Part One: Understanding and Exploding the Five Big Myths of Financial Planning Part Two: Fighting Back Here’s a summary of what you’ll find in part one:
Myth 1: If I had a $1,000,000… I Could Retire There is a myth perpetuated by many investment advisors that you will need approximately 70% of your pre-retirement income after you retire to maintain your current lifestyle. Some go as far as 100%. They say this for one simple reason: the more money you need to retire on, the more you w ill need to hand over to them and that means more commissions and fees in their pockets. In this chapter I show that this myth is often way off base. In fact, based on a detailed example in the book, I show a family of four could be just fine with only 40% of what they are making in their 40s. Myth 2: RRSPs are the Holy Grail of Retirement There is a question that comes up every year: Should I invest in an RRSP or pay down my mortgage? I used to be of the opinion that building up a retirement nest egg instead of paying down debt was the way to go. Over the past 20 years I have changed my point of view 180 degrees. The recent market declines have cemented it. Myth 3: Don’t Worry About Your Investments; You’ll Be Fine In The Long Run If you look at a typical RRSP investment statement, you will see a listing of the investments, the current number of shares or units of each as well as their market value. You will also see last month or quarter’s market value. The statement will also list the book value, which is the cost plus any reinvested dividends for each investment. They don’t give you this figure to help you determine how well you are doing – they do it because they are required to do so by the foreign content rules. Your foreign content book value can’t exceed 30% in Canada. Consider what the statements don’t tell you: - Overall rate of return for the year-to-date; - Overall rate of return annually for the last year, three years, five years and since inception; - Comparison of your rate of return to various market indices. Myth 4: We Have Met The Enemy and He Is The Tax Collector (with apologies to Walter Kelley) Let’s face it nobody likes to pay tax. The problem is that investment and financial sales people know this and often use it against you to sell products you should avoid like the plague. Your dislike of taxes also can lead to bad decisions. Myth 5: Secure Your Financial Future: Buy Life Insurance Life insurance has its purpose – it should allow the dependents of the breadwinner in a family to maintain their standard of living should the income-earner die. If you talk to many life insurance agents, however, you may get a different idea. Often they will try to convince you that a universal life, or worse yet, a whole life policy is the way to go because of the “savings” component or because you don’t want to pay all that tax upon your death. Don’t fall for this ploy.
(c) David Trahair, CPA, CA, 2015. All rights reserved.