Traps to avoid a few years prior retirement

Cathy Duval |

Traps to avoid a few years prior retirement

We already know that we will be physically healthier if we exercise and eat well. But what about our financial health and peace of mind?

A sound financial plan will take into account important factors that might have an impact on reaching our goals.

I have indicated below « the 5 most important risks that have an impact on our retirement plans ».


Risk # 1 : Our life expectancy

As the years go by, our life expectancy increases. The result? Our golden years might last longer than anticipated. As a consequence, we are no longer planning for 15 years retirement but sometimes for as long as 40 years! In other words, this means that our life expectancy at birth (82 years for a woman and 78 years for a man) increases as we grow older.

You are 65 years old? Did you know that you stand a 50% chance that you will live longer than 90 years old?


• When updating your retirement plan with your advisor every year, you should also increase your life expectancy because the probability you will live longer will increase with age.
• Evaluate how your annual revenues would change if you were to live past your life expectancy by 5 or 10 years.

Risk #2 : Increase in the cost of living

Inflation represents the general increase in the prices of goods and services as years go by. Between 1987 and 2008, the average inflation rate has been 2.4% in Canada.

  • Over the long term, even a low inflation rate will have a considerable impact on your lifestyle if your revenues don't increase accordingly.
  • Because over 50% of retirees plan on travelling more at retirement, let's take the price of a trip as an example. In the past 2 decades, the prices for travel have increased at 4% per year rather than at the inflation rate of 2.4%. What if the price of gas keeps going up? Will that impact further the cost of travel? Will that have an impact on your retirement plans?



• When updating your retirement plan, use a conservative (the highest, the most conservative) inflation rate target.
• Also, plan for annual increases in your revenues accordingly to allow the same lifestyle at the years go by.

Risk # 3 : Health care

This is definitely an area that needs improvements from most of us. We have been educated in the past 20 years to plan and save for retirement. However, who has an emergency fund or some kind of plan in case our health worsens. Health care costs are climbing much faster than inflation. If I have to withdraw $75,000 from my RSP following unexpected health care costs, how will that affect my retirement plans for the next 20 years?


• Estimate future costs related to health care taking into account your current physical condition and plan for expenses in your retirement plan.
• Keep in mind that our health can change rapidly even if we are in good shape and always have an emergency fund that is separate from the retirement money necessary to mainting your lifestyle.
• if your previous employer's health care insurance ends at retirement, evaluate the possibility with your advisor of subscribing a private health care insurance. Please note that most of these policies will reimburse you all of the premiums you have paid if you haven't claimed medical costs after 15 years.


Risk # 4 : The rythm of withdrawals

Running out of revenus at retirement is not an option ! Once in your golden years, the number of years your savings will last will depend on a lot of factors like inflation... and the rythm at which you spend !

Spending only 1% more per year could make all the difference. It could mean running out of money 7 years earlier.


• Make a budget before retirement. In it, eliminate all the expenses that will vanish at retirement (i.e. mortgage, children's education, etc.). That will help you determine how much money is needed every year to maintain your current lifestyle.
• Simulate different scenarios (withdrawals of 4%, 5% ou 6% per year) with your investment advisor taking into account the long term returns expectations of your portfolio, inflation and your life expectancy.
• Long term return expectations should be calculated in function of the type of investments you hold in your portfolio (i.e.: bonds, stocks).
• Adjust periodically your withdrawal target in function of changes in your personal situation or of the markets. For example, an important market decrease in the first years of retirement will have an impact on the duration of your investments.

Risk # 5 : Your asset allocation

Some investors prefer to invest solely into risky but potentially high return investments, others prioritize investments security. Attention ! Everything is about balance. A healthy asset allocation will allow you to reduce certain risks linked to investments, namely market risk but also of running out of money. This way, if the return of one of your selected investments is weaker than anticipated, its repercussions on your portfolio won't be as important.

What is market risk?
It corresponds to stock market fluctuations. It is particularly apparent over the short term as investments values are highly influenced by market fluctuations. However, over the long term, the impact is much smaller.

What is the risk of running out of money?
It is the risk of surviving past our capital. If you only use guaranteed investments, the return you get (net of inflation and taxes) might be insufficient to compensate for your expenses at retirement.


• Diversify your holding into different asset categories classes (bonds, real estate, stocks, etc.)
• If retirement is near, make sure you have secure investments that will mature in the first years. If the markets ever go down in the first years of retirement, you will not have to sell stocks at a loss to provide for your expenses.
• For those who would like a more conservative investment portfolio at retirement, start to position your assets from 5 to 10 years BEFORE retirement. You could gradually sell stocks every year in a way to reach your target percentage. Do not wait until the last two years before retirement, just in case.

I hope these tips are useful to you. Do not hesitate to contact me if you would like to get more information on any of the above-mentioned points or if you would like me to provide you with a retirement plan. It would be my pleasure to assist you in reaching your financial goals.