Q: I’m diligently preparing for my retirement and doing some extensive financial planning. I’m only 57 years-old and I’m in fabulous health, but my parents both retired in their mid-60s and then died in their mid-70s. They were also in good health, then life threw them both a curve ball. On the other hand, my four grandparents all lived into their 80s and 90s, so I guess you never know what can happen. I figure I’ve got another 25 years ahead of me and want to save and plan accordingly. Am I on the right track for a successful retirement?
A: Comprehensive wealth planning incorporates two life expectancy risks: dying too soon and leaving a dependent spouse and/or young children; or living too long and not having saved enough to financially sustain yourself throughout retirement. The latter situation may apply to your generation and the ones that follow.
Your parents weren’t far off in average lifespans for their generation. In their lifetime, work was more physically demanding, medical technology was less advanced, tobacco use more prevalent and seatbelts were optional. As might be expected, these factors took a toll on life expectancy.
Back then, retirement planning was pretty simple: stockpile a few years’ worth of savings in a cookie jar and live off that for the few years that you had left. You’d soon be dearly departed and your savings would hopefully not be depleted before that time.
But there’s a bigger problem brewing for your generation and those that follow. Canadians are living longer and this demographic transformation will have tremendous financial implications in their retirement planning. Today, average life expectancy is 80-plus years of age, and this number continues to increase, thanks to enhanced health care, cleaner air and water, better disease prevention and healthier food choices.
The future will look very different because we will live longer, more productive and healthier lives. As a result, the cookie-jar method of retirement planning will no longer do the trick.
You still have quite a few years to go before you even get to today’s life expectancy. And by the time you do, it will have extended again. Under current projections, when you get to age 80-plus, the average life expectancy will be approaching 90 years of age. This trend means that you could spend 20, 30 or maybe even 40 years in retirement. That’s a long time to plan for, and a long time to finance with the money you are saving today. You could potentially spend more years in retirement than in your working career.
The English writer Charles Dickens summed it up perfectly nearly 175 years ago and the fiscal lesson still applies today. In his 1849 novel, “David Copperfield,” he wrote: “Annual income 20 pounds, annual expenditure 19 [pounds], 19 [shillings] and six [pence], result happiness. Annual income 20 pounds, annual expenditure 20 pounds ought and six, result misery.”
To paraphrase Dickens, if you plan for longevity and die with money in your metaphorical pocket, you will have attained financial success. Whereas, if you have not saved enough for a long life but happen to live one, you will experience financial challenges or even hardship in your later years.
It’s much better to err by assuming you will live a longer than anticipated life expectancy, having saved a bit too much and dying with excess cash, than needing money down the road and not having set aside enough initially. So, don’t shortchange yourself in your retirement planning and funding.
I encourage you to intentionally design your retirement with longevity in mind. Of course, live as though today is your last day, but also create and implement a retirement savings plan that will financially sustain you for the rest of your — potentially very long — life.
By Thie Convery Contributing Columnist - Feb. 16, 2022 - The Toronto Star