If you are starting to consider retirement or hope that one day you will achieve financial independence, you should read the following paragraphs very carefully. For most of us, the concept of retirement means “living off our investments” at 65—or even better at 60. However, in reality, many people are unaware of very important details regarding their financial security.

Ads for financial products, such as RRSPs and TFSAs show couples in their fifties smiling as they sail, play golf or take a stroll in Naples, Italy. These images, however, are only mirages if you don’t plan for your retirement well-ahead of time. Here are the top three mistakes you should avoid:

1-Not planning for retirement early on

This is the number one mistake you can make. Even if you retired at the age you planned for, you must nevertheless continue to prepare annual budgets as well as set up automatic payments and installments.  In other words, you have to take control of your take-home pay! Make sure you rely, as much as possible, on regular and fixed deposits in order to avoid using up your capital.

Once a year, take a good hard look at your entire budget and find ways to reduce expenses and adjust your revenues according to inflation—enemy number 1 that can gouge 1% to 3% of your purchasing power each year.

If you set aside $100 per week for groceries and outings at restaurants, it will cost you $5200 annually. Considering an inflation rate of 2% to buy the same items at the grocery store and eating the same meals at your favourite restaurants, you will have to spend $7727 in 20 years. Without effective budget planning, your purchasing power can be reduced by $2527. And this is also the case for municipal taxes, transportation fees, your lodgings, insurance, hobbies, entertainment, and so much more!

What’s more: you have to also factor in healthcare and medication, among other things. Degenerative or debilitating diseases can completely disrupt your retirement plans and budget. Without proper insurance, retirees can find themselves with less money than they had planned for. 

2-Not strategically allocating your investments 

Investing in a diversified portfolio allows you to protect yourself against inflation. A big mistake you can make is to randomly invest or invest in only one financial solution. A lack of strategy can cost you a lot of money. You have to consider yourself your very own pension fund. Once you retire, you can invest in stocks or securities. To finance a 20- or 30-year retirement, diversification is your keep to remaining afloat. 

Your tolerance for market fluctuations will determine the percentage you will allocated to each investment category. For retired investors that have a moderate profile, they could easily invest 65% in bonds and cash, 12% in Canadian stocks, 10% in American stocks, 8% in international stocks, and 5% in securities. As with any efficient and effective pension fund, you must regularly balance the proportions and adjust its allocations based on the current economic climate. Two meetings on an annual basis with a trustworthy financial planner is ideal in order to keep your investment portfolio up-to-date.

3-Neglecting the impact of taxes on revenues generated outside of registered funds

It can cost you a lot of money if you neglect the taxation aspects of your investments outside of registered funds. Income tax and other taxes can easily represent 40% of Canadian household revenues. This is more than the sum you’ll spend annually on your rent or mortgage, food, transportation and clothing. We all have to pay our dues; however, what you pay should be fair and just.

Retirees should pay close attention to how they are taxed on their revenues that they receive other than those from a RRIF, LIF, RRSP, TFSA and others registered funds. For example, revenues from rent and certificates of deposits, bonds or other interest-generating products will be taxed at the highest rates possible. Strategically allocating your investment portfolio will help to minimize the impact. 

You should also consider income annuities and other class funds to mitigate the effects of highly taxed incomes. Small adjustments could literally make miracles happen! By reviewing your disbursement strategy for your retirement, you could save $100, $200 or even $500 a month! Now that’s well-invested time!

Oftentimes, this is the way you can uncover the capital need to cover health insurance and other healthcare costs without having to cut out leisure activities or entertainment.

Keys takeaways

  • When your retire, you should always put together an annual budget to factor in inflation that can affect your purchasing power.
  • Meet with a financial planner to help you better manage your assets.
  • Get the most out of your budget by strategically managing your taxable revenues.