Retirement Fear Factor
Let’s talk about the single most compelling concern all pre-retirees and retirees confront and which we discuss with our members every day: the fear of outliving their savings and investments. This fear is referred to among retirement planners as longevity risk and it is becoming one of the biggest issues in retirement planning as the world’s population ages. Human lifespans are rapidly lengthening due to improved medical care, better nutrition, innovations in disease prevention and control, and a general increase in the standard of living. A child born in Canada today has a greater chance of living to 100 than ever before.
Life Expectancy
Average life expectancy for Canadians has risen to 82.2 years, according to 2024 Statistics Canada data. The country’s population of people aged at least 100 more than tripled between 2000 and 2023, up from 3,393 to 11,705 — making centenarians the fastest-growing age group in Canada. Statistics Canada forecasts the centenarian population could reach 106,100 by 2073 under a medium-growth scenario, which would also see the population aged 85 and older more than triple.
Living Longer Comes With a Price Tag
Living longer sounds terrific, but it comes with a price tag, which impacts the level of income required as we age:
- Higher health care costs.
- Reduced mobility.
- The potential need for long-term care.
- The potential need for age-appropriate housing.
Pre-retirees and retirees also have to confront two additional risks: inflation risk and investment risk.
Inflation Risk
You don’t have to be a brain surgeon to figure out that even a 2% inflation rate will reduce the purchasing power of your money over time. Inflation tends to erode a portfolio’s returns, especially in periods of market volatility.
With a portfolio return of +6% in the same year that inflation is -2%, your real return will be +4%. Should markets fall by -6% in a year, with inflation remaining at -2%, your real return will be -8%. Ouch!
Investment Risk
We all know about investment risk. But what a lot of otherwise savvy investors – especially those facing retirement – don’t grasp is a concept called the sequence of returns. Sounds ominous? It is. Let us translate it for you.
When you’re young and your portfolio goes south, you have years – maybe decades – to recover. When you’re old, you simply don’t have that luxury. Investors are most exposed the day they retire. Poor returns early in retirement are more damaging than those confronted later.
Consider two investors who each start with $1 million portfolios and take initial withdrawals of $50,000 with 2% inflation adjustments each year — but experience a market decline at different points. The investor who faces a significant drop early in retirement runs out of money far sooner than one who encounters the same decline later on. Even when the total average returns are identical, that one change in the sequence makes all the difference — an investor can run out of money simply because they encountered a down market much earlier in retirement.
It’s important to limit drawdowns to your portfolio at the start of retirement and maintain a steady, measured withdrawal strategy throughout.
Conclusion
- Wealth accumulation is fundamental during a working career.
- Drawing income from your assets prudently is fundamental in retirement.
- That drawdown must be accomplished in a way that ensures you always have some reserves.
So, please let our team know if we can help you clarify any of the issues raised relating to longevity risk. It’s an issue in retirement that should be taken very seriously and which we can enable you to navigate successfully.