Planning for 100

May 02, 2019 | Michael Tse


Retirement planning for a longer life.

Life expectancy is an important factor in retirement planning. Due to medical advances, the odds of living to 100 are improving. Although this is good news, a longer life also presents new challenges, from a financial planning perspective.

With longer life expectancy and higher medical costs, one of the greatest fears for pre-retirees is outliving their retirement savings. We believe that it is wise for those in their working years to rethink their investment time horizons. The conventional thinking for retirement planning involves investing according to your time horizon; the longer the time horizon, the more risk you could take on to realize the potential of higher growth over time. Near the end of your time horizon, you would gradually reduce your risk by transitioning to assets with little to no risk. The assumption is that once you hit retirement, you could not afford the risk, as you would need the money to fund your retirement.

In the past, when interest rates were higher, you could conceivably retire with a portfolio of GICs and bonds paying 5% income. With the current low-rate environment, and interest rate increases pegged lower for longer, retirees cannot rely solely on the income from fixed-income investments to generate their required cash flow. Worse, such a portfolio is vulnerable to the scenario where bond prices fall when rates rise.

It is important to review with your advisor what types of higher-yielding instruments can be incorporated into your portfolio that 1) can fulfill your retirement income needs, 2) are suitable for retirees, and 3) are tax-efficient. As we live longer, our retirements are lasting longer. Therefore, investment portfolios need to take advantage of this longer time horizon by incorporating longer-term growth strategies, which likely involve equities. This will help retirees to meet their preservation and income needs.

It is also important to ensure that at the end of your life, your surviving spouse has the appropriate support in place to handle financial matters. If one spouse has been solely responsible for managing the family finances, it is wise to begin to close the knowledge gap and share responsibility. It is not unusual for our team to sit down with the less-involved spouse separately, to educate them on portfolio strategy and help them begin to obtain a pulse on the market. Often, the less-experienced spouse can be overwhelmed in group meetings, so setting up an individual meeting provides him or her with the best opportunity to “learn the ropes.”

An additional layer of planning that could benefit the surviving spouse is a spousal trust. A spousal trust provides certain benefits, including 1) income for the spouse, 2) legacy predictability, 3) creditor protection, 4) tax-free rollover, and 5) professional management of assets, which may be helpful if the remaining spouse lacks financial expertise. You should consult your advisor to determine if the benefits of a spousal trust are applicable to you.

As life expectancy increases, it is important to adapt your thinking, to ensure that you are making the most out of your retirement years. This way, you’ll be in good financial shape when you blow out your one hundred candles.