4 retirement savings mistakes to avoid making
A few ways to optimize your financial life
It isn’t always easy to make the best decisions when it comes to managing your finances. Actually, it’s quite normal to make mistakes from time to time, we all do! Knowing how to recognize and correct them, however, makes it easier to get started and keep your retirement savings on track. To this end, we’ve identified 4 common errors investors make, and we’ll look at some simple solutions to help you avoid them.
01Letting money sit idle in a bank account
Close to 1 Quebecer in 5 says he or she hasn’t thought about saving for retirement, which inevitably leads to money sitting in a bank account instead of being invested inside an RRSP or TFSA. That can be a costly error, as the money does not grow and inflation actually causes it to decrease in value over the years. It amounts to lending the bank money at almost 0% interest! On top of that are the transaction fees and service charges that tend to eat into these dormant funds.
There are lots of benefits to investing your money instead of leaving it lying around in a bank account. In fact, just using simple interest, $1000 invested each year for 5 years at 3% will earn $150 in interest. It gets even better when we calculate the outcome using compound interest, with interest accumulating year after year not just on the initial capital but on the interest earned itself. In this scenario, the $1000 invested becomes $1030 the second year, then $2091 the following year, and so on. The total interest earned after 5 years becomes $468.41!
Opt for automatic savings
The most effective way to benefit immediately from potential returns and take advantage of the effect of time on your investments is to set up automatic bank withdrawals. The amount you choose will be deposited into a savings vehicle, like a TFSA or an RRSP, at your desired frequency. Opting for automatic savings early on could make all the difference when it comes to accomplishing future projects. If you start to routinely save small amounts now, you'll build up a decent savings cushion without even having to think about it!
Some people would still like to keep money on hand in a bank account for a rainy day. So it’s important to choose the right financial institution and make sure the package you get meets your needs (for example, the number of monthly transactions) with minimal service charges and access to a high-interest savings account.
02Relying only on your employer pension
Some Quebecers enjoy employer sponsored pension plans, but it’s a mistake to think they will be enough for your retirement and so you don’t have to make a comprehensive financial plan! Nothing guarantees that your employer plan will fit your specific situation and that it will provide enough income for your future retirement needs.
When planning your retirement, you need to know your needs, your potential plans and their associated costs. A financial planner can be a big help in preparing multiple scenarios using a number of variables such as retirement age or the sale of a vacation home. You can even simulate these situations yourself using the SimulR calculator from Retraite Québec. This will make it easier to understand if an employer pension will or will not let you reach your savings objectives and determine the precise amounts you’ll need to set aside to make up the difference. By doing this as early as possible, you’ll have more time to prepare and it’ll be easier to reach your goals with a whole lot less effort!
03Not taking advantage of tax credits
There are a lot of tax credits available to Quebecers to help lower their tax bills, but many people are unfamiliar with which credits they are eligible for. That makes them great savings opportunities to take advantage of! By getting up to speed on the various credits available each year before doing your taxes, you can maximize your refund when the time comes to file. The provincialAttention, this link will open a new tab.Attention, this link will open a new tab. and federalAttention, this link will open a new tab.Attention, this link will open a new tab. governments update the list of available credits frequently online and they change practically every year, which could mean some pleasant surprises for you! By talking with your accountant or tax preparer you can potentially learn more about these credits and what’s new this year. Here are a few that can add up to easy savings.
Buying your first home
First-time home buyers can benefit from federalAttention, this link will open a new tab.Attention, this link will open a new tab. and provincialAttention, this link will open a new tab.Attention, this link will open a new tab. tax credits amounting to $750 each. That’s a nice helping hand when it comes time to pay the welcome tax!
Tax credits for medical expenses related to infertility treatments are now available at the federal as well as the provincial level. You can request your federal tax creditAttention, this link will open a new tab.Attention, this link will open a new tab. for infertility treatments for the 10 previous years, while the provincial tax creditAttention, this link will open a new tab.Attention, this link will open a new tab. can cover up to 80% of these expenses in the current year.
RRSP contributions to a labour-sponsored fund
If you contribute to a labour-sponsored fund like the FTQ Fonds de solidarité, you can be eligible for a 15% tax credit for each level of government federalAttention, this link will open a new tab.Attention, this link will open a new tab. and provincialAttention, this link will open a new tab.Attention, this link will open a new tab., for a total of 30%. What’s more, you still benefit from the RRSP deduction associated with this contribution, which ranges from 27.5% to 53.35% depending on your income. That’s a double advantage!
When you make a donation to a charitable organization, you can request a tax credit. The federal government creditAttention, this link will open a new tab.Attention, this link will open a new tab. varies between 15% and 33% depending on your income. The provincial governmentAttention, this link will open a new tab.Attention, this link will open a new tab. adds a tax credit of 20% to 24% and improves it if your marginal tax rate exceeds 24%.
Interest paid on a student loan
You can deduct interest paid on a student loan going 5 years back on your federalAttention, this link will open a new tab.Attention, this link will open a new tab. and provincialAttention, this link will open a new tab.Attention, this link will open a new tab. returns, with refunds of up to 15% and 20% respectively, for a total interest savings of 35%!
04Not diversifying your investments
You may be tempted to make the mistake of falling for the investment “flavour of the month” or taking the advice of a friend or family member who has a hot tip, instead of listening to a financial advisor accredited by the Autorité des Marchés Financiers, the Quebec securities regulator. An advisor can develop a complete financial strategy choosing investments that fit your specific needs, while ensuring adequate diversification of your portfolio, so you don’t end up placing all your eggs in one basket.
Using of a variety of financial products, such as mutual funds, is a simple, efficient means of diversifying your portfolio. These funds combine hundreds of stocks from different economic sectors such as finance, primary materials and technology, and can also let you participate in international markets like the U.S., Canada, Europe and China. Investing in a variety of securities in a range of asset classes, such as stocks, bonds and real estate, leads to optimal portfolio diversification. That way, no matter how difficult economic conditions become, volatility within the portfolio will be milder and the variations in value of the holdings will be reduced. It’s important to watch out for management fees on different investment vehicles, which can range from 1% to over 3%, which can prove to be quite costly over the long term!
Keep in mind you don’t need a huge variety of investments to achieve adequate diversification. A portfolio containing only a few carefully chosen investments following the advice of a financial advisor can easily help you maximize your returns over the years to come. Also, it’s usually easier to invest by making regular contributions using automatic withdrawals, whether these investments are destined for an RRSP or a TFSA.
Saving for retirement can be a challenge for a lot of people. But by starting early and making a few adjustments and changes to your savings habits, you’ll be in a better position to reach your investment goals more easily and with greater peace of mind.