By Sheryl Smolkin
Read this article and comments at Moneyville.ca
In the first two months of every year, oceans of words are written trying to help people understand why retirement savings is important and how best to grow their money.
However, a recent TD Poll reveals Ontario residents still have a variety of misconceptions about their retirement finances, from when they should start saving to the amount they will need.
Here are four retirement savings myths that continue to proliferate in spite of ongoing efforts by financial institutions, governments and the media to enhance the financial literacy of Canadians.
Myth 1: Eliminate debt before saving for your retirement.
Two-thirds of Ontarians (64 per cent) think you should focus on eliminating debt before saving for retirement, and they are also the most likely in the country to feel that you should never retire with any debt (73 per cent vs. 66 per cent nationally).
If you have a mortgage, you have debt. With most mortgages amortized over 25 years, if you wait to start saving until your mortgage is paid off, you will never accumulate enough to retire. It’s important to pay down as much debt as possible before retiring, but it’s also essential to strike a balance between reducing debt and saving for retirement.
Myth 2: In an economic downturn it’s safer to sell stocks and keep money in guaranteed investments.
Forty-four per cent of Ontarians believe that putting money only in guaranteed investments or selling investments is the safest strategy during an economic downturn.
Consumer prices rose 2.3 per cent in the 12 months to December 2011, following a 2.9% increase in November. GICs may be safe, but at best they are currently earning about 1.5 per cent – much less than inflation.
An advisor can help you determine the right asset allocation for your portfolio, which will optimize potential returns without exposure to inappropriate levels of risk.
Once you have a plan, stick with it. Trying to time the market doesn’t work, even for the experts. If you sell everything and move to fixed income investments when markets are down, you will not participate in the gains when the inevitable recovery occurs.
Myth 3: The older you get, the less money you spend/need for day-to-day expenses.
Almost half of Ontarians (48 per cent) believe that your expenses will decrease as you age. But that depends on the lifestyle you hope to maintain once you retire.
If you plan to travel, continue membership in pricey clubs and eat in expensive restaurants, your cost of living in retirement could be more rather than less. Also, don’t forget to take into account everyday expenses such as dental and health care, or unforeseen expenses such as accidents or home repair.
Work with an advisor to estimate what your expenses will be in retirement, and to ensure that you are saving enough now to pay for these future expenses when you no longer have a pay cheque.
Myth 4: You don’t need the stock market to grow your retirement nest egg.
About six in ten Ontarians believe that they do not have to invest in the stock market to save for a financially-secure retirement.
When it comes to retirement savings, it’s important to establish a good balance and have a variety of investments and savings products, including equities, bonds, and savings vehicles such as an RRSP or TFSA.
Your portfolio should also contain a mix of conservative and more aggressive investments, depending on the number of years you have until retirement and your comfort level, which will help you maximize your retirement savings.
Saving money is as easy or as hard as you make it. You don’t have to start by saving hundreds of dollars from every pay cheque. Find a number that works for you – even if it’s only $25 bi-weekly – and have it automatically deducted from your bank account as soon as you get paid.