Live Long and Prosper: Managing Longevity Risk

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?Longevity risk, the possibility of outliving your retirement savings, is a growing concern because we’re living longer and need to fund more years in retirement.

According to Statistics Canada the centenarian cohort in Canada grew by 16% since 2016 and the number of Canadians aged 85+ rose 12% between 2016 and 2021, more than twice the growth rate for the overall population. Developing a financial plan to age 90 (or longer) with your advisor can help ensure you get the most out of your retirement years.

In 1975, Canadians lived, on average, to 73, which meant their retirement savings only had to last about eight years. If you retire today at age 65, you can expect to live to almost 86, meaning you’ll need retirement income for more than 20 years. Medical advances for treating serious diseases and healthier lifestyles (including better diets and much less smoking) are a few of the reasons we’re living longer.

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The good news is that increased longevity provides more time to enjoy greater freedom and leisure after many years focused on working. Travel, more time with grandchildren as they grow, philanthropic endeavours or even a second career are just a few of the many possibilities. But longer lives aren’t being matched yet by extended “healthy lifespans”, or years spent in good health. Aging can still bring various physical and mental challenges and increasing longevity means we may experience them for longer.

Here are several ways you can manage longevity risk:

·???????? Develop a financial plan

·???????? Consider deferring CPP (or Quebec Pension Plan) Benefits

·???????? Diversify Your Investments

·???????? Consider Annuities

·???????? Maximize Tax Efficiency

·???????? Plan for Increasing Healthcare Costs

·???????? Manage Expenses

·???????? Work Longer or Part-Time

·?????????Get Expert Advice

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RETIREMENT EXPENSES THAT MAY LAST LONGER

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?Some basic health care expenses you may have to pay for in retirement, depending on your financial circumstances and your province, include prescription drugs, dental care and medical equipment. But the largest potential costs are housing and personal care. According to a new report from the National Institute on Ageing (NIA) at Toronto Metropolitan University, more than 52,000 Canadians were on waiting lists for a long-term care home in 2021. Approximately 167,000 Canadians 65 and older were estimated to have unmet home-care needs and most elderly people rely on spouses and family for free care. The NIA report says Canada’s below replacement birth rates will result in far fewer family members by 2050 to give that unpaid care. Yet demand is rising as supply drops, with the number of Canadians needing unpaid caregivers expected to double to 700,000 by 2050.

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?TOPICS TO DISCUSS WITH YOUR ADVISOR FOR MANAGING LONGEVITY RISK

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What’s my plan?

Developing a personal financial plan is the starting point for managing longevity risk. Key elements include short and long term financial goals, current and future income sources, budgeting, debt management, retirement savings and investments, tax planning, insurance, and estate planning.

When should I start my Canada Pension Plan (or Quebec Pension Plan)?

The standard age to begin collecting CPP is 65 but you can start as early as 60 or as late as 70. For 2024, the maximum monthly amount payable at age 65 is $1,364.60. The average monthly amount paid at 65 in January 2024 was $831.92. If you start before 65 the amount will be smaller. It will be larger if you start after 65 but the maximum you can receive is reached by age 70. Your personal situation and employment income history will determine how much you’ll receive, up to the maximum.

How diversified are my investments?

A well diversified retirement savings portfolio can help manage risk and provide potential growth opportunities. Depending on your age now, your retirement savings portfolio should be evolving from a growth focus towards an income focus to support your needs in retirement. An appropriate mix of growth and income in retirement will depend on your personal financial profile.

Should I consider annuities?

An annuity provides regular, fixed payments, often monthly, making them an effective source of steady income. These features and the fact that many annuities pay out for life make them useful for mitigating longevity risk.

Can I be more tax efficient?

In addition to maximizing your RRSP and TFSA contributions, tax-efficient investment strategies can help preserve and grow your assets for funding a longer retirement. Work with your advisor to explore strategies for generating consistent levels of income in retirement to stay in as low a tax bracket as possible, including income splitting with your spouse or common-law partner.

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How can I prepare for more healthcare expenses?

We inevitably spend more on healthcare as we get older, particularly if additional personal care is required. When employment ends workplace healthcare benefits usually end as well. The cost of retirement residences and long-term care can vary widely, and be quite expensive, depending on your circumstances and province. In-home personal care can also become very costly. Consider long-term care insurance or discuss with your advisor a dedicated investment or savings account to help manage large, unexpected expenses in the future.

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Should I work longer?

Extending your career or working part-time in retirement can supplement your income and reduce the number of years during which you rely solely on your retirement savings and CPP. And a second career or part-time work can also be personally rewarding.

As you navigate the prospect of a longer retirement, the importance of developing a financial plan tailored to your needs and circumstances cannot be overstated. With Canadians living longer than ever, it's crucial to prepare not only financially but also for the physical and mental challenges that may arise with age. Whether it's optimizing your investment portfolio, planning for healthcare costs, or adjusting your retirement timeline, expert advice is invaluable for managing longevity risk effectively.

Please feel free to reach out to us to discuss and plan your personal retirement strategy.