A financial plan is often seen as a marker of responsibility and preparation. Canadians spend thousands of dollars and hours thinking about their financial futures. But as well-intentioned as they may be, many financial plans fall apart because the foundation they’re built on is flawed from the beginning.
The biggest reason financial plans fail is because most are not personal. Often it is based on replacing a percent of your income, such as 70% or 75%, but that is too vague for most people to be confident that is the right amount.
Ed Rempel has written financial plans that replace 40% of preretirement and 250%. An average of 75% might be the average of all plans, but that is unlikely to be the right amount for you specifically.
Your financial plan should target a specific retirement lifestyle that you and your spouse want to live, including your actual spending habits.
Start by thinking about the lifestyle you want to life in retirement, how much travel, how much you want to spend on entertainment, where will you live, what car(s) will you drive, etc. Then your plan should start with what you spend now and adjust to add or subtract each expense to get to your desired lifestyle. You may want to add a bit for unknown future lifestyle choices. Review it and think about that life with your spouse. Is that how you want to spend your last few decades?
Then figure out how much income before tax you need to give you your desired lifestyle. Your financial plan should aim to provide you that income plus inflation for the rest of your life.
If your financial plan is not personal with the lifestyle you actually want to live, then you are unlikely to commit to it and do what you need to achieve it.
“People live their lives based on income instead of bank numbers. The question is if your plan can provide dependable income, year after year, to keep your lifestyle and inflation,” says Rempel.
Financial plans often fail because the underlying assumptions are not realistic.
The first assumption is life expectancy. In Canada, the average life expectancy is around 81 years, according to Statistics Canada. That is from birth and averaged down by childhood deaths. For people that reach age 65, average life expectancy is 86. It is rising with today’s 65-year-olds expected to reach age 89.
Planning should be for couples, since you want your money to last as long as either of you is alive. For couples age 65 today, 50% are expected to have at least one live to age 94.
But averages are also deceptive in planning. About 50% of the population will outlive that number. A large portion of today’s retirees will live into their 90s and even their 100s. Many financial plans assume life ends at 90, which leaves no margin for the possibility of longevity. This assumption can result in people withdrawing too much from their savings in the early years of retirement, not realizing they might need their money to last several years.
Financial planner Ed Rempel of Toronto, who has written thousands of financial plans, says this is one of the most common planning mistakes. It’s important to plan so that you will have money as long as either of you is alive with only a small chance of running out of money, say 10-20%. For couples age 65 today of average health, there is a 20% chance that at least one will live to age 99. “When people see how many years they have to make their money last, it can be pretty sobering. It’s not uncommon to live to 100 years old. If your plan wraps up at 90, you may be stuck in a bad financial position for the most fragile years of your life,” says Rempel.
Another issue is the expectation that spending drops significantly as people age. Some costs, such as commuting, work deductions, mortgages and the cost of children do go away in retirement, but travel and entertainment spending are often far higher. Most people still spend their money at the same rate as long as they are able, especially if they want to stay independent, travel, or enjoy the lifestyle they’ve earned.
A report by the Canadian Institute of Actuaries found that while some discretionary spending falls after 75, overall expenses remain roughly level, taking inflation into account. These results contradict the notion that expenditures rapidly decline over time. Given that people have a longer life expectancy and want more in retirement, the old rule of drastically cutting retirement spending may no longer be the baseline.
Financial planner Ed Rempel finds that most people want to maintain their lifestyle. Reduced spending after age 75 is often a result of not having saved enough. People in their 80s with health and money usually spend as much as they did in their 70s. They may also do more luxury travel and less active travel.
Inflation is another variable that often sabotages financial plans. Many plans use long-term inflation estimates of about 2%, following the Bank of Canada’s target. Recent spikes in inflation, like the 8.1% year-over-year rate recorded in 2022, are a reminder to Canadians how suddenly the cost of living can change. Most 30-year retirements have at least one higher inflation period, so that the 30-year average inflation has always been above 2%.
We had low inflation from the early 1990s until Covid, but inflation has been significantly higher through most of history before and after this one period.
A persistent rate of inflation, even just a little higher than anticipated, could erode your purchasing power significantly over 30 years.
Rempel warns that even small errors in inflation assumptions can compound dramatically. “If your plan is based on 2% inflation and it ends up being 3%, that discrepancy can eat through more than half of your buying power over 30 years. That can mean the difference between comfort and stress,” he says.
A proper financial plan should use more realistic inflation assumptions of 3% or possibly more, not 2%. Inflation has been above 2% in every 30-year period in recent memory.
Government benefits like Old Age Security (OAS) are also often misrepresented. Most plans assume that retirees will receive the entire OAS benefit. But there are clawbacks, beginning when net income exceeds $93,454 in 2025. For wealthy retirees, these clawbacks can eliminate much or all of their benefits. Ignoring this fact can make future revenue seem higher than it will actually be.
Finally, many financial plans fail because they feel abstract. They follow formulas and charts that have nothing to do with how people think about money or how their lives unfold. When a plan doesn’t feel right for the person it’s meant for, it’s hard to follow. People get bored, stop tracking progress, or make emotional decisions that affect their long-term goals.
Without questioning the assumptions inside the plan, the strategy may look solid but offer a false sense of security. A plan that is not based on the retirement you actually want to live and that quietly underestimates longevity, overstates government support and that does not include inflation, can look okay in theory but collapse under pressure when tested in reality.
Most financial plans don’t fail because people make bad choices. They fail because the original inputs were never accurate to begin with. When the numbers don’t match real life, the plan is a story we tell ourselves, until reality tells another.
