return. We’re going to assume that we’ve maximized our RRSP and TFSA contribution room already and are deciding between paying off the mortgage or investing in a non-registered investment account.
Doing something for a month is hard, doing something for a week is difficult, but doing something for 24hrs…. well that’s not so bad, it’s achievable, it’s realistic.
When trying to do something difficult, something huge, something never done before, we’re often given the advice that you should “eat an elephant one bite at a time”.
To overcome a big challenge you need to break down your problem into smaller, more manageable pieces.
Budgeting isn’t different…
Sticking to a budget for a month can be hard, super hard. Sticking to a budget for a week is hard, but not impossible. Sticking to a budget for 24hrs…. that’s achievable.
It’s HARD to control your spending day-in-day-out for a month straight but with the daily budget you only have to control your spending for the next 24hrs. After 24hrs your budget resets and you have a new amount to spend for the next day.
That’s the beauty of a 24hr budget. Once the money is gone it doesn’t take a month to come back. With a daily budget you get to spend a new chunk of money tomorrow!
The 24hr budget is like an allowance except instead of $1/week you’re getting $20/$30/$40 per day! This is how you create a 24hr budget…