Does Longevity Risk Mean A New Financial Solution?
If you enjoy running as much as I do, you may have noticed an increase in runners with grey hair the last time you were at a race. This is a fantastic sign that our generation is taking care of themselves. Participation in consistent physical activity has many benefits for our general health and often leads to a better quality of life. Not surprisingly, healthy life habits also lead to an increase in the quantity of life as well. Have you factored the possibility of an extended retirement into your financial plan?
Longevity Risk Defined
Longevity risk is simply the risk of living longer than expected. According to the Statistics Canada, the average life expectancy for males who are 65 today is 84, and for females, 86.9. (1) Currently, 5 out of 10 Canadians aged 20 are expected to reach age 90 and 1 out of 10 will reach 100. But 1 in 4 will live past the age of 90 and 1 in 10 will live past 95. (2) The thought of living past 100 may seem laughable, but the Canadian centenarian population is the fastest-growing age group in the country and grew 41.3% from 2011-2016. (3) Based on these numbers, your retirement could easily last 30 years instead of 20. Since those ten years have the potential to make or break you financially, how can you plan for longevity and make the necessary adjustments to ensure a financially stable retirement?
How Long Will You Live?
A look at a recent study by the Journal of the American Medical Association shows us that there is a significant difference in life expectancy between the richest and poorest groups in the U.S., up to 15 years for men and 10 for women. The data tells us that the factors that determine a longer life expectancy are how educated and affluent people are, as well as where they live. For example, even low-income people who live in well-off areas such as New York or San Francisco are living longer than those in the industrial Midwest. Surprisingly, things like medical care, insurance coverage, or unemployment did not make as much of a difference as researchers expected.
As much as we wish we could get a glimpse into the future, there’s no way we can predict how long we will live. The unknown aspect of life expectancy makes planning complicated. Retirees need to secure an adequate stream of income for an unpredictable length of time. If you plan to live to age 82, and you end up living until 92, how are you going to stretch your savings to last the additional ten years?
Planning For the Unknown
Wise planning starts with a realistic expectation of life expectancy using life expectancy calculators, as well as considering personal and family health history. It would be much worse to outlive your money than the other way around, so it’s also essential to factor in 5-10 extra years to your life expectancy number so that you will be covered until the end of your life. This adds a buffer for unexpected expenses, long-term care, and inflation. What are some strategies you can employ to protect yourself against longevity risk?
Save More And Spend Less
The longer the planning horizon, the more resources will be required for retirement. The most obvious way of lowering the risk of outliving your money is by saving more before you retire and underspending when you reach retirement. If you have any debt, focus on reducing it as much as possible so your resources can be devoted to saving.
Find Alternative Income Streams
There are also a variety of investment strategies and products that can provide you with a steady stream of income throughout your retirement years, such as annuities. Delaying Canada Pension Plan claims, as well as finding creative ways to earn income longer, can also add years to your retirement savings. If it’s possible for your situation, consider working longer, even if it’s part-time or as a self-employed individual.
Modify Your Investments
Implement an investment strategy that takes into account market risk, fiscal efficiency, inflation risk, and time horizon to achieve your objectives. As you draw closer to retirement, and especially once you enter your retirement years, your asset allocation should change. When you started investing in your younger years, your portfolio was probably weighted more heavily towards stocks and aggressive investments. But as you age, you need to lean towards the conservative side, focusing more on preservation than growth. If you want to achieve better returns and accumulate at a faster rate, make sure you are working with a financial professional who is investing according to your risk tolerance.
Build Contingency Funds
Have a contingency fund that gives you a bit of a savings buffer. There will always be unexpected expenses in life, whether it’s needing a new car or healthcare costs that aren’t covered by the universal healthcare system.
Consider Withdrawal Rates
Once it’s time to start living off of your savings, create a sustainable withdrawal rate of 3-4% and monitor your assets frequently to make sure your money will last.
Retirement often means major lifestyle changes. As a result, your expectations may need to change as well. If you want a comfortable retirement, you may have to rethink how much you will be able to give your children as a down payment on a house or an inheritance. You may need to downsize your home or relocate to a more affordable area. Stay flexible and be willing to make adjustments in order to secure your financial future.
One of the biggest retirement fears is that of outliving your savings. But you don’t need to let the unexpected nature of life expectancy worry you. Talk to us today to create a plan for your life throughout your retirement, regardless of how long that lasts. Book an appointment now and find peace of mind.
Carl Martel is the president and portfolio manager of Montag Private Wealth. Along with more than 15 years of capital market experience and 10 years of experience in real estate hard assets, he is a Chartered Investment Manager® and holds a Certificate in Derivatives Market Strategies from CSI Global Education, a Masters of Science from Laval University, and an MBA from l’Université du Québec à Montréal. A focused and pragmatic, results-oriented investment professional and entrepreneur, he specializes in serving the unique financial needs of high net-worth individuals and families, foundations and endowment funds, and business owners. To learn more, visit http://montagprivatewealth.com/ or connect with Carl on LinkedIn.