In part two of this series, we assessed some of the main strategies Canadians can use in order to minimize the taxes they pay. In part three, we will take a look at how long a person can be expected to live, and how that can affect their financial profile.
How long a given person can be expected to live is, of course, a matter which cannot be predicted with a great deal of precision, but still, we can use data to help us make estimates. The newest data from Statistics Canada on death and mortality rates contains a wealth of information which can help shape our perspective on modern life expectancies.
There are a number of ways to derive a reasonable estimate for how long you might live. There is some correlation between your parents’ and siblings’ longevity and yours, and other factors, such as whether a person is a smoker, can also provide insight into the issue. But, uncomfortable as it may be, there is a great deal of randomness in how long a person lives. Illnesses like cancer still affect otherwise healthy people without identifiable risk factors. In spite of that, however, it is clear that people – particularly upper- and middle-class people – live longer than ever, even with chronic conditions. As a result, whenever possible it’s important to err on the side of people living for a long time, with the assumption that many people alive today will live into their 90s and beyond.
The graph below, adapted from the StatsCan data, shows the number of years an average person is expected to live based on their current age. An average 65-year-old will be around for over two more decades, while a person alive at age 80 can expect to live for about 10 more years on average.
For married couples thinking about funding retirement, it is not just a question of one’s own estimated life expectancy, it is also important to consider that of their spouse1. The table below shows the likelihood that a person will live to at least age 90, based on their current age, as well as one or both of a male and female couple.
|Probability of living to at least age 90|
|Male||Female||One or both – M+F couple|
|If you are now 60||27%||41%||57%|
|If you are now 70||31%||44%||61%|
|If you are now 80||41%||53%||73%|
These statistics are eye-opening. Even as young as age 60, there is already a greater than 50/50 chance that one or both of a couple will live to age 90 or beyond.
Estimating your expected lifetime has an important effect on your retirement and savings plans. The longer a person or couple is expected to live, the larger the size of the portfolio required to support them in retirement, or the lower the annual amounts withdrawn will have to be. A $1-million retirement portfolio which has required withdrawals of $80,000 (before taxes) will likely last about 20 years, based on 4% or 5% investment returns. If this is a newly retired couple, both 65-years-old, it probably will run out before their deaths. This couple, given the circumstances, has two paths forward:
- Take out less money each year. If they want the portfolio to last to age 100, they can probably spend about $55,000 per year from the portfolio – less than 3/4 of the required amount needed to maintain their desired lifestyle; or
- Retire later. For some people, this is not an option. For those who do have the option, working longer has a two-pronged benefit: it allows the portfolio to stay invested for longer (and perhaps receive additional deposits), and also reduces the number of years of required withdrawals.
The bottom line of this analysis is to demonstrate that for Canadians, planning for retirement should be a several decades-long process. An early retiree may well be only halfway through her or his lifetime, and even a typical 65-year-old retiree should work hard (and plan) to have a portfolio capable of funding a reasonable lifestyle for three decades or more.
In the next instalment, we will take a look at the fourth question – how much can an investor expect to earn on his or her portfolio? We’ll also wrap up the series with a quick example.
|1Spouse||Gifting securities to a spouse for the purpose of having the spouse pay taxes on dividends and interest, for example, triggers attribution rules which result in the person who gifted the securities remaining liable for paying the taxes.|