Six big retirement mistakes – what I’m doing about them
Jason Heath, a respected fee-only financial planner, outlined a number of mistakes investors make when it comes to retirement planning and/or investing during retirement.
I thought I’d outline what I’m doing to avoid these six big retirement mistakes and provide some counter arguments to a few of them as well.
1.Preoccupation with dividends
Jason is very correct when it comes to what dividends are (a cash distribution of profit agreed upon by a company’s board of directors) and what they mean (a company that does not pay out a dividend or pays a lower dividend may provide more of its return to an investor in the form of future capital gains, stock price increases or dividends.)
This means dividend aren’t everything. I get it – they are part of total return.
However when it comes to avoiding a portfolio of “bank stocks, pipelines and telecoms simply because they have high dividends” I’ve failed according to Jason. Or, I downright disagree.
Canadian banks, pipelines and telecoms have been both excellent dividend payers and have provided nice capital appreciation to my portfolio. They also help me sleep at night after the stock market tanks. I know regardless of a big market correction, I am very likely to get paid.
In fact, I might even get an increase like I did this month.
Beyond banks, pipelines and telecoms I own utility companies and infrastructure companies. This is not the end of my portfolio either. I also invest in low-cost U.S. ETFs for extra diversification. So, I’m also preoccupied with long-term growth and diversification from these ETFs.
Alas, the index investing or nothing mantra will likely never end….and is an investing model I don’t subscribe to.
2.Reluctance to realize capital gains
Potentially this will be an issue for me in the coming decades but I highly doubt. I’m doing what I can to defer my capital gains during my working years – avoid selling assets in my non-registered account.
In retirement, I intend to have no problem realizing capital gains – after my RRSP or RRIF is drawn down.
My asset draw down strategy is planned to be as follows:
Exhaust RRSP/RRIF assets with our non-registered accounts over time, then Tax Free Savings Accounts (TFSAs) until the end.
You can see a supporting rationale for this below.
3.Drawing a RRIF (Registered Retirement Income Fund) too late
In the article Jason tells us “RRIF withdrawals are fully taxable and if a retiree has a low income in their 60s, but a high income in their 70s, they often end up paying more lifetime tax by deferring their RRIF withdrawals.” I definitely plan to avoid this problem by drawing down my RRSP/RRIF before I take my workplace pension at age 65. These are the terms of my pension:
If I terminate work on or after age 55:
I can get a deferred pension at age 65, or a reduced pension payable during the first of any month prior to age 65.
The pension will be reduced by:
- 0.3% for each month between ages 60 and 65 (3.6% per year).
- 0.4% for each month in early retirement preceding age 60 (4.8% per year).
If I terminate work before age 55:
I can get a deferred pension at age 65, or as early as age 55 with the reductions applied above, or an amount transferred to an RRSP or Locked-In Retirement Account (LIRA) equal to the commuted value of the pension.
All this to say, I am likely to consider taking my commuted value in a few years – we’ll see.
The big problem with taking my pension at age 55 or before age 65 is I will incur some major early withdrawal penalties in doing so. I’m not a fan of that.
4.Preserving investments by starting CPP/OAS early
Delaying RRSP conversion (to a RRIF) could push a retiree into a higher tax bracket or even have the Old Age Security (OAS) pension reduced or outright eliminated through OAS clawback – if their income is too high. Personally, I think OAS should be overhauled.
Any senior making > $75,000 in retirement does not need a government benefit.
Should you defer your CPP? I wrote a post about that here and included a case study for you as well.
Generally speaking, these are good reasons to take Canada Pension Plan (CPP) and/or OAS later in life, when:
- you don’t necessarily need the money to live on now;
- you have good reason to believe that you have a longer-than-average life expectancy;
- you don’t have a reliable defined pension with full indexing, and the CPP and OAS are integral to your inflation-protected, fixed-income financial well-being;
- you are concerned about market risk to your savings portfolio;
- you aren’t concerned about leaving a large estate – so you use up some or all personal assets before taking government benefits.
Given that I may take my workplace pension around age 65, we intend to draw down our personal assets before taking this pension benefit and before taking both CPP and OAS government benefits that provide inflation protection.
5.Poor use of TFSAs (Tax Free Savings Accounts)
I’ve never been a fan of the name – I prefer to call the TFSA this.
I’ve used our TFSAs as investment accounts since Day 1.
Don’t know what you can do with your TFSA? Check out these great things here – including a promo I have that can save you hundreds if not thousands of dollars over years of investing.
6.Incorrect Asset Allocation
Jason wrote: “Many investors have the same asset allocation across all their accounts. This may not be the best approach.”
I would agree. I consider my accounts as one big portfolio, so I try to be tax efficient where possible.
You can read about my asset location, location, location biases here.
Jason also asked: “Would you rather the larger account be your tax-deferred RRSP account, where your withdrawals are 100 per cent taxable to you, or would you prefer that growth in your more tax-efficient accounts?”
My answer – I prefer to have a sizeable RRSP and a sizeable TFSA. This is because I never paid tax on the RRSP contribution anyhow AND by maxing out both the TFSA and the RRSP, over many years, it will almost assure me I need to think about optimal ways to draw down my portfolio. This is a great problem to have – a small tax problem in retirement. That means I saved enough money.
Jason is spot on, encouraging investors to focus on the things they can control when it comes to investing and ignoring what they cannot; things like where interest rates are headed, worrying about the rise and fall of the stock market and tax measures that the government might or might not introduce.
While there are many more retirement mistakes to avoid, and surely Jason and I could list more, I’m doing what I can to avoid these six for starters.
I enjoy your column. Am late 70s, live well on pension income. Upon my death I want the income on half my portfolio to provide a lifetime income to an heir. On their death, I want the remaining stock to go to another designated beneficiary. I’m done with investment advisors. Any suggestions how I can achieve my aims simply.
Thanks for your kind words, Barrie.
You can definitely set up your wishes in a Will. You can also gift shares while you are alive of course. Some interesting reading for you!
BTW is anyone splitting CPP benefits?
Lloyd – my condolences on the recent passing of your daughter. Hope you are finding the support you need.
An old University Professor once told our class – “when doing research believe half of what you read half of the time and you’ll be somewhat close to the truth”. I appreciate seeing what others are doing with their portfolios but I’ll make my own decisions and live with the consequences. I am here to get ideas and contribute when I can. When we read articles, blogs and books YOU MUST put the information into the perspective of your situation and we are all different. I hope to have an OAS claw back problem. I love watching my bank, telecom, Reit, pipeline and utility dividends come in regularly and I’m guilty of chasing yield. I have a plan and that plan will change as I learn more, process that information towards my situation and adapt. Best wishes to all.
Thank you for addressing this problem. For most of my life the saving mindset has prevailed. At 65, a whole new mindset must be created in that now you have to drawdown those savings. How to do it efficiently? Not a lot of information out there. After a long bit of reading and developing different scenarios, the current plan is as follows
I took CPP at 60 and OAS at 65 since I have no pension income .”A bird in the hand” is my moto. I view this as part of my fixed income portion of my portfolio, which is a darn bit better than purchasing any kind of annuity on the market today.
I have decided to draw down my RRSP for the next 6 years until I am 71, so that the amount when I need to convert to a RIFF is more manageable and does not trigger the OAS clawback. I purposefully am not converting to a RRIF early, as this let’s me decide the exact amount I will take out annually rather than being forced to take the amount per CRA regulations. Yes there is a 30% withholding tax, but that means there will be no big tax surprises at the end of the year.
The dividend income from my non registered accounts will add to the annual income but be taxable at a much better rate.
Finally to balance everything out, I intend to give charitable contributions to keep my income just below the OAS clawback. I found these 2 calculators very useful in developing future scenarios on RRSP/RRIF withdrawals and charitable tax credits.
We shall see if all this works….. or not
Very solid plan and very similar to what my wife & I are doing. I did the same with CPP at 60 and OAS at 65. We are also trying to draw down our RRSP/RRIFs. I converted my entire RRSP to a RRIF at age 64 so we would have more flexibility with income splitting.
I’m not sure if you have any pension income that would qualify for the $2000 pension income credit but if you don’t, then converting some of your RRSP to a RRIF and withdrawing $2000 will give you the full credit. Regular RRSP withdrawals, CPP, and OAS don’t qualify.
Most welcome and I’m trying to educate myself over time.
How much is enough and then when to draw it down and how, are important questions and not easy ones to answer.
Nothing wrong with “bird in hand” and based on my readings, I wouldn’t touch an annuity until at least age 75. That’s just me.
I think if you can be in charge of taking the money out on your terms, vs. CRA, that’s better. 30% withholding tax is just that, tax withheld, it will reconcile how it should at time of tax filing.
Continued success to you.
I definitely fall into #1, but I’m Preoccupied with Dividend Growth, rather than just dividends or yield. Many of the others are good points, but each person will have to access their own needs, not just follow blindly or cliches.
Great point. Define your own needs and live within and from those. We’re trying to do exactly that.
Seems like diplomacy is not your long suit. You may have a valid point but you sure could have explained your thoughts way more politely. I’m not saying I’m king of posting but when I disagree with someone, I usually just say how I am doing things or plan on doing things.
Having said that, here’s my thought on potential OAS clawback. (Bryan – this might give you some ideas as well)
I have given it a lot of serious thought and developed a spreadsheet to figure out how to avoid/minimize the clawback when the time comes (2018 for me, 2022 for my wife). The spreadsheet factors in CPP, OAS, bacnk account interest, all the dividend income for the RRSPs and non-registered accounts, uses a 4% increase across the board for all stock values, factors in RRSP withdrawals, and ultimately figures out each account projected value and net income for both of us each year using the dividend gross up, etc. I then just adjust the RRSP withdrawal amounts and see the repercussions over the next 20 years. At the end of each year, I adjust the spreadsheet with the actual dividend income amounts, the current account balances, etc.
Since retirement, the increase in stock prices for our holdings has been way above the 4% so we’ve ramped up our withdrawals. It still looks like we should be fine for avoiding clawbacks. (unless one of us passes away and then good-bye entire OAS for the other)
Other points to note:
– I retired at age 60.
– I started my CPP at 60.5 years old. I did a spreadsheet to assist with the date.
– I’m starting my OAS right at 65 (next month) and my wife will as well. I figure these may not last so may as well get what we can
– I converted my entire RRSP to a RRIF late last year using my wife’s age. The RRIF allows for better income splitting..
– For some of our RRSP/RRIF withdrawals, we just do in kind transfers to our TFSAs and non-reg accounts
– We withdraw more cash than we need and are just increasing our cash wedge and have been giving our kids some of their inheritance.
Anyway, being retired and all, it was a fun exercise.
Seems like a well thought out and smart plan to me Don. Very well done.
Hi Mark. My situation is possibly somewhat similar to Don G’s above. I personally was always self employed, so my retirement is funded by my RRSP, TFSA, investments in my small business corp and non-registered accounts. My wife also has contributed to her RRSP and TFSA, but is in the fortunate position to also have a company pension. My question is specific to the timing and amounts, of drawing down my RRSP before the age of 71. I currently am 57 years old, so I have a bit of time to implement a strategy. My wife and I are now both retired, so there is no longer any employment or business income being generated. Without getting into specific details, I was wondering if there is a guideline, chart, table etc. that based on age and RRSP value gives you a suggested draw down rate. Something sort of like the CPP scenario tables out there that are based on when you begin to receive CPP payments. I realize that the complete answer involves numerous other factors and variables making each situation unique. I have posed this question to our accountant, but have not yet received a definitive recommendation. Her comment is “we will ensure that you draw down your RRSP to a level that won’t result in an OAS clawback”. For what it is worth, the goal of this is not just to ensure maximum OAS as our thinking is similar to a reader above, that OAS is not something that every Canadian necessary needs or should qualify for. Thanks.
Don is way more precise than what I do and I think I’ll adopt his method in a few years. I’m 57 coming up on 58 in a few months. Retired exactly at 55 with a moderate DB indexed pension. Still farm a bit with some income. Spouse is disability pensioned with a disability insurance payment that ends at 65 (we’re the same age). I’ve been withdrawing funds from my RRSPs to bring us up to the 20.5% tax bracket threshold taking into consideration all the tax credits and deductions. My intent was to leave a substantial RRSP to transfer to disabled adult daughter (RDSP) upon my death. With the recent passing of my daughter, all those plans have been erased and am coming up with a new one (still a work in progress). So for now, I’m sitting on more than I need in my RRSP and I don’t (and likely won’t) need the income. I’m still going to withdraw to make sure I get some out at the low rate but beyond that, I don’t know yet. I’ll get a CPP estimate for 60, 61 and 62 with the thought that due to the drop-out, my optimum is likely in that range. May consider deferring OAS but will assess health closer to that time period. I don’t really care a whole lot if I get into the clawback range. We’ve had a pretty good life and paying back to those that funded the health care we’ve used over the years is not a bad thing for us.
Thanks for the detailed comment Bryan. First, kudos to you and your wife.
Second, have you checked out this calculator? All free 🙂
I’ve found I can play with this calculator and estimate my drawndown rate while estimating my other income.
“For what it is worth, the goal of this is not just to ensure maximum OAS as our thinking is similar to a reader above, that OAS is not something that every Canadian necessary needs or should qualify for.” I would agree with you!
Thanks for being a fan and let me know if you have more questions.
Hey Mark…BAM.A increased their dividend this morning. Up .01 U.S. Reading the report makes me kinda wonder if another special dividend is in the works as well.
I think so. I got a raise from TRP today as well. 10%!!
I was hesitating to buy more trp yesterday and somehow did not pull the trigger. Damn.
Lloyd says “Having OAS clawed back is not a big mistake to me.” I SAY: – This certainly is and was a mistake! Lloyd – did not plan properly! You could have took your CPP at 60 – that would allow you to show less taxable income now – and – thus might allow you to qualify for more in OAS. Plus having 400K in GICs (this is income to Lloyd) and is another blunder. Why do u want more (higher) taxable income – if OAS is being clawed back? It is obvious to me that you did not plan properly. If you would have planned better – you would be collecting the full OAS! (shaking my head)
You’re funny Mike. I’m only 57 dude. Not getting OAS or CPP yet.
Mike, what if you have OAS fully clawed back? Is that planning poorly or being successful? Cheers.
Mark. It is apparent that you have a relationship with Lloyd and remove / adjust my comments to protect your ill advised friend. You have threatened to ban me from posting – is a joke. Everyone can it read here https://www.myownadvisor.ca/weekend-reading-dividend-raises-giveaways-retirement-numbers-moneystuff/. It’s your blog – run it as you wish – but you lost a contributor: Please delete all my comments from your entire site and block me. Thanks!
At the time i’m typing this, in your post you state that the DB pension will be reduced by 3% and 4% a month, I think that should be 0.3% and 0.4% a month. You can delete my comment if you like.
Thanks for calling out those typos! Geez, I must have read this over x2 before I posted it!
How she go?
Great review. I had read Heath’s article and thought it was hog-wash. Each to his own but I always hate people slamming other people’s investing strategy.
As you know, I’m a 65 yr old retiree without any company pension who lives entirely off of dividend income, CPP, and OAS (starting next month). My wife was a stay at home mom but I put more into her spousal RRSP than mine for better income balancing in retirement.
To me, the 3 biggest advantages of dividend income are that it always rolls in (other than very rare dividend cuts – I’ve only had 1 with D.UN), you don’t ever have to think about selling anything (if you have more dividend income than expenses – which we do), and it’s taxed favourably in a non-registered account.
My wife and I only own dividend income/growth stocks – no bonds, preferred shares, or GICs. We’re in basically 5 sectors – financials, utilities, midstream/infrastructure, telecom, and REITs. Our portfolio is currently getting spanked but it doesn’t matter in the least. I know it will eventually recover after people come to their senses and realize most of these are great companies with good future prospects.
Anyway, as I always say, our strategy definitely isn’t for everyone but it sure works for us. 🙂
Great to hear from you Don. Why long time no comments?! 🙂
Yes, I recall your plan: no company pension who lives entirely off of dividend income, CPP, and OAS (starting next month).
(I still own D.UN for the record).
1. I like the income, like you; 2. I don’t need to sell or I avoid panic selling and 3. it is taxed favourably in a non-registered account as you well know.
“Our portfolio is currently getting spanked but it doesn’t matter in the least. I know it will eventually recover after people come to their senses and realize most of these are great companies with good future prospects.” Smart man.
I often wonder, do people really think FTS, BNS, TRP and other companies in our country are going under? Oh well. I get to buy those stocks at cheaper prices. To each their own!
All the best.
We won’t have any pension either and are trying hard to get where you are. Great to see successful role model the strategy actually works.
Dividends and interest almost completely cover our monthly transfer to bank account from RRIFs. Works beautifully and will likely continue to do so until my wife turns 70 in 10 years. So far, in time, markets take 1 step back, but 2 steps forward. Not too worried about claw back when the time comes because with income splitting, together we’ll need to make $150,000/year or so. Don’t mind paying tax, but don’t want to pay more due to poor planning (working on that). Thanks for good lessons/articles and your input to them Mark.
Wow, you’re in outstanding shape Paul. Kudos 🙂
Recently discovered your blog and am finding it quite informative. Thank you! A book you reviewed “your money or your life” was a game changer for me.
I am wondering if you or your wife have ever considered taking your CV just before turning 50 as part of retirement planning ( and thus, one or both of you, exiting the fulltime rat race sooner!). When looking at DB plans, the rate of return is lower than what you could manage yourself, especially with the clawback at 65 (This is assuming you want to take early retirement at 50 and not defer pension).
Thanks for being a new fan Karen!
That book was great, and opened my eyes as well.
That is a consideration for us but we both like our jobs (for the most part!) so working until age 50 is fine. As for 50+, it all “depends”. How much debt we have, where we want to travel, etc.
The CV might not be good as deferring my pension until age 60 or even without penalties at age 65. Besides, that pension has inflation protection built in. I’ve calculated my pension should yield close to $28k per year (in today’s dollars) if no new money goes into it. That’s pretty good. The CV would need to be a healthy amount, well over $250k for me to even consider it.
I figure $500k invested at age 50, might be enough to get us through to age 65 and defer all the pensions and government benefits – at least until age 60 anyhow. We’ll see. I’ll probably change my mind many times over in the coming years 🙂
All the best!
Same here, there¡s nothing worse than opening your statements to see the value of your holdings down 25%. Since none of this was due to a pending dividend cut it was just a matter of grinning and bearing it. Currently I experimenting with a dividend capture strategy. Definitely not recommended for most people, but if it goes right you can make a lot of extra money.
Interesting Rob. Do share more details. I’m boring – sticking with my current investments and just paying down debt in the meantime. Ah well 🙂
I had this argument with my friend many times already. She doesn’t understand why I am preoccupied with dividends and said it’s just mental accounting. Dividend or not, the only thing matters is total return. But in times like this, mental accounting actual is very comforting. I certainly bought quite some stocks in high price. While my portfolio went down by thousands, some times ten thousands a day, my forwarding annual dividend income increased more than $400 this year by drips and dividend raise alone already. Preoccupied by dividends may or may not sacrifice some total returns, but you get better sleep at night which is priceless when you become older.
I too have purchased stocks at higher prices. I’ve also bought some at lower prices. While my portfolio fluctuates, like yours, sometimes tens of thousands per day, my dividend income is going up, and up, and up over time.
Seeing that in action, helps me stick to a financial plan that a) works for me and b) keeps me disciplined. At the end of the day that’s what matters.
I’m not sure I would classify some of these as “big” mistakes. For me, having too much money in retirement that I have to pay tax on is not a bad thing. Having OAS clawed back is not a big mistake to me. Sure, in hindsight maybe things could have been done differently but when we were in the accumulation phase, we didn’t know what was going to happen and tried to cover as many bases as possible. Heck, there was a time when we had limits on foreign investment we could hold in our RRSPs. I’ve said it many times, I’d rather be in the retirement boat and having lots of options rather than having few or none.
Oh for sure, I could have done things differently to date but it’s that part of life’s journey – live, make mistakes, make some “wins” and wake up the next day doing it all over again? I wouldn’t be too hard on yourself and others shouldn’t be as well.