Even with careful planning and diligent saving, some parts of retirement planning are out of your control. Factors like longevity, rising medical costs and the ups and downs of the market can have an impact on your savings. But while you can’t plan for the unexpected per se, there are ways you can manage these risks and protect your retirement income. Here’s a look at four common retirement risks and how to address them.
1. Longer life expectancy
People are living longer now than ever before. The average life expectancy in Canada is around 80 years for men and 84 years for women. That’s about 10 years longer than people were living in the 1960s.
There are many benefits to living longer, but it also means carefully considering strategies to avoid outliving your savings. One way to combat this is to delay the age you start collecting your Canada Pension Plan (CPP) benefits. You are eligible to start collecting your benefits at age 60, but the longer you wait, the greater your benefit will be. If you can hold out until age 70, you’ll receive the maximum monthly amount.
You may also want to consider other sources of regular income, such as annuities to supplement CPP benefits and withdrawals from retirement accounts. You typically purchase annuities with a lump sum, and the annuity then makes regular payments to you over a fixed period of time. That said, annuities come with unique trade-offs and risks. For example, it’s possible inflation could rise higher than an annuity’s guaranteed rate. What’s more, annuities are generally illiquid investments, meaning your money will be tied up for a set period and you won’t be able to access it without facing stiff penalties. Discuss annuity options with a financial advisor before adding one to your portfolio.
2. Medical costs and long-term care
Another implication of living longer is increased health care costs, including long-term care services. Long-term care refers to assistance needed for daily activities, like eating, bathing or dressing. This type of care can be provided at home or an assisted living facility like a nursing home. About 7 percent of Canadians age 65 and older live in some sort of assisted living facility, and the average cost of a private room in these facilities is about $33,349.
Even if you don’t anticipate needing long-term care anytime soon, it may be worth considering long-term care insurance now in case you need these services in the future. Consider purchasing coverage well before you retire as it typically becomes more expensive as you age.
3. Market risk
Market fluctuations are a natural part of the market cycle, yet a downward turn right before retirement can lower the value of your investments just when you need them most. As you near retirement, consider rebalancing your portfolio to include more lower-risk investments, like bonds, that are less likely to be affected when stock markets head south.
4. Rising inflation
Inflation reduces your spending power and can have a big effect over a 30-year (or longer) retirement. There isn’t much you can do to stop inflation, but you can invest in assets that protect against some of its effects. Property prices tend to rise with inflation, making real estate investments a good inflation-protected option. You may also consider inflation-linked bonds (ILBs), which offer a fixed interest rate, but their principal is adjusted for inflation.
Understanding these risks to retirement can help you know how to address them and keep your savings on track.
Sources:
https://www.cpp.ca/blog/what-is-the-life-expectancy-in-canada/
https://www.conferenceboard.ca/hcp/Details/Health/life-expectancy.aspx
https://www.canada.ca/en/services/benefits/publicpensions/cpp.html
https://www.newswire.ca/news-releases/health-and-long-term-care-costs-are-an-overlooked-factor-in-retirement-planning-edward-jones-study-884235616.html
https://www12.statcan.gc.ca/census-recensement/2011/as-sa/98-312-x/98-312-x2011003_4-eng.cfm
https://www.canada.ca/en/financial-consumer-agency/services/insurance/long-term-care.html
https://www.qtrade.ca/en/investor/education/investing-articles/experienced-with-investing/inflation-linked-bonds.html