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Tuesday, March 28, 2017

Two Retirement Mistakes to Avoid

Posted by Robert on August 30, 2010

A few weeks ago, a journalist contacted me through this blog, requesting an interview about early retirement. I shared my story and some of my ideas and experiences regarding starting early and enjoying success at a relatively young age. I enjoyed my conversation with Jacqueline Nelson from Canadian Business magazine and looked forward to seeing the article in print. As many people who have been interviewed for an article before can probably guess, the article ended up being very different from what I expected.

The current issue of the magazine contains an article called: Top 10 Retirement Mistakes and How to Avoid Them. The link opens in a new window, so feel free to click on it and read it at your leisure. I contributed to ideas number 8 and 9: plan for a long life and don’t plan to inherit your retirement fund. Those ideas could both be related to early retirement planning, but I know it’s a bit of a stretch.

First, if I were planning to retire at age 45, how would I inherit money? My parents will be in their late 60s, not likely to be leaving an inheritance. And I have many brothers and sisters and cousins. I don’t expect to receive anything from my grandparents, but even if they leave money, it’ll be split many ways.

Second, how many years will I need my investments to provide income for me? As I mentioned to Jacqueline, there’s not much difference between planning to spend down the capital over 35 years (age 65 to age 100) and planning to never touch the capital. Retiring at age 45 leaves 55 years during which investment income will be required. This can only safely be accomplished by never spending capital. As the authors pointed out in the article, a 4% withdrawal rate is likely to achieve this. Coincidentally, 4% income can be produced by dividend paying common and preferred shares, as a way of producing income and protecting capital.

I was lucky to get to share some of my expertise with a wider audience, pointing out two dangerous assumptions people might make when approaching their retirement. Many of us readers of Canadian Dream are already aware of many of the others. We understand the costs associated with our children, if we decided to have kids. We don’t plan to work into old age, but are young and able enough to work if we need to. We are careful with our spending and likely won’t need a million bucks.

What did you think of the article? Is the financial press helpful, or merely distracting? Where have you found the information that has been most helpful to you? fre


5 Responses to “Two Retirement Mistakes to Avoid”
  1. George says:

    We know that any successful retirement plan, particularly early retirement, is all about the saving rate and that should have been included in any list of top mistakes. Most retirement articles seem to ignore that issue.

    Your contributions were on the money.

  2. George says:

    Oh yeah, a smaller nitpick… the 4% safe withdrawl rate is the initial rate and the resulting dollar amount is then increased by CPI each year thereafter. The withdrawl in future years likely will not be 4% of capital; it could be more or it could be less.

  3. Tiny Potato says:

    The information I found most helpful are contained in the various PF Blogs including yours. The financial press is helpful in the sense that the more people made aware of their financial situation, the better.

    I personally don’t think relying on an inheritance is a good plan either. My parents worked hard all their lives, I’d rather they enjoy retirement than worry about saving some money for me. If I need more money, I should save it…

  4. Robert says:

    George, a drawback to being quoted in an article is that readers may misunderstand the source of the “information” presented. I never mentioned a 4% withdrawal rate in our interview. Fortunately, I don’t disagree with it, and you make a good point. The cash-on-cash yield may increase with dividend increases. The current yield may decrease as share prices rise. And the cost of living (inflation) may affect the desired withdrawal rate. 4%, however, is a pretty safe rule of thumb, especially since it should be possible to create a stream of dividend income from a portfolio yielding around 4%.

    As far as the savings rate, it relates really closely to the spending rate in financial planning. Maybe the reason it’s often ignored is that it’s taboo to ask how much people spend? And, in my experience, many people don’t know how much they spend, anyway. The most common answer I get is: “All of it.”

    Tiny Potato, I fully agree that relying on your parents is for children. Part of being an adult is providing for yourself and your family.

  5. George says:

    People usually know how much, in absolute terms, they’re saving even if they don’t know how much they spend. From there, it’s easy to calculate what percentage of salary that represents. As long as it’s expressed as a percentage, it reduces the social taboos of dollar amounts.

    If we don’t talk about minimum saving rates, then people believe absurdly low savings rates like 1% or 5% or 8% are perfectly good for financing their retirement (or other saving goals).

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