Gordon Powers

When it comes to money, most of us like to think we're pretty sharp. We know enough to comparison shop, stay out of debt and set up some sort of savings plan. Sometimes though, we just get things wrong.Last year, Consumer Reports highlighted how making poor choices can cost you. Some of the blunders identified were more applicable to U.S. investors but here are a few that apply equally in Canada.

Investing too conservatively during retirement
Conventional wisdom suggests that as you age, you should shift money out of stocks and into more stable investments, such as bonds. For instance, a popular rule of thumb is to subtract your age from 100, the difference being the percentage of stocks you should keep in your portfolio. Being too cautious once you retire can hurt you though, Consumer Reports suggests. Annual returns on bonds may barely keep pace with inflation, while stocks typically provide returns that do.

* Even in retirement, be sure to keep as much of your money in stocks as your comfort level allows.

Retiring too early
Attractive as it may seem, early retirement may mean leaving too much money on the table. First, you give up income you would have earned during what might be the best-paid years of your career. Retiring early can also result in sharply reduced pensions, including CPP, as well as lost benefits. Since OHIP and other provincial plans don't cover many health costs, you'll have to search out individual health insurance at an age when costs are much higher.

* If you're in good health and have a choice about when to retire, consider waiting until you're a bit closer to full retirement age.

Getting divorced
If divorce is unavoidable, make sure you take steps to reduce the financial impact. Hiring lawyers can ensure everyone's interests are represented, but the more issues spouses want to contest, the more billable hours they face. Consumer Reports found that a low-conflict divorce can generally be mediated for about 75 per cent less than going to trial. Since the intensity of the conflict is the major driver of legal costs, work more toward diplomacy than war. Lower-cost mediation works best when both parties are on a fairly equal financial footing and are able to work together without acrimony.

* Property settlements generally mean a 50-50 split in most provinces. Find a way to get along on custody, the most contentious and therefore expensive issue.

Adopting a healthy lifestyle
Unhealthy habits mean higher life-insurance premiums. Consumer Reports compared the costs of a $1 million term insurance policy for a 40-year-old, healthy male with one who had one of several risk factors often associated with poor health habits, including smoking. The additional costs in premiums for higher-risk men worked out to roughly $42,000 over the subsequent 20 year period.* Before applying for life insurance, consult a doctor about the best ways to bring your vital stats in line with the "preferred plus" underwriting requirements.

Underfunding your retirement
The only way to make RRSPs really work is to start contributing early. A longer time horizon creates more tax-deferred income through the power of compound interest. Look at it this way: At age 20, George makes his first RRSP contribution — depositing $1,000 into his plan and contributing the same amount each year until age 65. Assuming an average rate of return of 5 per cent, the value of George's RRSP at 65 is $167,685. His older brother Raymond doesn't get started in an RRSP until he's 30 years old, depositing the same $1,000 and making the annual contributions until age 65. At the same return but with less time to compound, Raymond will end up with just $94,836 - $72,849 less than his little brother.

* Contribute as much as you can afford to your RRSP and don't miss out on the catch-up provisions if you fall behind.

Underinsuring a home
If you've lived in the same house for at least 10 years, it's likely worth much more than you paid for it. But if you haven't updated your homeowners insurance and disaster strikes, you could lose those gains. Some insurers automatically increase your policy limit each year to reflect inflation changes but others don't. Be sure to review specific items as well. For example, if you purchased extra insurance coverage a few years ago for a high-end bike, you may want to reconsider now that the bike has depreciated in value.

* Check out an inflation-protected policy. Make sure it would pay to rebuild according to the current housing standards in your area.

Carrying a credit card balance
Owing money on a credit card is a costly mistake that can take an incredible toll. If you have a card with an interest rate of 15 per cent and you pay only the minimum due each month, it will take you 22 years and 2 months to retire a $5,000 debt, and you'll have paid $5,729 in interest, CR calculates.

* Use credit cards for their convenience but plan to pay off the balance in full every month.