The Fatal Flaw in Most Retirement Plans

Here at the Hub we make a big distinction between Wealth Accumulation and its mirror image, Decumulation. Decumulation is all about drawing an income from your investments and pensions once you’ve stopped working full-time. The mindset is quite different from working and saving to invest.

We plan to run a number of contributors by guest experts on Decumulation. This is the first of what we hope will be many contributions by certified financial planner Doug Dahmer (pictured), founder and CEO of Emeritus Retirement Income Specialists.

By Doug Dahmer

Special to the Financial Independence Hub

There is a critical issue that continually arises that people don’t tend to think about when it comes to their retirement planning. I’m not discussing their retirement income requirements, retirement age, accumulated assets, government benefits or even their expected rates of return, though those are all important. What’s often ignored is their life expectancy.

Your life expectancy is probably a more important decision than deciding how close you are to retirement. Yet the latter is what the focus is put upon.  Deciding this critical factor then allows you to consider other important things like where are you going to live and for how long will you live there?  When should you downsize and when should you consider a retirement home?

Also consider your spouse’s life expectancy

Don’t forget to consider the life expectancy of your spouse – the disparity between your two longevities can have even more significant implications to your planning. How should you split incomes and which assets you should draw from first?

Longevity has increased thanks to medical advances and the fact that many boomers have adopted better lifestyles that often allow them to celebrate their 100th birthdays. However,  many variables play a role in how long you may live. These include reducing stress, genetics, eating healthy, exercising and even being married. While we would all agree that living a long life is a good thing, it is important that each individual is prepared for the financial consequences of their longevity.

When Canada set the retirement age, almost a half century ago, at age 65, life expectancy was approximately 72 years old. In a report from Statistics Canada, the average life expectancy for a 65 year old man in 2009 was 83.5 and for a woman it was 86.6. Remember, this is the average, which means over half the population will live longer than this.

As you can’t see into the future, it’s unclear exactly how long you’ll live in retirement; however there are superior ways of estimating  this rather than simply making a guess based on how you feel about yourself on any given day.

The Longevity Game

A fun, easy and free way to accomplish this is to visit The Longevity Game website, courtesy of Northwestern Mutual Life Insurance. By completing the questionnaire, you will receive a life expectancy calculation tailored to you, generated by factors like your levels of stress, lifestyle habits, current health and family history.

In a recent report by the Society of Actuaries entitled ‘Key Findings and Issues: Longevity,’ it has been revealed that more than half the population undervalues their life expectancy. As a result their retirement planning time horizons are much too short.

Preparing for the ‘No Go’ Years

If you overestimate your life expectancy, you’ll leave your heirs with a little bit extra. However, if you underestimate your life expectancy, you could end up running out of money and having inadequate resources to secure your dignity and independence during your ‘No Go Years’.

According to the report from the Society of Actuaries, “As in 2009, retirees say they typically look five years (median) into the future, while pre-retirees typically look 10 years (median) ahead when making important financial decisions.”

For most, a big part of retirement planning is making sure your money lasts as long as you do, so to avoid a fatal flaw in your retirement planning it would be a good idea to start with a better understanding of how long each of your journeys may last.

Doug Dahmer is CEO and founder of Emeritus Retirement Income Specialists, based in Burlington, Ont.