When Lisa Colalillo, a real estate agent in Toronto, helped her great-grandmother celebrate her 100th birthday on Oct. 14, she was thrilled to see her reach the centenarian milestone.
Yet mixed with Ms. Colalillo's joy that day was something else – a feeling of unease. After all, if someone in her family could live to such a ripe old age, she could, too. But would she be able to afford to? Would she someday outlive her retirement savings?
"You think, okay, I'll retire at 65 and then have 20 years left. But if we go by how long my great-grandmother has lived, suddenly we're talking 40 years," she says. "Apparently we have some good genes in my family. It hits home."
She is right to be concerned. Although no one can accurately predict when they'll die years before it happens – if they could, retirement planning would be a snap – statistics show Canadians are living longer than ever, says Ian Edelist, a consulting actuary with Eckler Ltd. in Toronto.
According to the actuarial firm's most recent analysis of the data in Canada, the United States and Britain, Canadians' average life expectancy for those who have already reached 65 has increased 1.5 months each year over the past 40 years to just under 84 years old for men and just over 86 years old for women. What's more, over the past 20 years, men's life expectancy has risen even more: two months for each year.
Or put it another way. If you grouped 100 Canadian couples together now, all 65 years old, at least 10 of them would expect to see one spouse live for more than a century. That's a 10-per-cent chance that one of the spouses will live until 100.
Is a longer life good news? Of course it is. Unless that longevity is combined with miniscule savings and ill health, thus becoming a curse.
Back in 2013, BlackRock Canada released survey results showing that while Canadians needed to wake up to the realization their retirement nest eggs should last at least 25 years, they weren't making plans to ensure they would actually have that money available. The new reality hadn't hit home with potentially dire consequences.
"What does someone do if they think they're only going to live to 80? How do they bridge the gap if they end up living to 93 or 100?" asks Mr. Edelist.
Luckily, government programs are already accounting for longer life spans with the Canadian Pension Plan routinely updating projections and Old Age Security increasing the eligibility age from 65 to 67 effective in 2023 to accommodate longer lives. Still, Canadians also need to take matters into their own hands to mitigate the risk of outliving their savings. Fortunately there are a few ways to do just that.
When Patrick Sager, a senior financial planner and elder planning counsellor with Investment Planning Counsel in Blairmore, Alta., sits down with new clients, he does his best to come up with a rough estimation of when that person will die. That information is vital for creating a financial plan that makes sense for the long haul.
How physically active are they? How long did their parents and grandparents live? Any health issues to be aware of?
"We always plan to age 90 at a minimum unless someone says, 'Listen, I have really bad health. I'm probably not going to live to 75.' We account for that," he says.
Even the best made plans can go awry, however. The marathon runner who gets hit by a bus. The two-pack-a-day smoker who wins the longevity jackpot. His own father, a diabetic who suffered a stroke and had quadruple bypass surgery, went on to live until he was 85.
"It's a crapshoot. No one can guarantee, even if you have longevity in your family, that you're going to have it too," he explains, while maintaining that knowing family history still usually helps.
Get familiar with annuities
Think of them as you would an employer's defined benefit pension – annuities give you guaranteed income for as long as you live. The theory is straightforward: You hand over a lump sum payment to an insurance provider and in turn you'll receive guaranteed income every month until you don't need it any more. (Read: once both you and your spouse are dead.)
While they're not for everyone – say, you're so wealthy there's little chance you'll run out of cash or if you're already on death's door – annuities are a good way to avoid the longevity trap. Many retirees use them, along with CPP and OAS, to create a steady income stream to pay for basics. Once that's taken care of, they can rest easily knowing any other investments held outside the annuity can cover trips to Italy or a new roof. Waiting to buy an annuity until you're at least 70 will help you reap the biggest rewards and land the largest payouts.
Mr. Edelist recently convinced his own parents to buy an annuity with some of the proceeds of their house sale.
"I said, 'You really don't want to be investing your money when you're 80 or 90 years old.' We have longevity in our genes. An annuity is a good plan for us," he says.
Mr. Sager agrees that annuities are the way to go, as long as some other funds are available for contingencies.
"Advisers are using a combination of life annuities and other products to get their clients to the end game," he says.
Get thinking about real estate
Meanwhile, some cash-strapped retirees turn to reverse mortgages to generate income in their golden years. Canadian homeowners who are at least 55 are eligible to get up to 50 per cent of their home's value and aren't required to make mortgage payments or pay interest or principal until the home is sold or the owner dies. It can be a pricey option though with mortgage rates above market. For those entering their later retirement years, it often makes more sense to avoid going into debt and selling the house since they would likely need to move soon anyway.
Ms. Colalillo is planning on being even more creative with real estate to generate cash flow and avoid debt in her later years: She's made a goal for herself to create $10,000 worth of monthly income through private lending, taking in international student borders and investing that money in real estate. Once her properties are paid off, she'll use the rent as income. What's more, she'll be leaving a sizable legacy for her heirs.
Already the 35-year-old says she's earning $3,000 a month.
"I've got to have cash flow because if I'm still alive at 100, there will still be money coming in," she says. "I won't be a huge burden to my family."