SEVEN MYTHS OF FINANCIAL PLANNING

Myth 1: I need some investments before I need a plan.

Investing is about one-fifth of what financial planning is all about. There is also risk management and insurance, income tax planning, retirement planning and estate planning. And to the extent that you don’t reduce income taxes and develop the discipline to start saving the amount needed to fund your retirement, you won’t have any investments to need advice about.

Myth 2: My estate won’t be subject to tax.

While that will probably be true for the first spouse to die, it may not be true for the surviving spouse. Your estate could face some major tax liabilities when Canada Revenue Agency comes knocking.

Myth 3: I’m saving enough for retirement.

Most Canadians are not, and most underestimate the amount of money they will need. The only way that one will know the amount of money needed for retirement is to create a financial plan that sets out specific goals.

When you retire, you may face certain risks. Namely, longevity risk, inflation risk, or market risk.

In developing an income stream its important to address basic questions about family history and current medical conditions which could have a bearing on how long you may live.

Market risk and inflation risk are not knowable events, so it is important to take a realistic and conservative approach to planning your retirement.

Myth 4: I can beat the market.

Extremely improbable! The wonder is not that people like Warren Buffet exist, but that more of them do not exist. Based on pure probability, there should be hundreds or thousands more like him, but there are not. Why is that? Since no one can consistently predict the future, few can consistently beat the market, unless they are lucky and repeatedly guess correctly. And of the very few who do manage to beat the market, you only know that after the fact, which is to say 15 – 20 years later.

Myth 5: If something happened to me, my family would know what my wishes would be.

Many Canadians mistakenly believe that having a will or a power of attorney are not priorities. Nothing could be further from the truth. In fact, your will and power of attorney are probably the most important documents you will ever write.

If you die without a will the province will decide how to distribute your estate. And if you have children who are minors, the provincial government through the public trustee will decide who will raise them and care for them until the courts determine guardians.

Myth 6: Old Age Security and the Canadian Pension Plan will provide most of my retirement income.

Our government administered retirement benefit programs were only designed to provide one-third of an individual’s total retirement income. The remainder is to be generated from both employer pension plans and the retiree’s own savings.

Myth 7: I don’t need to save for my retirement because I’m going to die young.

So what will happen if you don’t die young? The top worry for retirees is the chance of out-living their money. With advances in health and science, many people are living well into their 90’s. For some folks they will be retired longer than they are in the work force, particularly if they retired early – say at 55. Based on data from Statistics Canada, at least one spouse in a 65 year couple has a 12.3% chance of surviving until age 95.