Sunday, September 26, 2010

The most common ways we sabotage our retirement plans

The following post is from a Financial Planner/Advisor resource website where the underlying audience is normally the financial planner. However, I think it holds some valuable points for all...

By Joanne Sommers, IE

Most clients know what they should be doing to prepare themselves for retirement. The problem is that many are not very good at following through. As a result, too many clients may find themselves unprepared financially as retirement draws closer.

There are many ways in which your clients may be sabotaging their retirement plans. Here are some of the most common:

> Procrastination

Caught up in the demands of day-to-day expenses, many clients simply wait too long to start saving for retirement, says Al Nagy, an Edmonton-based certified financial planner with Investors Group Inc.

“We tend to think in the ‘now’ rather than about the future,” Nagy says. “My job as an advisor is to get my clients thinking about how the choices they make today will impact their wealth accumulation strategy. I try to get them to establish a plan and review it regularly. That helps them maintain their focus.”

Human nature is such that anything happening in the present or short term seems more important than the long term, says Tracy Piercy, founder and CEO of Moneyminding International, a Victoria-based financial literacy firm.

The key to helping clients avoid procrastination is to get them to focus on creating sustainable income to support their desired lifestyle, she says.

That approach brings long-term financial independence into the present and helps to minimize procrastination, says Piercy, adding, “We won't succeed if we continue to 'try' to get people to behave in a way that is counter to basic human nature.”

> Misusing RRSPs

People often regard their RRSPs as tools for reducing their taxable incomes rather than as the retirement savings vehicles they were intended to be, according to Clay Gillespie, managing director with Rogers Financial Group in Vancouver.

Using RRSP funds to finance pre-retirement needs and desires is another frequent mistake clients make, Gillespie says. “It’s quite common to see RRSPs used as savings accounts, with the funds used to pay for non-emergency purchases.”

The use of RRSP money to pay off short-term debt can also create tax problems, while permanently reducing RRSP room.

Two more ways clients sabotage their retirement plans

By Joanne Sommers

Your clients already know they should be making regular RRSP deposits, investing long term and paying off debt. But they don’t always follow your advice to a tee.

They may procrastinate about starting a retirement savings plan or raid the RRSP funds for a non-essential purchase.

Here are two more ways clients sabotage their retirement plans — and ways you can steer them in the right direction.

> Failing to set goals

Many clients sabotage their retirement plans by failing to set clear personal financial goals, says Piercy.

To help clients understand what a clear personal financial goal looks like, Piercy offers this example: “I’d like to be financially independent within five years, with household income of $10,000 per month from our stock, real estate and business investments so I can spend my time gardening, looking after our grandchildren and volunteering with at-risk youth. I’d like to take two vacations annually with my husband in our motor home.”

That’s much better than a long list of unspecific, generic goals such as “retiring early,” “paying off the mortgage,” “getting a better return on investment” or “selling the business,” she says.

“Generic goals simply don’t resonate with the commitment required to see them through,” Piercy says, “whether it’s a retirement goal, a fitness goal, or any other lifestyle goal. The goal must be personal, specific and have an emotional meaning to the person setting it – and of course it must be in writing and be measurable in terms of accomplishment.”

> Carrying debt

An estimated 40% of Canadians currently retire with some debt. That’s a significant reversal from the past, when the conventional wisdom was that most or all debt should be eliminated before retirement.

Gillespie believes that debt elimination should still be a priority when planning for retirement. “[Advise clients to] repay credit card balances as a demand loan rather than a line of credit,” he says, “because that forces you to pay it off.”

It’s also better for clients to repay non-deductible debt, such as a mortgage, before investing in anything else, Gillespie adds.

He recommends this strategy for some clients: “Sell your portfolio to pay off your mortgage, if necessary, then borrow to invest, using the house as collateral. That makes the interest tax-deductible.”

Piercy, suggests advisors help their clients think about debt as a wealth-building tool rather than pushing them to eliminate it altogether.

“The key is to focus on income creation,” she says. “When clients can earn income from their assets, with proper monitoring and exit strategies in place, carrying debt isn't an issue.”

www.saveriomanzo.com
Saverio Manzo

Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham; Merrill Lynch Fund Managers Survey, Gordon Pape,

No comments:

Post a Comment