Financial Myths That Will Ruin Your Retirement Dreams, from a CPA
You balance budgets, set financial goals and build strategies where you work, but have you worked as hard on your own finances? CPA Ontario wants you to get confident about your financial present and future with our on demand Building Your Wealth: Fundamentals of Personal Finance Certificate.
Build a personal financial foundation with a return to basics and by gaining the tools for budgeting, saving, investing, managing debt, retirement and more.
David Trahair, CPA, CA, is a financial writer, trainer and best-selling author who operates his own financial training firm and offers seminars to organizations. He offers his independent views throughout the certificate’s four updated courses:
- A Six Point Plan for Financial Freedom
- Cash Cows, Pigs and Jackpots
- A Complete Guide to Investing Options
- Financial Myths That Will Ruin Your Retirement Dreams
David’s financial myths course is based on his book Smoke and Mirrors: Financial Myths That Will Ruin Your Retirement Dreams, which he wrote because he was sick and tired of hearing the same traditional retirement plan. Here we provide an overview of three of the five myths covered in the course.
Myth: If I had $1,000,000, I could retire (the 70% rule)
The 70% replacement ratio rule states that you'll need about 70% of your pre-retirement income to maintain your standard of living after retirement. For example, if you earned $100,000, then you’ll need $70,000 a year in retirement.
The problem is that each of our personal financial situations is different. First, it takes aggressive investment in your RRSP to be able to do this, and it’s harder to achieve for people making less than $100,000. But David highlights that if you gain control of your finances, you won't need 70% to maintain your standard of living. Gaining control of your finances means you spend less than your take home pay, you pay off your mortgage and credit card debt and have money to invest for retirement.
Also, the replacement ratio may be much lower than 70%, meaning you won’t need to save nearly as much. Things will be paid off or will decline, like mortgage payments, income tax, travel costs and the cost of raising children, and you won’t be making the RRSP, pension plan, Canada Pension Plan (CPP) or EI contributions or some types of insurance payments anymore. You’ll also have additional sources of income like CPP.
David suggests also practicing what retirement will look like, and what your time and money will go to so that you are prepared. The on demand course also includes “My Income and Expenses” and “Cash Flow Projector” spreadsheets that will help you estimate your total inflows and outflows to help plan for retirement.
Myth: Don't worry about your investments; you'll be fine in the long run
This myth concerns the call for people to hold their stocks for the long term as they whether the ups and downs of the stock market. David cautions, however, that the long term is assumed to be 30 to 50 years but ends up being a shorter period for many of us. This is what makes the market a risky place to be.
David suggests that the key metric to track is your personal rate of return: what return on your portfolio you have made after fees. And what’s more important is not what has happened in the past few months, but what’s happened over years.
Sometimes this can be difficult to acquire as most firms that handle RRSPs no longer even list the book value of the investments. But David shows how newer regulations may help you get more of this information. The course includes a “Personal Rate of Return Calculator” that lets you do this yourself. David also shows how to read financial statements so that you can calculate the costs of your mutual funds with his included “Mutual Fund Fee Calculator”. David also gives tips to find a good investment advisor.
Myth: Buy permanent life insurance to secure your financial future
The first decision when it comes to buying life insurance is whether you need it. Depending on your stage and situation in life, there will be pros and cons, which David reviews. David cautions, however, that permanent (universal/whole life) insurance is a bad investment because of its costs and commissions, lack of control over investments and issues around getting your Cash Surrender Value.
If you do decide to get life insurance, term insurance can be beneficial. It’s better than mortgage insurance (not to be confused with mortgage default insurance), for example, because it’s more flexible because your beneficiaries can decide what to do with the funds. Also, the death benefit remains constant. With mortgage insurance the value of the benefit declines as you pay down the mortgage. David also recommends income protection insurance due to the odds of you not being able to work due to disability or illness.
Sign up for the certificate to learn more about financial myths that could ruin your retirement dreams. In the certificate, you’ll get the spreadsheets mentioned here, as well as the “Net Worth Calculator”, “Retirement Optimizer” and “Car Lease vs Buy Analyzer”. And enjoy the three additional courses that will help you manage your personal finances for success.