You’re retired, you’ve invested wisely and now it’s time to reap the rewards of a well-managed investment portfolio. That means travelling, spending on a few luxuries and continuing to cross items off your post-retirement bucket list.
Even better: You’ve won the genetic lottery. You’ve exceeded your life expectancy, and there’s a chance you might live to age 100.
Now here’s the bad news: That could be a big financial problem, because your wealth projections didn’t take your longevity into account.
“When we do retirement plans now we very rarely project [clients living] to less than age 100,” says Kevin MacLeod, a financial planner with Money Advisor Wealth Management in Calgary. “We want to make sure they don’t run out of money.”
Living longer is a pleasant predicament for many Canadians, but it can become a financial challenge.
An Ipsos poll conducted last year for RBC Insurance Services Inc. found that 62 per cent of seniors worry about running out of money in retirement. Based on 2011 census data, they may have good cause for concern. According to Statistics Canada, the life expectancy for the average Canadian man is nearly 80 years old, while women can expect to live to nearly 84.
Some will, of course, live longer. Between 2006 and 2011 the number of centenarians in this country exploded by 25.7 per cent, with 5,825 Canadians living to 100 or older in 2011. Statistics Canada projects that the centenarian cohort could climb to nearly 80,000 by 2061.
In the past, financial planners likely would have recommended a portfolio rebalance once a client reached retirement age, reweighting their portfolio away from riskier equities and toward fixed-income products such as bonds or guaranteed investment certificates (GICs).
The goal was to protect their clients’ nest eggs by minimizing risk. But extended life expectancies have upended traditional investment-planning models.
“The rule of thumb used to be 100 minus your age, that’s how much of a [retiree’s] portfolio would be in equities, the other part should be in fixed income,” says Jeff Kaminker, president of the wealth management firm Frontwater Capital in Toronto.
“To compound the problem of people living longer, you also have interest rates at all-time lows. The two are just toxic for the traditional old style of having a huge portion of a portfolio in fixed income,” he says.
Being too conservative is a very risky strategy now, Mr. Kaminker adds. “We tell our [senior-aged] clients that they want no more than 30 per cent of their portfolio invested in a combination of bonds and GICs.”
The big question is how much money an individual should have saved by the time they reach retirement.
Brian Himmelman, a Halifax-based senior investment advisor with Manulife Securities Investment Services Inc., says the average Canadian should aim to build an investment portfolio with about 20 times their annual preretirement income to ensure they don’t outlive their money.
An individual earning $150,000 per year, for example, would need to bank about $3-million and aim for an annual investment return of 4 to 5 per cent – assuming about 3 per cent inflation – to live a comparable lifestyle and avoid depleting their capital.
Broadly, “even with no growth on that money over 20 years, that takes you from age 65 to 85,” Mr. Himmelman says.
At Mr. Kaminker’s firm, a growth-focused plan would place about 70 per cent of a retiree’s portfolio in equities, with about a quarter of those stocks in relatively low-volatility preferred shares that deliver annual returns of about 5 to 6 per cent.
About half of the remaining equities in that part of the portfolio would be made up of what he calls “dividend champion” stocks that have delivered consistent returns over the past 25 to 30 years. These include ubiquitous brands such as McDonald’s Restaurants of Canada Ltd., Pepsico Inc. and Microsoft Corp.
Mr. Himmelman’s firm, on the other hand, recommends dividing portfolio assets into three investment “buckets” designed to guarantee income over the short and long term.
He works with clients to determine the amount of cash they need to support their lifestyle in the coming five years, determines a dollar figure, then invests that amount in low-risk, fixed-income investments. Money needed in five to 10 years is given a low- to medium-risk treatment, while the remaining funds – that won’t be needed for around a decade – are weighted about 60 to 70 per cent in equities to ensure sufficient capital growth.
“If investors can segment their money, then even in a downturn they know that the money they’re drawing for the next five years is sitting in fixed-income investments and is producing an above-inflation rate of return,” he explains.
While specific investment strategies will vary – and should be customized to suit each investor’s unique lifestyle goals – one of the most important considerations for investors looking to mitigate longevity risk is to make saving a life-long habit from an early age, says Nathan Parkhouse, a portfolio manager with Parkhouse Financial in Toronto.
“The best foundation for financial planning is to pay yourself first,” he says. “Put something away as frequently as possible and invest it in equities like good-quality, dividend-paying mutual funds, stuff you’ll never have to think about. Then you’ll build wealth without even trying.”