One of the biggest concerns investors have is outliving their money – and it’s often their financial advisors who tell them if this fear could become a reality.
This discussion is more challenging today due to volatile stock markets, low returns for fixed-income products and a more precarious labour market, including the trend toward contract work and away from jobs with defined-benefit pension plans.
Still, one of the most unpredictable factors in determining if a person has enough money to last in retirement is life expectancy. Although Statistics Canada reports that the average Canadian will live until age 82, up from 79 two decades ago, most advisors today are planning for their clients to live well into their 90s – or even to 100.
This estimate is considered to be conservative – even as Statscan reports that the number of centenarians is growing – and often determines when investors can stop working and how they’ll spend their retirement years.
Although not all investors are happy about how the use of a longer life expectancy might cause them to restrain their spending before and during retirement, it’s a critical part of financial planning and a decision most advisors don’t take lightly.
This is especially important as a new white paper from the World Economic Forum titled “Investing In (and for) Our Future” suggests Canadians will outlive their retirement savings by more than 10 years, on average.
“We are trying to strike a balance between [the client] not running out of money – or leaving the estate in a form that’s smaller than desired – and living well now,” says Rona Birenbaum, certified financial planner and founder of Toronto-based fee-only financial planning firm Caring for Clients.
When Ms. Birenbaum began doing financial plans about 25 years ago, she would assume that the male in a married couple would live to the age of 85 and the woman to the age of 90, following the common assumption that women live longer than men. Then, her clients started living longer.
“I saw the longevity in front of me,” she says. Today, she uses the assumption that the male in a married couple will live to 90 and the woman to 95.
Her decision is based on more than her client’s experiences. FP Canada Standards Council’s projections assumptions guidelines for 2019 show that a 65-year-old man today has a 50 per cent chance of living to 89 and a 25 per cent chance of living until 94. For women who are 65, the projections are a 50 per cent chance of living to 91 and a 25 per cent chance of living to 96 .
Some investors push back on the use of a longer life expectancy, often citing their parents or grandparents, who died at a much younger age.
Bradley Eizenga, vice-president and portfolio manager with the Eizenga Lacey Koostra Wealth Management Group at BMO Nesbitt Burns Inc. in Windsor, Ont., often counters that argument by pointing to ongoing advances in medicine that will likely help people live longer. Unless the client has a health issue or a terminal illness for which a shorter time frame is more appropriate, he likes to use a life expectancy of 100 years of age.
“If you’re wrong and you live longer, the effects could be catastrophic,” says Mr. Eizenga, whose great grandfather lived past 100 and his grandparents lived into their 90s.
“Personally, I don’t want to run out of money when I’m 95,” he says. “If you plan longer and live shorter, [the benefit is] your estate will be bigger.”
At the same time, Mr. Eizenga tries to ensure the financial plan isn’t so restrained with the longer timeline that it makes retirement less enjoyable for clients.
“Any financial plan should have some sense that money isn’t the end game,” he says. “It’s the tool that leads to the end game. It’s important for us to have a discussion about that with clients to ensure their financial plan does the things they want to do, if they can.”
Nicholas Flemming, vice-president, portfolio manager and wealth advisor with Flemming Private Wealth at RBC Dominion Securities Inc., in Toronto, says he often uses a life expectancy of 95 for his clients as well as conservative return rates on their portfolios, based on their risk tolerance.
“A flair of conservatism goes through the whole process,” says Mr. Flemming. “I like to talk people down and say, ‘Let’s plan for lower returns and longer life expectancies.’” This way, he says, “if a plan suggests a client can retire comfortably using conservative assumptions, their actual experience should be much better.”
He also likes to run various scenarios in the retirement planning software, to show clients what they could spend if they left fewer assets to the next generation – or none at all.
“It’s not only fun, but adds value for the clients,” Mr. Flemming says. “They want to know the ‘what if’ scenario.”
The exercise can also prompt clients to start making decisions about what to do with the assets they leave behind after they die.
“That’s the whole point of financial planning,” Mr. Flemming says. “It’s an exercise in mortal beings trying to predict the future. If we can plan for the future proactively … then we can help our clients make better financial decisions.”
Ms. Birenbaum says using a longer life expectancy also helps clients determine how much risk they want to take in their portfolio and whether they wish to continue working or if they need to go back to work.
For example, using a life expectancy of 95 could mean a retirement that lasts as long, or maybe longer, than investors’ working years. When it comes to investing, it means the period of withdrawing assets in retirement could be equal to, or more than, the years spent adding to the portfolio.
Having this information as part of a financial plan can help clients make better spending and investment decisions both today and in the future.
“Most people don’t want to solve [a potential savings gap] by taking more exposure to equities than they’re comfortable with,” she says. “A lot of people would rather spend less than invest more aggressively.”
Overall, Ms. Birenbaum says most clients are comforted by the longer life expectancy assumption used in financial planning.
“They’re not paying us to placate them,” she says, “they’re paying us to advise them.”