Canadian politicians aren't the only ones who face difficult choices to address the demographic impact of an aging population.
Baby boomers themselves are increasingly feeling the pinch as they struggle to generate enough cash flow to fund the lifestyle they dreamed of in retirement.
"The biggest challenge for our clients and investors generally is to build a portfolio that generates a sufficient income to retire on in what has been a low inflation, low interest rate environment," says John Nicola, chief executive of Nicola Wealth Management, which manages $1.2-billion of assets for 600 high net worth families in British Columbia.
Investors need to be more conservative in their assumptions of returns and should be willing to increase savings, retire later or retire differently, he said in an interview.
More people will work past 65, even if the government doesn't raise the retirement age to shelter itself from higher pension costs, Mr. Nicola added.
A growing chorus of think-tanks, bankers and observers has begun to urge governments to cut deficits to accommodate the needs of baby boomers, the large group of people born between 1945 and 1965 who this year began to reach the traditional retirement age.
Among the most difficult quandaries is how to reign in health-care spending that is expected to explode as this group ages and increasingly demands costly care.
"Whereas we might argue that we have universal health care, we're going to make more and more of that health care funded by individual patients," added Mr. Nicola.
The key to surviving these challenges is to develop an investment strategy based on value, cash flow and diversification as individuals move from the accumulation phase to the spending phase of their lives.
High-yield stocks still offer tax advantages, but Nicola urges investors to consider alternatives. These include preferred shares with adjustable medium-term rates, life annuities as an alternative to other fixed-income vehicles, distressed debt in publicly traded companies and income-producing real estate.
Ben Radidoux, a trained financial adviser and author of the finance blog Financial Insights, said the current interest rate environment has pushed retirees, near retirees and pension funds to embrace more risk to achieve moderate growth.
"Having a generation of retirees with unusually high-beta portfolios is certainly a concern," said the Georgian College professor.
The other concern is potentially lower values of real estate, which typically make up about half of the net worth of the typical Canadian household.
The desire to downsize or need to sell to free up capital will put further pressure on housing prices as the pool of buyers for large homes fails to absorb that much supply, Radidoux added.
"The era of the McMansion is over."
If the structural weakness of the Canadian economy constrains interest rate hikes, demand will continue for large cap dividend paying stocks, well-capitalized utilities, bonds, income trusts and REITs.
Investors looking to take advantage of the demographic shift will seek to tap into sectors such as pharmaceuticals, businesses in the health-care field, leisure and recreational companies and retirement homes.
But there aren't a lot of public investment opportunities available in Canada. The health-care sector makes up less than one per cent of the Toronto Stock Exchange based on market capitalization, says Andrew Beer, manager of strategic investment planning for the Investors Group.
The largest exposure is in the United States, where it makes up just under 12 per cent of the S&P 500.
Diversification is still the best strategy since some of these companies and sectors can be volatile.
The biotechnology sector collapsed after hitting its prime in the late 1990s. Pharmaceuticals and health-care service providers have also been stagnant for the last decade.
"Whether an aging population is enough to provide a boost where we're going to see spectacular returns from them against, it remains to be seen."
An alternative is to invest in mutual funds that specialize in investing in the health-care sector.
An RBC survey earlier this year found that 90 per cent of Canadians believe they will have enough retirement income to cover basic expenses, but 75 per cent doubt they can achieve the retirement of their dreams.
Andrew Zwaig, senior wealth adviser and director of wealth management for Scotia McLeod, said investors need to increase their risk to achieve a decent rate of returns. But he said the willingness to rack up debt by those nearing retirement is mind-boggling.
"I see people well into their sixties with a mortgage on their house and credit card debts. How do you go into retirement and have a reasonable expectation if you're paying 28 per cent (on a) credit card debt?"