This is a guest post by Mike from DoNotWait, a blog focused on retirement planning.

As a financial planner, I create retirement plans on a weekly basis. When I meet my clients, they all have ideas of what they want their retirement to look like and how they can make it happen. This can be a major problem since several of their preconceived notions are often wrong. This is also why many individuals think they don’t need to plan for retirement. But going over a retirement plan is very important.

Here are 4 common critical mistakes in retirement planning:

#1 I Don’t Need a Retirement Plan

Is it because you lack time or that you think your financial advisor will try to sell you products? Either or, many people think that a retirement plan is useless. Some find it too complicated, others just think that they don’t know where they will be in 10 years so why bother with a plan?

While your retirement plan will likely change over the course of your life, it is important to have a line of direction. Thinking that you will manage retirement once it is “the right time” won’t be enough.

Do you have a will? Do you have enough insurance if you die tomorrow? How much can you withdraw per month at retirement? When can you retire and not worry about your finances?

All those questions can be answered through a retirement plan. Not having a plan is like driving to Brazil without a map by thinking “I just have to go south”… good luck!

If you think you need $45K per year to live comfortably at retirement, it will be very important to know how much you need accumulated by age 60 or 65 to be able to receive this amount of income. The sooner you plan your retirement, the easier it will be to achieve your objectives.

#2 I Will Generate 8% Returns

Some folks will create their retirement plan but they will prefer to draw nice graphs. When you input an 8% return in your investment projection, it sure looks good to see the huge balloon of your net worth hitting a million dollars before retirement. However an 8% projection may not be realistic. As a reference, here’s what you should use as an investment projection based on how you are invested:

Investor Profile Fixed Income / Equity (%) Expected Yield (%)
Secure 100-85 / 0-15 3.25%
Conservative 85-70 / 15-30 4.00%
Moderate 70-55 / 30-45 4.50%
Balanced 55-40 / 45-60 5.00%
Growth 40-25 / 60-75 5.50%
Equity 25-0 / 75-100 5.75%

This may sound discouraging but you are better off planning your investment strategy with a 5% yield rather than hoping for a miraculous 8% and realizing that you will end-up short by $250,000 in your portfolio upon retirement.

#3 My Pension Plan (or the Government’s plan) Will Be Enough

For many years, individuals were able to count on generous pension plans sponsored by huge companies. They were called defined benefit pension plans (DBP). The beauty of them was that they assured a steady pension income until you die. All that assured by the company itself. DBP’s are becoming very rare with the exception of a Government job or by working for a Canadian bank.

Nowadays you are on your own. Most pension plans have become defined contribution pension plans (DCP). What is the difference between benefit and contribution? The level of responsibility from the employer ;-). In a defined contribution pension plan, all you know is how much you contribute and how much your employer adds to the pot. You manage the pension plan through a choice of mutual funds and you leave the company with your investment portfolio. Therefore, you are vulnerable to market fluctuations and there is no fairy godmother to add more money into the fund to compensate for the bad years.

So depending on how much you invest in your pension plan, it can be interesting to know what it will amount to upon retirement.

#4 I Will Be Debt Free at Retirement

If you are 30 and have a mortgage, you probably think that you will be mortgage free at 55 – 60. Since your mortgage is 25-30 years of amortization, this sounds like a logical assumption. However, chances are that you won’t live in this house for the next 30 years. And if you do, I bet you will drop a ten grand or more in renovations, for a pool, spa, new kitchen or garage. Therefore, chances are that you won’t be debt free at retirement.

I regularly meet clients who still have a mortgage in the neighborhood of $100,000 when they are about to retire. It is safer to think that you will still have monthly payment of $500 to $1000 to pay off your debts at retirement. Some will buy a boat, others will change their car every 3 years. It all leads to a monthly payment. If you manage to retire debt free, you will only feel more comfortable and you will be able to afford more trips per year or finally renovate your bathroom without a renovation loan ;-).

Are you thinking of anything else? What is your perception of retirement planning? What do you think about making a plan? Do you have one?

Looking for more retirement planning tips? This guest post is provided by Mike at DoNotWait! A retirement planning blog where you can find information about investing, saving, estate and retirement planning.


  1. FrugalTrader on October 13, 2010 at 11:00 am

    Make sure to check out Do Not Wait as they are giving away an iPAD!

  2. Christy on October 13, 2010 at 2:45 pm

    A fantastic guest blogger post.

  3. FrugalTrader on October 13, 2010 at 2:49 pm

    Mike, one point I will disagree with is #4. For example, my parents paid off their mortgage years before their retirement. But since they were savers by nature, they retired with $0 in debt (besides rental properties). They even did extensive renovations, but again, since they put cash aside, they simply paid cash for any upgrades.

  4. The Financial Blogger on October 13, 2010 at 3:18 pm


    I agree that disciplined individuals (like your parents) will retire debt free. However, out of my 350 clients, I can say that several of them will end-up with owing balance at retirement.

    This is unfortunate, but the saving rate in Canada is pretty bad. So while I agree with you that we all should retire debt free, this is not going to happen for at least 50% of us…

  5. sco on October 13, 2010 at 5:10 pm

    Where did you get 5.75% projection for return on equities, and why are you calling 8% miraculous?
    My goal is average returns of between 10% and 15% and I’d be pretty pissed off if I only got 8% in the long run. You’d get 8% (after inflation) if you only buy a broad-based index ETF and do nothing else.

  6. Robert on October 13, 2010 at 5:46 pm

    sco, there have been decades (see USA: 2000-2010) where the return on equities BEFORE inflation has been 0%. There is no such thing as an “average” in stock market returns. 5.75% after inflation seems like a pretty safe bet for someone who’s planning for 20-30 years in the future (although I use 5%).

    The biggest mistake I see people make is not knowing how much they spend. I have no way of know how much money you’ll need if you don’t know how much you spend. The pension might be enough, if you don’t spend more.

    I like to have a plan, but at the same time, I know life will throw more than one curve ball my way before I reach my goal. Even so, my plans gives me a basis for making decisions in the meantime.

  7. Scott on October 13, 2010 at 9:03 pm

    I know a municipal BUS DRIVER who will retire with a pension of almost $1,000,000.

    That’s right — a MILLION DOLLAR BUS DRIVER.

    I wonder what a truly valuable civil servant is worth?

    Said person also takes in ~$65,000/yr (10-month work year).
    Said person also does NOT have to save a single penny because they have no worries about retirement — it’s taken care of by the government via the union.

    I also recently read that university/college graduates view the government (all levels) as the number one favoured employer.
    With above average pay, below average work hours, full benefits, and an insane pension plan, I can see why.

    @Robert: inflation is also a tricky stat. I would have no qualms with putting the REAL rate of inflation somewhere around 10% (think politician annual pay raises) and NOT the “official” reported number. Tack on all those omitted “too volatile” items we all use every single day (eg. gasoline, heating oil, mortgages, food, etc.) and you will most definitely see a very real rise in inflation. Therefore, your portfolio would have to be earning at least 15% to get you the desired 5% net return. Or you could just face facts that we are all getting poorer (by varying degrees) as time marches on.

    Have a good day.

  8. bob on October 13, 2010 at 9:15 pm

    Pension envy is not a pretty thing.

    First, Government workers do not have higher than average pay for most jobs. Look at private vs government lawyers for one example.

    Second, you make it sound as if pension recipients do not contribute to their own pension. In fact, somewhere around 9% of a government employee’s income goes towards their pension.

    Third, the contracts were negotiated in good faith.

    Instead of decrying the public pensions, why not demand equivalent from the private sector? Part of the answer is that many in the private sector don’t want that sort of pension because they see it as “losing control of their own investment decisions” and believe they can do better than the pension plans by doing it on their own. In essence, they want it both ways — the freedom to invest on their own, with the security of a pension.

  9. bob on October 13, 2010 at 9:56 pm

    I’m also not sure how you calculate a pension value of 1 million. Are you talking commuted value?

    You realize that for pensions you don’t actually get a million bucks, right? If you die 5 years after retiring, for example, you don’t get any money to leave as inheritance (depending on options chosen, etc.).

  10. The Financial Blogger on October 13, 2010 at 10:37 pm


    Most Gov workers will earn a good pension. If we take the bus driver example, he will probably make 70% of his income as a lifetime pension. This would make a pension income of $45K per year. If the guys gets this pension during 30 years (from 60 to 90), this probably worth 1M$ ;-).

    I really would like to see how you can get a 10-15% annualized return over a 20-30 years investment horizon while almost no stock index or mutual did it…If you can make it, write a book about it or become a portfolio manager, you will become a millionaire ;-).

    Those yield were taken from the Institute of Financial Planner of Quebec. They are not made to draw nice graph, they are made to make your retirement plan with safe assumption.

  11. dusen on October 13, 2010 at 11:19 pm

    @Sco, you’re at best a naive investor, at worst an idiot. Like the previous post said, if you can guarantee a goal of 10-15% average returns, you’re smarter (and luckier) than 99.9% of all the investors out there.

  12. Jungle on October 14, 2010 at 3:08 am

    What if you just pay your debt, save and invest the best you can. Whatever you come out with in the end, will be your retirement income. Does that sound like a plan?

  13. Dr Dale Rathgeber on October 14, 2010 at 10:46 am

    This was agreat post; even if the discussio became a bit abrasive from some of your readers. Keep up the good work.

  14. Robert on October 14, 2010 at 1:53 pm

    @ Scott, I take real issue with your “real” inflation estimate. First, you don’t have a source to back up your statement. Second, you’re implying there’s some conspiracy that’s hiding the truth from us (and we’re too stupid to see it). But my favourite argument is to compare the price of a hammer in 1960 with today. Or milk. Or a (comparable) car. Some things are actually getting cheaper. What’s actually becoming inflated is our lifestyle. And if I want to live 10% better year-to-year, you’re right that I’ll need a 15% return.

    @ dusen, That was uncalled for. Warren Buffet has averaged around 20% per year returns for around 50 years. Some people I have work with have averaged around 20% (on leveraged real estate) over the last 15 years. And I think a lot of small business owners earn a “return” of 20% or better each year on the value of their business. It’s not impossible to do, but it takes skill, experience and effort. Buying an index fund requires none of those things, and offers a lower return.

  15. Elbyron on October 14, 2010 at 3:00 pm

    Jungle, that sounds like my kind of plan! I’m a pretty good saver, so I don’t worry too much about what I’ll end up with when I’m 65. Like FT’s parents, I expect to be responsible enough to have my mortgage paid off years before retirement, and not incur additional debt.

    My strategy is to put 6% of my salary into RSPs (my wife’s pension contributions are about 10%), and all the extra left after living expenses goes toward paying down the mortgage faster. If we go on a big vacation, buy a new vehicle, or do major renovations then there will be fewer extra mortgage contributions, but even without them it should be paid off before I turn 50.

    The article does make a good point in #4 about possibly moving to another house, but assumes that this means a bigger mortgage. My current house is quite likely the most expensive one I’ll ever own (unless I move to a more expensive city – but that would come with a higher salary too).

    So, if I just pay off debt and save as much as I can, I’m pretty sure I’ll have plenty of dough by retirement age. If I have extra, I can retire early. And if I’m short, I can work a couple more years. That’s one of the things that I hate about the retirement plans that advisors try to push – they make you choose an age you want to retire at. And it’s also very hard to decide how much income you’ll need to live on, even with the best estimator tools out there. I’d rather just keep things loosely planned and not worry about the details yet.

  16. Financial Cents on October 14, 2010 at 4:33 pm

    Excellent point Mike!

    “This may sound discouraging but you are better off planning your investment strategy with a 5% yield rather than hoping for a miraculous 8% and realizing that you will end-up short by $250,000 in your portfolio upon retirement.”

    People dreaming of getting 8% return, all the time, every time, are just that, dreaming.

  17. Paul on October 14, 2010 at 5:55 pm

    5% ? Where are you putting your money to get such a good return? I’m lucky if I get something higher than 0%.

  18. Todd Tresidder on October 14, 2010 at 8:39 pm


    You made some excellent points that are critically important for anyone planning retirement to take note of. It is far easier to avoid the obvious mistakes by reading your article than to have to overcome them later.

    In a similar article I published titled The Dirty Dozen Retirement Planning Mistakes To Avoid I include a couple additional mistakes not discussed here that could be added to your list…

    For example, expected future investment return on a diversified portfolio over a 7-10 year holding period is inversely correlated to the valuation at the beginning of the period. This might help with some of the comments challenging your accurate attempt to lower their investment return expectations. In fact, surprisingly, according to the statistical evidence you were overoptimistic about expected returns.

    Some other mistakes people might want to consider include (1) underestimating health care costs (2) improperly determining how much money they need to retire by making inaccurate assumptions (3) not maximizing tax deferral (4) investing in variable annuities (5) and not controlling investment expenses to name a few.

    Anyways, I agree wholeheartedly with your position to help people avoid the obvious retirement planning mistakes. Hopefully these points further that objective.

  19. Ty Webb on October 14, 2010 at 10:14 pm

    I think that the last point doesn’t apply to MJD readers as they are disciplined enough to have their mortgage paid off for many years before retirement. Fancy renos, boats, expensive cars, etc are choices that aren’t made by people who read PF blogs.

  20. Dave@50plusfinance on October 15, 2010 at 2:25 am

    Nice list of things to tell me how I am doing everything wrong. i have #1 covered. I am living with my kids, probably in their garage. Number 2 is covered because if I ever have any savings, I am going to take it over to the bingo hall and double my money. Number 3 Obama says I have nothing to worry about because Social Security will take care of me. Number 4 is no problem. I won’t have any debt because I’ll be in the new debtors prison they will be building for me.

  21. Future Money-Bags on October 15, 2010 at 8:10 am

    Start young, save 10% of your income a year for life, or save 50%+ for 10 years. Put all those savings into investments, and than just live life.
    Starting young, compound intesrest, and living below my means to ensure I save the rest, Are the 3 ways I plan to have plenty when I ‘retire’.

  22. Hot Spot Investments on October 15, 2010 at 8:58 pm

    First off, i don’t see anyone here acounting for drawdown. While it’s all nice and good to assume your stock portfolio will grow at 5.75% or better, what you’re not explaining is what happens when you try and withdraw any of this money and spend it at retirement age… there are far smarter ways to generate a large annual growth rate and keep yourselves away from the dangers of any of the stock market disasters i see are conveniently not mentioned here. ROTH IRA’s for example with leveraged real estate and a maximum of $416.00 a month/$5000 a year contributed (depending on age) can see a fair minimum of 10% growth annually and as much as 120% depending on which type of real estate is used. Then when you do want to retire you aren’t paying those pesky, and again not mentioned in your summary, taxes, and broker fees, (A.K.A. Drawdown) that make a million dollar retirement plan seem so unattainable to 95% of the retirement plans that “financial planners” so often tell you are your only path to a secure future. I emplore people to look outside of this ridiculous circus of the stock market and find what has really made almost all of the real wealth in the world for centuries. REAL ESTATE!!!

  23. Jan on October 19, 2010 at 11:50 am

    #4 we are debt free- but not tax free.
    The taxes and insurance on our property is about $4500 a year. That might not seem like much, but it is the largest chunk of our pension payouts.

    Great article.

    PS- we have “made” about 15% in the market these last two years. Of course- we have sold very little so the reality is that we have made nothing at all. My husband says that DRIPS are so crazy to sell that we will give them to our grandchildren to deal with after we die!

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