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Kevin-Barry Henry

What is Your Longevity Risk?

By: Kevin-Barry Henry, #1 Bestselling Author

Longevity risk refers to the possibility of outliving your money. Living so long that you deplete your savings.

Longevity risk was not a major concern for Canadian retirees a few generations ago. Canadians had an average lifespan of around 72 in 1970, so their retirement savings only had to last for about seven years.

Today, if you retire at the age of 65, you can expect to live to be nearly 86, and your life expectancy increases as you age. Thus, many Canadian retirees will require their retirement income to last at least 21 years, which is significantly longer than seven.

And, while longevity gives Canadian retirees more time to enjoy their freedom after decades of working, it can also cause them to wonder: how long will my money last in retirement? Longevity risk entails some challenges that you should be aware of and prepare for.

You should consider Health Care Expenses

One of the most common longevity risks is an increased likelihood of developing health problems, which can be costly. Your chances of developing dementia or Alzheimer’s disease, as well as certain other illnesses, increase with age. Over half of Canadian adults with diabetes, for example, are over 65, and 44% have high blood pressure, 30% have high cholesterol, and 15% have heart disease.

Depending on your circumstances and province, the following are some of the health costs you may have to pay for in retirement:

  • Prescription drugs: If you are over the age of 65, your province may cover a portion of the cost of certain prescription drugs if they are on their drug program list. Otherwise, you may be required to pay the entire amount.
  • Dental care is typically only provided for low-income retirees.
  • Physiotherapy is rarely covered for people under the age of 65 and is frequently not covered for those over the age of 65.
  • Some provinces may cover a portion of the costs of medical equipment if you are over the age of 65, while others will only contribute if you have a low income.
  • Diabetes care, eyeglasses, and dentures are examples of additional health-care costs.

If you develop a chronic illness or become disabled, you may require ongoing care, either at home or in a nursing home. As you can imagine, these expenses can quickly add up.

In Ontario, for example, if you stay at home, a personal support worker (who can assist you with bathing, eating, and dressing) can cost between $28 and $35 per hour. A registered practical nurse can charge between $45-60 per hour and a registered nurse can charge between $55-80 per hour.

If you decide to move into a long-term care home, the costs can range from $800 to $6,000 (or more) per month, depending on your province, the type of room, and the amount of provincial government assistance you may be eligible for.

You were always told you would spend less in retirement.

A common retirement myth is that you will require far less money in retirement than you did while working. In the past, a general rule for retirement planning was to set aside approximately 70% of your working income for retirement. This figure can now be closer to 80%, and even 100% or more if you intend to travel and live an active retirement, which many of us do.

The amount of retirement income you’ll require is determined by a variety of factors, including the type of retirement you want, the amount of debt you have, and your other financial obligations. For example, approximately 14% of retirees still have a mortgage, and 42% have some form of debt. Having to manage debt payments can have a significant impact on the amount of income you require in retirement.

Many Canadians in or nearing retirement continue to provide significant financial support to their children. This could be for their children’s education or a down payment on a home. This may have a significant impact on your retirement savings.

Retirees who have recently divorced may find that their single income, as well as the division of the family home and belongings, has resulted in less retirement income.

Longevity risk, dealing with potential health issues, and stretching your savings further can all make retirement a financially difficult proposition. Fortunately, careful planning can help you enjoy your retirement to the fullest, regardless of how long you live.

So how long should I live?

It is critical to be realistic about your life expectancy; on average, people underestimate their life expectancy by 4.7 years (2.5 years for men and 6.1 years for women). While predicting your life expectancy can be difficult, overestimating is preferable to underestimating. And leaving a little extra money to your family is preferable to running out of money too quickly.

When developing your financial plan, your advisor should consider longevity risk, as well as several aspects of your retirement plan that will address potential longevity risk, such as:

  • The best time to begin receiving benefits from the Canada Pension Plan/Quebec Pension Plan and Old Age Security. Starting them as late as possible means you’ll receive a higher guaranteed annual income that is inflation-indexed for the rest of your life.
  • Being tax-efficient. Maximizing your Registered Retirement Savings Plan and Tax-Free Savings Account are important objectives. In addition, your advisor can assist you in planning your taxable retirement income so that it is as consistent as possible from year to year, allowing you to stay in the lowest tax bracket possible. If possible, they will also assist you in developing a retirement income splitting plan with your spouse or common-law partner.
  • Starting to save as soon as possible, so that you have the most years to benefit from compounding returns, can significantly increase your retirement savings.
  • Ensure that your retirement investments are still working for you. Given that retirement could last 20 years or more, keeping your savings solely in low-interest assets may cause them to lose purchasing power. They should be a mix of assets that can provide consistent income, regardless of market volatility, and provide adequate growth while taking your risk tolerance into account.
  • The ideal retirement age in terms of longevity. If your savings and other retirement income sources are insufficient to cover your needs for the rest of your life, you may need to postpone retirement for a few years. You could also choose to reduce your lifestyle expenses to help bridge the income gap.

There is hope however and living longer should be viewed as a wonderful thing! We just want to make sure that you have enough money to properly enjoy those extra years.

If you would like to discuss your own plan, feel free to reach out for a FREE DISCUSSION HERE

With Gratitude,