As our population ages and life expectancies increase, financial planning for retirement must adapt. Today, it’s not uncommon for individuals to live well into their 90s, and some even surpass 100. This shift is demanding a re-evaluation of retirement strategies, with a focus on factors like longevity and healthspan.
Longevity refers to the duration of one’s life, while healthspan refers to the number of years spent in good health. As people live longer, they may require more financial resources to maintain their quality of life. It’s essential for advisors and clients to acknowledge the possibility of living past 100 and consider the implications for their financial plans.
In terms of healthspan, the goal for most individuals is to maximize their years of healthy life. Long-term care insurance can be a useful tool in this regard, providing a financial safety net in case care is needed later in life. It’s an especially worthwhile option to consider for those who start early, when premiums are low, and are willing to invest in their future health.
Common questions and concerns
When it comes to income planning, it’s important to consider the impact of compound interest on your retirement savings. For instance, consider the difference in cost between providing an income stream for 25 years versus 35 years. If you invest an extra 20%, you can fund an additional 40% of income over your lifetime, thanks to compound interest.
One of the most frequently asked questions about retirement income is when to start drawing from Canada Pension Plan (CPP) and Old Age Security (OAS). Typically, it’s best to defer these benefits until age 70 — doing so can significantly increase your monthly income. For example, deferring CPP until you reach 70 can result in a 42% increase in monthly payments, while deferring OAS can yield a 36% increase. Both of these benefits are guaranteed, indexed, and payable for life, making them essential components of a secure retirement plan.
However, it’s essential to be mindful of tax implications when deciding when to draw from CPP and OAS. While CPP benefits are taxed as regular income, OAS benefits are subject to clawbacks for individuals with higher taxable incomes. To avoid triggering these clawbacks, it’s crucial to strike a balance between retirement income sources and tax planning.
Innovations for an aging population
As people live longer and healthier lives, the financial industry is also constantly adapting to accommodate their needs. There are already a variety of tools and innovations to help individuals navigate the challenges of retirement and ensure their financial security. Here are a few to consider:
- Life Annuities: With long-term interest rates now greater than zero, life annuities are seeing a resurgence in popularity. They are considered the ultimate tool for protecting against longevity risk because they guarantee a steady income stream for life, regardless of how long you live, alongside government pensions and other benefits.
- Tontines: A tontine is an old financial product that has been revived to address the issue of longevity. It involves pooling funds from a group of people, with only the survivors able to draw from the pot. As participants pass away, their share remains in the pool, benefiting the remaining members. This arrangement rewards those who live longer, ensuring they have a source of income even in their later years.
- Deferred Annuities: The government and financial industry are working together to create new products and legislative frameworks to better serve retirees. Deferred annuities, which start paying out at a predetermined age (e.g., 85), are one example. This type of annuity allows retirees to secure a guaranteed income later in life, even if they outlive their initial retirement savings.
- RRIF Rule Changes: Experts are also advocating for changes to the Registered Retirement Income Fund (RRIF) rules in Canada. Currently, individuals must convert their Registered Retirement Savings Plan (RRSP) into an RRIF by age 71, with the first payment due the following year. However, many people continue working past this age and may need access to their capital later in life. Pushing back the conversion age to 75 or later would provide greater flexibility and security for retirees.
As our society continues to grapple with the challenges of increased longevity, it is important for individuals and financial professionals alike to stay informed about the latest innovations and tools available to help secure a comfortable retirement. By considering longevity, healthspan, long-term care insurance, and optimal timing for CPP and OAS benefits, you’ll be more likely to maximize your retirement income and enjoy a comfortable, secure and worry free retirement.
Reach out to us anytime to discuss your long-term financial planning. We are here to help.