By Ermos Erotocritou, CFP
Special to the Financial Independence Hub
Are you planning for a 40-year retirement?
The question may sound absurd but if you are a healthy Canadian in your 40s having a 40-year retirement is not just possible but very likely.
According to the World Health Organization, a male’s life expectancy in Canada is 80 and 84 if you are female. Let’s take the half-way point between 84 and 80 and say longevity will be age 82.
The median retirement age in 2011 was 63.2 for men and 61.4 for women. The half-way point will be age 62. It seems logical to calculate your retirement years as your life expectancy minus the age in the year in which you retire. If you retire at age 62 and expect to live to age 82 then you should save up enough money to generate income for 20 years right? Wrong!
Planning for your retirement paycheque is a lot more complicated. Life expectancy is a moving target. In Canada, we have increased life expectancy by 5 years over the past 25 years. Increased life expectancy has been consistent for decades and there’s no indication it will stop.
If we continue at this pace, we will add 10 additional years of longevity within the next 50 years. If you are in your 40s today, it’s quite reasonable to expect your life expectancy will increase from 82 to 92. But now it gets even more complicated. Life expectancy for a surviving spouse is longer than an individual’s. As long as one or both spouses survive, savings are required to support their retirement.
Estimating your own life expectancy
To find out more about life expectancy of couples you can find a calculator at Retirementadvisor.ca. When I type in a 62-year-old couple it shows the median age of longevity to be 88. But that’s using today’s longevity statistics. If we add 10 more years of longevity, the average surviving spouse will live to age 98 within the next 50 years, with a decent chance one of them will live to be a centenarian. Even at today’s longevity rates 10% of couples can expect at least one partner to live to 100. This number will increase significantly as healthcare and technology allow us to live longer lives.
Factoring in improved longevity rates, it’s quite possible that people now in their 40s will spend just as much time in retirement as they do working.
Here are some tips to ensure you don’t outlive your money:
- Calculate Retirement Expenses
Don’t assume you will spend less money in retirement because you no longer have to buy lunches and commute to and from work. Many people easily spend the savings travelling, taking up new hobbies or otherwise enjoying retirement. Who wants to retire and spend every day stuck in their home? The idea of relaxing sounds great while you are working, but weeks or months into “relaxing” you will begin to go stir crazy.
- Calculate Retirement Income
Include pensions, cash, Social Security (in the U.S.) or CPP/OAS in Canada, IRAs and Roth IRAs in the US and RRSPS/TFSAS in Canada. It’s vital that you factor inflation into your calculations. If your income coming in is greater than your expenses going out, it may seem that you are in good shape but you will be in for a rude awakening in the future if your income does not keep pace with inflation. Inflation will be the silent killer when living 40 years in retirement.
- Determine Income Gap
If there is a gap between how much you need versus how much you expect to be coming in, it should be motivation enough to start saving more for your retirement. Working with a professional could lead to opportunities to save more without affecting your current lifestyle.
- Calculate Withdrawal Rate
If you can keep your withdrawal rate to 4% your money should last for the rest of your life. But it will depend on the rate of return of your investments. You should aim for a rate of return that at least keeps up with inflation, which long term is between 2.5% and 3%.
- Determine Longevity
If you are retiring at age 65 in relatively good health, you should be planning for at least 30 years of retirement for you and/or your spouse. Better to leave some money to your beneficiaries than run out of money in your 80s.
- Appropriate Investments
This depends on your ability to take on investment risk but you need to be aware that inflation is also a risk. You may think you are taking on no risk by keeping your money in cash or GICs but you could be setting yourself up for a nasty surprise when the purchasing power of your money depreciates. You can see for yourself by using the Bank of Canada Inflation calculator. If the future is anything like the past, $100 in purchasing power 40 years ago will require $459.34 in today’s dollars to purchase the same amount of goods and services.
Retirement has become more complicated than ever. Working with a Certified Financial Planner professional has never been more important. The best part is the majority of CFPs I know will provide a complimentary no obligation initial consultation. If you see the value in what they can do for you, it could lead to a rewarding relationship moving forward. Even if you decide not to work with them, you will still walk away with some great tips and recommendations that could prove to be valuable when it comes to preparing for your retirement.
Benjamin Franklin was quoted as saying “If you fail to plan, you are planning to fail.” Truer words have never been spoken when it comes to preparing for a long retirement.
Ermos Erotocritou is a Regional Director with Investors Group Financial Services Inc.