Six big retirement mistakes – what I’m doing about them

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.

Summary

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.