Top 5 peak earnings pitfalls

Your peak earnings years can be a time of unprecedented financial freedom. With income increasing at the same time expenses are decreasing, you have the means to reach many of your important financial goals.

However, your peak earnings years can also be a time of danger. Failure to take advantage of a strengthening financial position now can harm your future.

With that in mind, here’s a quick list of pitfalls that can push your peak earnings years off the rails:

Pitfall 1: Playing it too safe with the portfolio

The peak earnings portfolio should be focused on growth. Overloading the portfolio with low-interest GICs and bonds can leave you at a serious risk that it won’t be large enough to fund future goals.

Keep in mind your allocations should be adjusted according to individual circumstances. Those fortunate enough to have a defined benefit pension can afford to keep more of their portfolios in equities. The same goes for those who can rely on alternative sources of income—a part-time job, consulting work, or maybe a rental property.

Pitfall 2: Not dealing with debt

Many Canadians have a laissez-faire attitude toward debt. That’s dangerous at any time, but even more so during the peak earnings years, because these years immediately precede the ramp-up to retirement. Instead of simply accepting debt as part of life, use your increased earnings power to aggressively pay it down. That way you’ll enter retirement with few, or no, liabilities.

Pitfall 3: Focusing too much on the bucket list

A lot of people consider the peak earnings years the time to realize financial dreams—to buy a new home (or renovate an old one), to purchase a new vehicle or boat, to start a business, etc. That’s fine, but there’s a point at which such spending impairs your ability to save for retirement. So identify your priorities. Then, apply additional earnings to those priorities, instead of trying to accomplish everything at once.

Pitfall 4: Not taking full advantage of tax-sheltering opportunities

If you’re like many Canadians, you probably have some unused RRSP contribution room, or perhaps an RRSP homebuyer’s withdrawal you haven’t paid back. And you may not have maxed out your TFSA. Now that you’ve reached your peak earnings years, there’s little excuse for not taking maximum advantage of these tax sheltering opportunities. Make it a priority to catch up on your RRSP contributions. Once that’s done, maximize your TFSA investments.

Pitfall 5: Getting your heart set on early retirement

Early retirement is a stated goal of many Canadians. But it’s not something you just pull off. If you’re interested in leaving the workforce early, make sure to do your advance planning. Be rigorous with saving and investing. And consult with a professional about how feasible this option actually is well before saying goodbye to your boss.