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Advisor Insights

Financial planning for the 100-year life

With people living longer than ever before, retirement planning has to change


Date: October 26, 2017

Retirement planning used to be focused mostly on the few years after someone stopped working — people didn't live long enough to plan much further than that. Now, though, many Canadians are spending more time in retirement than at an office desk.

That's complicated retirement planning. Today, people need their money to last at least until their eighties, the average Canadian life expectancy, and many advisors are using age 90 — and even 100 —in their financial projections. But how do you plan for someone who might live to 100 and be retired for 40 years?

It's complicated, says Peter Bowen, Vice-President of Tax and Retirement Research at Fidelity Investments Canada. Longevity risk — the risk of outliving savings — has taken on greater importance, he says.

"We need to manage the risk of outliving our savings by adopting a sense of urgency to saving enough to retire comfortably," he cautions.

Start saving early

"To avoid this costly mistake, advisors must assess retirement readiness and build a plan that addresses any gaps," says Mr. Bowen. "Tax efficiency should be considered, utilizing RRSPs and TFSAs to take advantage of tax savings, and the power of compounding and a long-term time horizon."

He encourages Canadians to take an active role in the retirement planning process and adopt a disciplined approach to investing in a diversified portfolio.

The younger generations, especially millennials, need to do things differently from previous generations and learn to structure their life and finances in new ways, he says.

"Though retirement likely seems to be an eternity away to millennials, it's important to commit to saving as soon as they start their first job," says Mr. Bowen. "With the cost of home ownership being at an all-time high, student debt on the rise and employers replacing defined-benefit pension plans with defined-contribution pension plans, millennials are facing a significant challenge."

Many millennials are forced to choose between competing goals, such as paying down debt, buying their first house or building a nest egg. They need to adjust their lifestyle spending to ensure they commit to all three goals, says Mr. Bowen.

He stresses, however, that "saving for retirement needs to be prioritized at this early stage in life. Realizing that every little bit counts will go a long way to securing their financial future."

Keep an eye on expenses

Living longer necessitates a fundamental redesign of life and a restructuring of finances. "It's important to take the time to envision our retirement lifestyle and clearly articulate our goals," says Mr. Bowen. "This should include the decision to remain in our home or to downsize, whether we intend to travel or buy a vacation property to spend winters down south."

The costs, he adds, vary greatly depending on the goal. Understanding those costs is key to having a retirement plan that's realistic.

"If the plan identifies a savings gap that may require downsizing a home when we're in our eighties, for example, knowing this well in advance allows us to be mentally prepared to scale back any goals as required."

Find more money

On the other hand, planning for longevity also involves finding ways to grow income and savings.

"One of the more effective ways to boosting retirement income is by delaying CPP and OAS, both of which are inflation-adjusted, until age 70," notes Mr. Bowen. "Most Canadians don't do this, but it's a great way to manage longevity risk."

Another approach involves strategically managing the order of withdrawal from various accounts. For instance, for many people it may be more suitable to make early RRSP withdrawals before being forced to make mandatory RRIF withdrawals, especially if they are in a low tax bracket.

"This can smooth out the tax liability over time, which can potentially enhance both the after-tax retirement income over one's life span and the after-tax estate that can be left to the next generation."

While planning for someone who might live to be 100 is a bit trickier, helping clients through their professional and equally long post-working lives provides advisors an opportunity for deeper engagement with them.

"Financial advisors can — and need to — add value in numerous facets of retirement planning," says Mr. Bowen.

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