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Why longevity is key to retirement planning

Canadians are worried they will outlive their savings. That’s why advisors should make longevity a priority when putting together an investment plan


Date: December 16, 2015

Financial advisors need to be constantly vigilant given the myriad risks facing their clients today, from market volatility and health care costs to the challenges when a breadwinner spouse dies early.

Increasingly, however, it is not the worry of dying too early that has Canadians worried. It’s the fear of living too long. The subject of longevity risk is suddenly a hot topic among Canadian investors who are now hearing horror stories about people outliving their savings.

What do the statistics show? In 1980, a 65-year-old Canadian male entering retirement could expect to live an average of 15 years in retirement, reaching the ripe old age of 80, while women, on average, lived to nearly 84. Those same 65-year-olds in 2014 can expect to make it to 84 years of age for men and 87 years for women, according to Statistics Canada. The average retirement has stretched out to nearly 20 years for men and 22 years for women and will continue to lengthen in future.

Canada’s chief actuary projected last year that many Canadians will live even longer than age 90 and will continue to be at the top of the list of the world’s life expectancies, among the ranks of long-lived seniors in Switzerland, Italy, France and Japan.

“Longevity is one of the significant risks retirees face,” says Rocco Taglioni, senior vice-president, distribution and marketing, individual insurance and wealth with Sun Life Financial Canada. “Longer life expectancies create the need for retirement income to last 20, 30 or more years. Advisors need to increase clients’ retirement planning horizon to reflect their possible increased lifespan.”

Mr. Taglioni adds that advisors should start conversations with clients about their retirement expectations, the importance of longevity risk and strategies that can protect them should they be fortunate enough to live a long life in retirement.

Those strategies might include adding products to clients’ portfolios that provide guaranteed income in the form of a monthly or annual cheque, such as life annuities, segregated fund products or guaranteed investment funds (GIFs). Advisors also need to plan for inflation risks and health risks from existing or new medical conditions.

Joseph Coughlin, director of the Massachusetts Institute of Technology (MIT) AgeLab and an authority on the “disruptive demographics” of an aging society, says that the rise of longevity risk will alter how financial advisors and their clients approach their relationships with one another.

“Advisors will need to help people answer the questions, ‘Where will I live? How will I plan for caregiving? Which company can I trust when I’m 85 years old?’” he says. “Canadians will need help navigating longevity and charting out, ‘What am I going to be doing for 25 or 30 years of my life?’”

Prof. Coughlin points out that retired and semi-retired Canadians are living longer, more active lives and that will put greater pressure on advisors to describe the risks and plan for clients’ expectations of a more robust retirement.

“I think financial product manufacturers and advisors are going to have to come up with dreams, images, and stories, no different from what the auto industry does when they sell a car,” he says. “[Car manufacturers] show you where you’re going to use it, how you’re going to use it, and what you can do [with it].”

Among his predictions, Mr. Coughlin anticipates that many seniors will choose to go back to school in their retirement. “Why isn’t there an education plan for seniors like the RESP?” he suggests. “If we’re starting to look more and more at 100 years as the new normal, does any of us genuinely believe that by age 40, the education we received from [age] zero to 24 is of any value? Technology is changing. Information is changing. The degrees are very nice to look at on the wall but aren’t that useful in real life.”

To keep up with the changing needs of retirees who are living longer, healthier lives, financial advisors will increasingly be called upon to help clients imagine the possibilities, says Mr. Coughlin. Then they will need to educate clients on how their investments can make those dreams into reality.

“We’re selling retirement, and the consumer today no longer believes in the retirement our parents and grandparents enjoyed,” he says. “[They’re] looking for a new vision of what 25 or 30 years of their life is going to be.”

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