Will You Outlive Your Retirement Income?

Your retirement may still be a long way off — or closer than you’d like to think. Either way, planning early is the best way to ensure your income will support your needs through your retirement years, especially since Canadians now have longer life expectancies than the generations before us.

Whether you own a business, work for a business or operate as an independent contractor, if you don’t belong to a defined benefits pension plan, the worry of building an adequate retirement nest egg is probably a major concern.

Record low interest rates, rising health-care costs and longer life expectancy are creating a potential shortfall for current and soon-to-be retirees. If we get another financial crisis, the retirement plans for many Canadians could fall far short of their expectations.

It’s no wonder one of the most common questions I get from prospective clients is: “Will I outlive my retirement income?” According to Statistics Canada, almost half of Canadians over 65 will live into their 90s. For some, unfortunately, there’s a real risk the last years of their lives will be their worst. Why? Because not enough planning has gone into how their retirement capital will be managed or who will manage it.

To help these retirees prepare for the future, I share with them five risks they could face and then provide strategies to minimize or eliminate these risks.

RISK: You may live longer than you think
One of the hardest jobs I have is convincing clients, especially women, that they are likely to live into their 90s and therefore need to put plans into place to handle their financial situations for a potentially long time. Realistically speaking, retirement income needs could last for decades, so giving away family wealth in the early retirement years might pose a problem in the final years.

RISK: Death of a partner
For 30 years of my career, I have watched couples go through the aging process. If the main bread earner dies first, the surviving partner is often left with a difficult economic transition. On the other hand, sometimes the surviving partner is left financially secure but has no skills to manage his or her social and domestic responsibilities.

RISK: Retirement versus inflation
One of the most insidious and often-ignored dangers that erodes the value and net worth of Canadians’ retirement savings is inflation, which can be defined as a sustained increase in the general level of prices for goods and services. As inflation rises, every dollar you own buys a smaller percentage of a good or service. In Canada, the inflation rate has averaged about 2 per cent per year. Unfortunately, health-care costs have risen by 4 per cent per year.

RISK: Age-related health-care costs
When I was 20, I didn’t have a medicine cabinet. When I was 40, it was half full. Now I’m 55, it’s jam-packed and regularly restocked. Three opened tubes of Rub-A535 seem to follow me around the house, and I swear my five pairs of reading glasses have invisible legs because I can never find any of them. Many of my 75-year-old clients laugh and tell me “Just wait; it gets worse!” For some, it gets really bad. A few of my clients are spending over $5,000 per month for long-term-care support. As their conditions worsen, costs go up.

RISK: A volatile market
The compound annual return for Canadian stocks over the last 50 years has been 8.9 per cent. The five-year return is 2.3 per cent — and for 2015 it was negative 8.3 per cent. For many Canadians, especially those between the ages of 55 and 70, this volatility is too great. After all, you don’t want to erode your retirement nest egg in the early years.

A Better Retirement
First, I strongly recommend consulting with advisers who specialize in this area. In conjunction with your lawyer and accountant, you can speak with professionals who are versed in both financial services and insurance products.

Second, look ahead at your retirement needs. Keep in mind that these needs are likely to change over time, so your retirement plan needs to be flexible to meet those changing needs. I like to divide needs into three groups: basics, variables and unwanted.

BASICS are food, shelter and clothing, so your first step is to create a budget and identify the basic sources of where your money will come from in retirement years. For most couples, the Canada Pension Plan (CPP) and Old-Age Security (OAS) are sufficient to manage these expenditures. But that’s not true in every case. If this sounds like something you face, look now at guaranteed investment products to create a steady source of income for your retirement years.

VARIABLES are somewhat discretionary needs, which usually wane over time. Newly retired Canadians often like to travel, spend time with grandchildren, join charity organizations or take up hobbies like golf. In many cases, they have a “spend-it-while-I’m-young-enough-to-enjoy-it” attitude. That’s great, as long as you factor in your potential longevity, investment performance and inflation. Again, planning ahead is essential.

UNWANTEDS are somewhat manageable needs. Diet, exercise and preventive medication play important roles in minimizing health-care costs, but for many Canadians, a medical condition will eventually crop up, causing us to divert expenditures away from our “wants” to our “unwanteds.” Plans need to be in place to pay for health care, either in the home or in a care facility, especially since age-related care costs often arise without warning.

The Legacy You Leave
Finally, many retired Canadians have questions about how their money should be used after they’re gone. To ensure your wishes are met,
put plans in place to manage the inter-generational transfer of wealth and bequests to charities. You’ll also want to take into account power of attorney, wills and trusts. These are mandatory unless you want Revenue Canada to reap the benefits.

By starting now and creating a plan, you are taking positive action to create more financial security throughout your retirement years. It may seem easier to put planning off, but the future arrives faster than we ever think it will.