Longer lives pose problems for retirement planning
We are living longer. Advances in health care, improvements in diet and enhanced fitness programs have contributed to increased life expectancy, with the current life expectancy in Canada at 81.24 years. It is projected to rise further.
According to TD, men born in 1931 have a 2.5% chance of reaching 100 and women 5.1%. Fast forward 30 years to those born in 1961 and the odds are substantially greater at 11% and 16% respectively.
The average retirement age in Canada is currently 63, which translates into at least 18 years needing retirement income. Those lucky enough to hit 100 will need a whopping 37 years of retirement income. Both are rather substantial funding requirements.
While longevity poses a danger to retirement income, it is only one risk. According to Fidelity Investments, there are four others to consider: inflation, asset allocation, withdrawal rate, and health care costs.
Forbes describes inflation as “…an insidious stealth tax that robs unsuspecting investors and retirees of real returns.” PIMCO Investments reported that inflation of just three per cent during the course of a decade can erode purchasing power by as much as 25%. Spread over decades, its impact is dramatic. Clearly, a retirement income plan that does not consider inflation is incomplete.
Market movements in the last few years have caused an allocation shift towards heavier cash weightings, making it a challenge for investors to meet their retirement goals. J.P Morgan found that the average investor generated a mere 2.1% annualized over the last 20 years while annualized inflation over the same time period rang in at 2.2%. A retirement portfolio should have an appropriate mix of assets, monitored and rebalanced as the retiree ages.
According to Fidelity, annual inflation-adjusted withdrawal rates exceeding four to five per cent of the original value of the portfolio raise the risk of outliving one’s investments. Retirees need to think about the rate at which they withdraw funds. Optimum withdrawal rates should reflect factors such as other income sources, inflation, taxation, and changing needs.
Although poor health or debilitating conditions don’t automatically come with age, the risk is greater. And, when ill health does strike the elderly, the issues can be chronic and complex. Some diseases are not curable, instead requiring continuous care, so Canadians must prepare for unexpected health care expenses that may not be adequately covered by our healthcare system.
In spite of the risks, Canadians haven’t placed enough importance on the role of in-depth retirement planning and many do not have a written financial plan. A survey by the Canadian Institute of Chartered Accountants found that 32% of those retiring in the next five years think they haven’t saved enough. A recent J.P. Morgan report found that average Canadian retirement savings will only last 11 years, meaning many people will outlive their money.
A favourable retirement outcome requires thorough analysis and Canadians need to make this a top priority. Putting together a comprehensive financial plan takes time, but it is time well spent.
– Kim Inglis, CIM, PFP, FCSI, AIFP is a Portfolio Manager with Canaccord Genuity Wealth Management, a division of Canaccord Genuity Corp., Member – Canadian Investor Protection Fund. www.reynoldsinglis.ca. The views in this column are solely those of the author.