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Top 5 things that can derail your retirement

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Here's how to maximize your retirement savings when rolling an old 401(k) into an IRA.

In an ideal world, we’d all have our finances in order and everything would unfold according to plan, leaving us to enjoy a comfortable retirement. However, things rarely go according to plan.

Although unforeseen circumstances can derail your retirement, there are ways to guard against them.

Stock market decline before or during retirement

Those who were ready to retire back in 2008 got hit hard by the financial crisis, something they likely never saw coming. Minimizing the risk of a big loss when you’re approaching the golden years is crucial.

“You need to ensure that your portfolio matches your time horizon and risk tolerance during each phase of your life,” says certified financial planner Tina Tehranchian, branch manager at Assante Capital Management Ltd.  

“However, you shouldn’t try and eliminate risk altogether when you’re approaching retirement or even during your retirement years, as you’ll still need the bulk of your assets to grow for another 20 or 30 years, and you may need to put up with some volatility to be able to achieve your required rate of return.”

The sequence of returns can have a big impact on how long your savings will last in retirement, she notes.

“Studies have shown that starting your withdrawals at the beginning of a market downturn can result in running out of money up to 15 years earlier than if you start your withdrawals at the start of a bull market,” says Tehranchian.

“Diversification is key, and ensuring that you have a guaranteed source of income in the form of a pension, life annuity, or guaranteed minimum withdrawal benefit plan in your retirement income mix will not only give you more peace of mind but will help you withstand market volatility better too.”

Illness

We never think it’s going to happen to us, serious illnesses like cancer or conditions like heart attacks can strike anyone.

If you have to take time off work to recover, you don’t want to be withdrawing from your RRSP or racking up your line of credit to get by.

Building up emergency savings is a must. Aim for six months’ worth of expenses so that you don’t have to drain your retirement funds or go into debt to make ends meet, says Kelsey Smart, certified financial planner at Freedom 55 Financial and Quadrus Investments. Insurance is another option to consider.

“What if the main breadwinner in the family were to suffer an interruption in employment due to critical illness and it becomes too burdensome to continue making mortgage payments during that stressful time?” Smart says. “Have an emergency fund in place. Have critical illness coverage in place.”

Disability

According to Canadian Life and Health Insurance Association, one-in-three Canadians will become disabled for 90 days or more before age 65. A disability can last a few months, a few years, or be permanent. A long-term disability can have a major impact on your retirement plan.

“For most Canadians, their health and ability to generate an income is their greatest asset,” Tehranchian says. “It’s important that you protect this asset and ensure that you have adequate long-term disability insurance in place to replace your income in the event that an accident or sickness prevents you from earning an income. The negative impact of a long-term disability on your retirement can be much larger than a decline in the stock market.”

Death of a spouse

Most retirement plans are built on the assumption that both spouses will be alive and healthy and earn and save enough to reach their retirement goals. The premature death of a one can throw a curveball.

“It’s important to have an estate plan in addition to a retirement plan,” Tehranchian says. “In your estate plan, you can ensure that there are adequate funds available on the death of either spouse by putting in place the right amount of life insurance.”

This is especially important for homeowners.

“What happens if a husband and wife share mortgage payments and one predeceases the other?” Smart says. “Have adequate life insurance in place so that the survivor is not forced into selling the home at an inopportune time, perhaps during a housing market downturn, when they might not receive what the home is worth.”

Lack of diversification

Putting most of your eggs in one basket can throw a wrench into your retirement plans. This can happen when a big chunk of your savings is in the form of stock options purchased through an employee stock purchase plan.

“The problem is that if the company fails, not only could your stocks become worthless, but your pension could be in jeopardy too, and of course you would lose your job,” Tehranchian says. “Employees of Nortel had to learn this the hard way.”

This can also happen if you have a large concentration of one security in your portfolio, making you vulnerable to a drop in price of that particular security.