With Canadians living increasingly longer lives, we are experiencing new and unfamiliar challenges as we age – from health, to wealth, to well-being – that require thoughtful solutions and planning to overcome.
For many of us, longevity is a blessing – providing us with the opportunity to enjoy more of life, spend time with our loved ones, and experience life-defining moments. This is something to be celebrated. But, given that outliving wealth or running out of money to meet obligations or current lifestyles is among the top fears of today’s retirees,1 it also poses some degree of financial risk. Like most risks, these can be managed if faced head-on, tackled as early as possible in one’s life journey, and dealt with through proper planning, execution and commitment.
Understanding longevity
Today, Canadians are increasingly living into their mid- to late-‘80s – and even well into their '90s – with one of the fastest growing segments of the country being centenarians (100+).2 And this trend isn’t slowing down: according to Professor David Sinclair, co-director of a Harvard aging lab, the first person to live to 150 “has already been born.”3
Data from Statistics Canada shows that our average life expectancy in 2022 was over 81 years of age, with an average age of almost 84 for women, and just over 79 for men.4 More revealing are actuarial projections of our probability of achieving ever-increasing lifespans. For example, a couple who are 60 years old today have a 25% chance that one of them (or possibly both) will reach 98, while a 30-year-old couple today has a 50% probability that one or both will reach 95!5
Planning for a long life: Expectations versus reality
Despite these statistics and projections, according to a recent paper published in the Journal of Risk and Insurance Economics,6 most of us underestimate how long we’ll live, particularly as we get older. If we underestimate and plan based on our perceived probable lifespan, we could very easily come up short to our actual lifespan, exacerbating the risks of this life stage.
And those challenges and risks vary widely, and depend entirely on each individual’s circumstances, but may include dealing with health issues such as cognitive and/or physical decline; remaining socially connected and avoiding isolation and its negative impacts; determining the best place to live; and preparing for the health challenges that may necessitate expensive personal care and/or relocation to a long-term care facility.
Many of the health and wellness challenges we face as we age have direct financial implications, and these can directly impact your likelihood to outlive your savings or necessitate unwanted changes to your lifestyle – particularly at critical and vulnerable moments in one’s life. This underpins the importance of setting realistic ages to which we expect to live, and given our propensity to underestimate our lifespans, to overestimate our lifespan versus underestimate it.
Presently, more than 1-in-5 Canadians over 65 are receiving care for aging and/or frailty,7 and the cost of a full-time Personal Support Worker is, on average, over $102,000 a year.8 For those opting for or in need of 24/7 personal care and support as they age and who choose a higher-end retirement/long-term care facility, the costs can easily reach $15,000 a month or more.9
Beyond the basics
Most senior Canadians are eligible for government benefits, from the Canada Pension Plan (CPP) to Old Age Security (OAS), and even the Guaranteed Income Supplement (GIS), helping to ensure that much if not all of one’s basic needs can be covered. Along with Canada’s healthcare structure and publicly funded long-term care, again, basic needs can often be met through government-provided benefits.
But for many Canadians, these government plans are not enough to support their retirement-lifestyle cashflow needs, and instead their own sources of income are required. But with inflation risk, market risk, and health risks – to name a few – a thoughtful, considered and well-structured wealth plan is required, one that properly accounts for your unique needs and goals, while helping to ensure you can have peace of mind in your later years.
Living to 100: Managing risks through wealth planning and portfolio management
Given the longer lifespans we are experiencing, many advisors are now structuring their clients’ financial and investment plans around higher potential lifespans to help ensure that they are properly funded throughout their later years. When it comes to investment planning and portfolio management, “living to 100” helps ensure that your wealth plan and your portfolio account for the challenges of longer retirements and end-of-life needs, and that they are flexible and adaptable to the increasing potential for health-related expenditures as we age and reach end-of-life.
To help ensure that your investment portfolio can support you towards “living to 100,” here are three risks that need to be considered and planned around:
1. Market risk
Investment markets rise and fall, although history has shown that they have risen steadily over time. Of course, as in life, there are no guarantees that what has happened will continue to happen. But again, as in life, we have to work with probabilities, and markets, particularly equity markets, have typically provided solid long-term returns to investors. However, as the adage says, “Timing is everything!” and market volatility that adversely affects investors’ portfolios can have a lasting impact.
For example, starting your retirement drawdown to fund your cashflow needs during a market downturn can have the unfortunate consequence of severely impinging on the long-term viability of generating cashflow from your portfolio, amplifying your drawdown impact as the value of your assets fall.
How to manage market risk
Diversification through effective asset allocation and portfolio risk management can help reduce market risk. Varied returns among different asset classes highlight that a properly managed portfolio needs to be rebalanced regularly to keep your asset allocation in line with and supporting your long-term goals and evolving needs. As well, having different and varied sources of investment income – for example, rental income that isn’t tied to the markets – can help avoid drawing down assets to fund cashflow needs at inopportune times
2. Behavioural risk
Most investors, especially those who have established long-standing, trust-based relationships with qualified and caring advisors, know that market returns take patience, and that markets can be volatile in the short-term. In turn, this means that short-term volatility shouldn’t lead one to make changes to their portfolio, unless something fundamental has changed for them (i.e., changes in life goals, life-stage change, loss of job or income, marital status change, family changes, etc.).
However, investors can be their own worst enemy, making changes (e.g., selling as the market is correcting) to their portfolios at inopportune moments, following the crowd or falling prey to FOMO (a.k.a the Fear of Missing Out). This can lead to “return gaps,” which is the difference between the average return for a fund or index and what the average investor earned with the same investment. This in turn can have a negative impact on long-term returns, and hence the ability of one’s portfolio to support their income and spending needs.
How to manage behavioural risk
Trusted advice and a properly qualified guide to ensure you are achieving your goals is the best way to avoid the worst angels of our nature and making bad mistakes with our portfolios. When you have a wealth plan that is properly aligned to what matters to you – a key focus and commitment of RBC PH&N Investment Counsel – then it’s much easier to stay on track to that plan without deviating when circumstances make it tempting to do so. Understanding the long-term payoff of a patient and a disciplined approach is part of a strong and constructive relationship with your Investment Counsellor.
3. Inflation risk
For more than two decades, inflation risk was often ignored as cost increases remained consistently low. But the period between 2021 and 2023 attests to the negative impact soaring inflation can have on one’s finances and portfolio, especially when central banks move to raise interest rates to combat inflation (in turn, negatively impacting bond and equity prices). Sudden and meaningful increases in prices can have a devastating impact on those who rely on a fixed income to live, or whose portfolios are designed to produce a certain level of cashflow based on an assumed (lower) level of inflation.
How to manage inflation risk
An important way to manage inflation risk is to structure one’s investment portfolio and income-generating assets to help ensure that their expected returns can adjust higher to absorb inflation and still generate enough net-of-inflation return to grow over time.
This means that one’s portfolio return must at least match the rate of inflation to ensure that the purchasing power of your assets is not declining over time. To do so often requires a growth component to one’s portfolio, and not a total reliance on income-producing assets (i.e., bonds, GICs, low-growing dividend-paying stocks), which can often fall short of meeting the rate of inflation plus a return to grow above that. Of course, as always, one’s portfolio should always align with their investment risk profile.
Putting the pieces together
Most importantly, having a proper wealth plan that accounts for your needs in your later years while remaining flexible enough to respond to unforeseen life events, including changes in health and financial circumstances, is critically important. Whether 100 is the right age to plan to for you or not, ensuring that you are managing the risks that arise with greater longevity will help you enjoy the latter part of your life – while also accounting for the possibility of legacy planning.
We are always here for you as the stewards of your wealth and life journey. Your Investment Counsellor can help to build the right wealth plan to ensure that your portfolio is working to support you through the various stages of your life. As always, we take a balanced, thoughtful approach to meet the evolving needs and challenges our clients face as they age, focusing not only on preserving and growing their wealth, but also on providing the guidance and resources to help our clients navigate the important questions, choices and outcomes that lie ahead in their financial journey.
Sources:
1“Rewriting retirement: Exploring the shifting mindset of a new generation of retirees”, RBC Wealth Management (December 2021).
2Annual Demographic Estimates: Canada, Provinces and Territories, 2021. Statistics Canada (September 2021).
3“The first person to live to 150 has already been born.” The World, Matt Purdy (2015).
4“Life Expectancy and deaths - statistics”. Statistics Canada (August 2024).
5“Projection assumption guidelines”. Institute of Financial Planning and FP Standards Council (April 2024).
6“A behavioral gap in survival beliefs”. Journal of Risk and Insurance (from the Wiley Online Library) (2024).
7“The experiences and needs of older caregivers in Canada”, Statistics Canada (2020).
8Audrey Miller, Elder Caring Inc. (2023).
9“Long-term care: How much it costs and how to pay for it.”, Jonathan Gott (July 2024).
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