Your retirement could last 30 years. Will you be prepared?

When planning for retirement, it's essential to consider your life expectancy. Find out everything you need to know to avoid leaving your future to chance.

By Fonds de solidarité FTQ

How many years will your retirement last? That's an impossible question to answer—which makes it difficult to create a savings strategy. Finance experts generally propose a 30-year withdrawal plan based on two key factors: the official retirement age in Quebec (65) and life expectancy. Here, we explain how to factor in the latter and start assessing your savings needs.

Understanding life expectancy

The older you get, the longer you're likely to live. Here in Quebec, life expectancy is constantly improving. With that in mind, how can you calculate the number of years you'll spend in retirement and anticipate your financial needs? For most people, this unknown variable is a nagging source of stress. For example, 47-year-old Nathalie is frustrated by how hard it is to predict the amount of money she'll need in retirement. "I constantly feel torn between wondering when I'm going to die and wanting to live in the present . . . I don't want to regret saving every penny for a future that might not even exist!" she says. "I want to live life to the fullest now, while I'm healthy, but I also want to be smart about it. Trying to balance all that is incredibly stressful."

Calculating life expectancy

Fortunately, government statistics offer some insight. According to Retraite Québec, in 2016, a 65-year-old Quebec man could expect to live to age 85, while a 65-year-old Quebec woman could expect to live to age 88. This is why financial planners typically base their calculations and withdrawal plans on a 30-year retirement period, usually from age 60 to 90. Statistically, however, 50 percent of the population will live beyond the average life expectancy.

It's important for everyone to have a personal savings plan. At the same time, additional elements come into play for women, who tend to live longer than men and are therefore likely to have a longer retirement. Unfortunately, they often have less retirement income than their male counterparts. Taking time off work and working part-time to raise children are among the reasons for this disparity. Another is the persistent gender wage gap: in 2018, women earned roughly 13 percent less per hour than men. In addition to living longer, women are more likely than men to live alone after age 65. This means they're unable to split costs, which adds to their financial burden.

A healthy retirement

According to a recent survey by EducÉpargne (French only), the majority of Quebecers feel that the ideal time to stop working is before age 65—age 61, on average—because they want to enjoy their retirement, especially while they're still in good physical shape. One-third of the respondents indicated they intended to apply for the Québec Pension Plan (QPP) before age 65, despite the penalty for early claims.

Though many people hope to have a healthy, active lifestyle in their retirement years, they also tend to underestimate what's known as longevity risk, or the financial risk associated with living longer than expected. Being aware that you could be living off your savings and retirement income for some time will allow you to plan accordingly and avoid running out of funds.

Moreover, since a person's health generally degrades with age, health care costs tend to creep up over time. On the other hand, your life will also slow down as you get older. In the early years of your retirement, you'll need 70 percent of what you were earning during your working life, but that figure will gradually drop to 50 percent.

Have a plan

No matter your circumstances, it's important to have a plan and to be well informed. Nathalie sees herself working full-time until age 65, and then part-time for another five years. "If all goes well, I'll spend about 20 years in retirement before I die," she says. "However, based on my savings to date, I need to be more careful and strategic over the next couple of decades. That's why I decided to consult an expert who could help me better evaluate my current situation and figure out what I want my retirement to look like."

Sylvie and Pierre opted to sit down with an actuary. After considering their financial situation, lifestyle, and family history, the financial risk expert developed a retirement withdrawal plan providing for payments until age 91—the couple's life expectancy. Sylvie and Pierre plan to ask their children for financial assistance if they end up living well into their 90s. When thinking about your own retirement, make sure your plans match your goals as well as your means.

Indexation and inflation

When your life expectancy goes up, your cost of living can be expected to follow suit. This is because of inflation: the steady increase in the cost of goods and services year after year. Nathalie is well aware of this reality and knows to factor it into her retirement plans. "Even though I intend to live a simple but comfortable life, I know that the cost of living will be higher than it is today," she says.

The impact of inflation

The current inflation rate in Canada is relatively low, having stayed below 2 percent for the past two years. That may sound trivial, but it adds up over time. On its website, Retraite Québec clearly states that inflation "is a key factor to consider when planning your retirement withdrawal strategy." Indeed, both the Old Age Security (OAS) program and the QPP are designed with inflation in mind: the pensions they provide are indexed, meaning they're adjusted annually to match the current cost of living. For the rest of your retirement funds, Retraite Québec notes that "you have to plan enough savings to counter inflation and maintain your buying power."

Investment returns to the rescue

Fortunately, the return on your investments can help curb the consequences of inflation. A 3 percent rate of return, for example, will more or less balance out inflation, while a higher rate will allow you to grow your assets and increase their value. Like Retraite Québec, the Financial Consumer Agency of Canada stresses that your savings must grow to keep up with inflation. Otherwise, it may be difficult to maintain your lifestyle once you've retired. This is crucial information to consider when calculating the amount you think you'll need for retirement.

There are many factors to consider when planning for retirement, including your life expectancy, your health, and inflation. The best way to ensure nothing is left to chance is to speak with a financial planner. They will be able to adapt your investment strategy to your needs, which will help you get the most out of your finances.

Review your retirement plans at least once every five years. You should also revisit them anytime your savings goals change and following major life events—good or bad—such as the birth of a child, a new home, a death or an illness, or unemployment. Doing so will help you make sure you're always putting enough money aside to live comfortably for the rest of your days.

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