The COVID-19 pandemic hit hard in early 2020, and it continues to remain prevalent as we near the end of the year. Whether you’ve just recently retired, or it’s coming up in the next few years, it’s likely the virus has brought about some financial uncertainty regarding your readiness for retirement. Before making any sudden changes, it’s important to remain rational and avoid these five big retirement mistakes below.
Mistake #1: Neglecting Your Emergency Fund
No word describes 2020 better than “unexpected.” Therefore, it should come as no surprise that preparing for the unexpected sits at the top of our list. When times get tough, it can be tempting to forego or forget important financial habits - like padding your emergency fund. If your income has been affected by COVID-19, you may be struggling to make ends meet for the time being. But that doesn’t mean adding to your emergency fund should be the first thing to go. A little preparation now can go a long way when the unexpected does hit. From a health emergency to car repairs, you never know what surprises may come your way in retirement. As a general rule of thumb, you should be able to cover at least 6 months of expenses without dipping into your investments. Take you monthly net income, remove any savings you currently contribute, and multiply by 6 to arrive at an appropriate emergency fund. For example, if you earn $5,000/month after tax but save $1,000/month in your RRSP and TFSA, then take the remaining $4,000 x 6 and your emergency fund should be $24,000. That may seem like a lot of money doing nothing, but it doesn't have to do NOTHING, it can still be in a high interest savings account - just make sure it's easily accessible and without any penalties.
Mistake #2: Making Unnecessary Withdrawals
Withdrawing from retirement accounts early could mean big tax penalties and less income in retirement. Accessing the funds in your RRSP for short term needs can seem reasonable in the moment, but it's always harder to replace those funds than you imagine at the time. In fact, the federal government reduced the minimum withdrawal required from RRSPs and similar accounts by 25% for 2020 to allow you to reduce the amount of money you might otherwise withdraw from your RRSPs and other accounts. Since we're already three quarters through the year, you may have already reached the minimum and may not need to take additional income this year. If at all possible look for other sources of cash for your short term needs rather than raid your retirement savings.
The money you withdraw from an RRSP will still be subject to income tax come 2021. And to avoid robbing your future retirement, you’ll want to develop a plan to replace that lost income in the coming years. If you’re struggling to cover your expenses amidst the pandemic, talk to your financial advisor about other options you may want to take first. Look into what relief programs exist, tap into your emergency fund if necessary and reevaluate your budget.
Mistake #3: Making Emotionally-Driven Investment Decisions
Nobody can go a day without hearing the word “coronavirus.” From social media posts to advertisements and news outlets, there’s no escaping the pandemic. COVID-19 aside, other big news stories are hard to avoid as well - the upcoming US election, the faltering economy, the stock market rising and falling, etc.
After absorbing info day in and day out, it’s nearly impossible to not let it affect your decisions about money. Should you drain your portfolio and stuff it under the mattress? Do you need to look at rebalancing assets amidst this market volatility? Working with an investment advisor can bring an objective, scientific and education-based perspective to the question of what to do with your assets. Together you can focus less on the world around you and more on your individual goals as you head into retirement.
Mistake #4: Forgetting to Reassess Your Current Budget
Have things changed since you last made your monthly budget? Maybe you used to commute to work, and now you’re working remotely. Or you used to spend every Friday at happy hour with friends, now you enjoy a quiet evening at home. It’s very likely that your daily habits, and what you spend money on, have been affected by the pandemic.
In many cases, this could be good news. You’re spending less on gas or commuter passes, travel and vacation, eating out, gyms and more. Reevaluate what your spending has been like over the past several months and determine if there are any opportunities to put more toward your retirement savings. Depending on your timeline towards retirement, an extra couple of thousand in savings this year could grow significantly over the coming years.
Mistake #5: Ignoring CERB & Other Legislative Changes
CERB can give you $2,000 for a 4 week period (remember that it's taxable income!) and it is being replaced by enhanced Employment Insurance (EI) benefits. You can find out more here: https://www.canada.ca/en/services/benefits/ei/cerb-application.html. But did you know that there are also some significant opportunities for retirees and those about to retire?
As mentioned earlier, the minimum withdrawal requirement from your RRSP, LIRA, RRIF, LIF, and other retirement accounts has been reduced by 25% for 2020.
If you don’t need this money to make ends meet, leave it invested to accrue more interest. Plus, your tax obligation will be lower without this additional income.
Plus, if you are receiving Old Age Security (OAS) an extra $300 should have been paid to you, with an additional $200 paid for those receiving the Guaranteed Income Supplement. More info: https://www.canada.ca/en/services/benefits/publicpensions/notice-covid-19.html
If the pandemic has created some cause for concern when it comes to your retirement, don’t hesitate to reach out to us!. We work with retirees and pre-retirees to develop retirement strategies and determine if things need to be adjusted,
Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.