Life expectancy averages aren’t a huge help
Canada introduced the first federal old-age pension in 1927 for seniors over 70. In the mid-1920s, life expectancy was barely 60 — meaning many worked until death.
But over time, as the retirement age shifted to 65 and medicine, social assistance and living conditions improved, so did life expectancy. As of 2019, the average life expectancy in the country hit 82, according to Statistics Canada data.
So assuming someone retires at 65, planning to have enough money for about 25 to 30 years should cover you, right? Not necessarily.
The “average” can be incredibly misleading, says Moshe Arye Milevsky, a finance professor at the Schulich School of Business at York University in Toronto.
“You have three people: one lives to 100, one lives to 90, one lives to 80. The average is 90. But only one of them made it to that,” says Milevsky. “The dispersion was ten years. On average, they all lived to 90, but boy is that wrong.”
It’s a matter of lifestyle
People often conflate longevity risk with a longer life expectancy, Milevsky says. While people are living longer in modern times, the real risk you’re dealing with is that you can’t know how long you’ll live, which makes coming up with an exact budget impossible.
Using the example of three people who lived to an average age of 90, if they sat down with an advisor to plan their retirements, there’s no way they could have known whether they’d die ten years short of that average or live for an additional ten years.
But even if you live well past the average and run down your retirement savings, we don’t put people in their 90s or older in debtor’s prison in Canada; you won’t be left penniless. But you should expect a fairly humble lifestyle.
“Nobody runs out of money in retirement in Canada; it doesn’t work like that,” says Milevsky. “What you do is, you have to adjust your standard of living perhaps, [but] nobody dies broke.”
With benefits from the Canada Pension Plan, Old Age Security and Guaranteed Income Supplement programs, he says if you live long enough, you can expect to receive around $30,000 a year no matter what.
“On a deeper level, longevity risk isn’t just about how long we’re going to live, it’s also about the quality of life that we’re going to have until that point,” says Milevsky.
That $30,000 should be enough to cover a place to live and the bare essentials, but forget about treating your family to a cruise or helping your children and grandkids with down payments for homes and their education. For some, that’s a lifestyle they’re comfortable with.
But for many others, living on the minimum from the government would be a shocking and heartbreaking turn of fortune.
Running out of money isn’t the only issue
We spend decades emphasizing the importance of saving for a vague future. And yet once someone reaches that point, it’s not so easy to suddenly pivot to spend that reserve.
“For 30 years, we teach our kids to save and then we tell them, turn it on. ‘No, you taught me this trick called savings, and I’m a dog and I’ve learned how to do it very well, and I can’t learn a new trick, I’m old now,’” says Milevsky.
But, he adds, that defeats the purpose of saving.
“The issue is that the reason you saved all that money was to enjoy it at some point,” says Milevsky. “And we did a great job at getting people to delay gratification, but that’s the essence of delay. Eventually, I want to be gratified.”
So how do you find the balance between gratification and living off scraps in your 90s?
How to address your risk
First, Milevsky suggests working longer if you can. And if possible, delay taking CPP and OAS a few years too.
If you don’t have a defined benefits pension plan, advisors recommend certain financial products, such as annuities, longevity insurance and pooled investment funds, with more security and certainty of income.
But ultimately, making your money last through your retirement is a matter of figuring out how sustainable your spending habits are. Pereira tells his clients it’s not his business how they spend their money, rather he tries to ensure that they can keep up their desired spending rate however long they live.
“I don't care if you want to travel around the world … or if you just want to basically live a simple life in the middle of nowhere ... it's not about me. What I care about is that that spending level is sustainable,” he says.
And that means regularly reviewing your retirement plan to ensure you’re spending at a pace that will maintain your lifestyle. Milevsky suggests retirees check in once a year, using the time around tax season when you would have shifted money into your RRSPs, to reassess where you stand.
Keep in mind that everyone’s comfort level is different. Some may be more than happy to sacrifice small luxuries to ensure there’s enough cash to carry them through their golden years while leaving some for the next generation. Others will be happy to live large in the first decade or so and forgo travel and little luxuries if they live longer than they would have expected.
But it will take some reflection and planning, possibly with a financial professional, to pinpoint your risk tolerance when it comes to longevity. And that process should begin well before retirement to ensure you make the most of your retirement years without risking depleting your savings while you still need them.
“You have to do what you can to prevent yourself from getting into that bad position,” says Pereira. “And the thing is, the one thing you cannot buy more of is time.”