Our Two Cents - 5 key risks that could sabotage your golden years

June 22, 2023 | Rachelle Allen


If you’re approaching retirement, it is crucial to be aware of the potential challenges that lie ahead. While retirement is a time of newfound freedom and relaxation, it also presents certain risks that can impact your financial stability and well-being.

In this issue, we explore the 5 key risks to your retirement and how to mitigate them.

1. Longevity Risk

Longevity risk is the possibility of outliving your retirement savings.  This risk boils down to a simple sentence, ‘you need to plan for the possibility that you may live longer than you think.’ With increasing life expectancy, it is crucial to plan for a longer retirement period.

Most people underestimate how long a retirement they need to plan for. A man who has reached age 65 has a 50% chance of living to age 83 and a one-in-four chance of living to 89. For a 65-year-old woman, those odds rise to a 50% chance of reaching age 86 and a one-in-four chance of living to 92. The odds that at least one member of a 65-year-old couple will live to 90 are 50%. And there is one chance in four that one member of that couple will live to 94. The median retirement age in Canada is 62 which increases your potential time in retirement.

If you’re contemplating retirement, you need to consider the possibility that you may live another 20, 30 or even 40 years, perhaps spending as much time in retirement as at work.

2. Inflation Risk

Inflation risk poses a threat to the purchasing power of your retirement income. Currently, as of May 2023 the annual inflation rate is 4.4% which is more than double the Bank of Canada’s target rate of 2% per year. Elevated inflation levels can erode the value of your money.

In the 2022 Fidelity Retirement Report, inflation was identified as the number one financial concern in retirement by both retirees and non-retirees.

Even though inflation is currently proving to be sticky, it will return to the target rate of 2%, its average annual rate for the past 20 years. Even a low inflation rate can have a significant impact on a retiree’s purchasing power. At a 2% inflation rate, the $54,194 spent by the average Canadian senior in 2023 would only buy $32,978 in 25 years.

It is essential to have a diversified investment portfolio that has the potential to beat inflation.

3. Asset Allocation Risk

Asset allocation refers to the mix of equities, bonds and short-term liquid investments in your portfolio. You need a mix of investments that meets your risk profile and has the best chance of providing the income necessary to meet your needs for as long as you live – in other words, an investment portfolio that is both productive and built to last.

Investors with longer time horizons can wait out the inevitable ups and downs of the market, however, if you’re close to retirement age, this isn’t the case. As you approach retirement, a more conservative mix of equities and bonds is appropriate. But not too conservative, you will need the growth that equities provide given increasing life expectancies and to stay ahead of inflation.


4. Withdrawal Rate Risk

Withdrawal rate risk is the risk of depleting your retirement savings too quickly due to high withdrawal rates. Determining a sustainable withdrawal rate is essential to ensure your funds last throughout retirement.

A balanced portfolio of 50% stocks, 35% bonds and 15% short-term instruments would last for at least 25 years if you withdrew 4% per year of the original value of the portfolio.

Withdrawing 4%-5% inflation-adjusted annually is a common guideline to follow.

Achieving an appropriate withdrawal rate depends partly on good preparation well before the actual retirement date. If you’re preparing for retirement, it’s prudent to periodically project the value of your portfolio at retirement and the income that could be generated and compare that with projected expenses in retirement. Variables such as savings rate, retirement date and retirement expectations can then be adjusted.

5. Health Care Expenses

One significant risk in retirement is the potential burden of health care expenses. While Canada has a publicly funded health care system, not everything is covered. Retirees may encounter certain health care costs that need to be considered in retirement planning.

Common health care expenses during retirement:

  • Prescription Medications

  • Dental Care

  • Vision Care

  • Paramedical Services

  • Medical Equipment and Supplies

  • Long-Term Care

While health care expenses in retirement are difficult to predict, they should be included in retirement income planning. It’s prudent to understand what is and is not covered by the health care system and your responsibility for covering expenses may change over the coming years.

Planning for retirement is a crucial undertaking that requires careful consideration of the 5 key risks that can impact your financial security. Each of these risks poses unique challenges, but with proper planning, they can be mitigated to ensure a more secure retirement.

As retirement planning is a complex and highly individualized process, it is advisable to see professional guidance from a financial advisor. An experienced advisor can help navigate the intricacies of retirement planning, tailor strategies to your specific needs, and help you make informed decisions to safeguard your financial stability during your golden years.

Whenever you’re ready, here’s 1 way we can help.

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Vito, Eric & Rachelle