On having enough financial resources through retirement

Balancing living for today and not running out of money in retirement is perhaps the greatest financial challenge most people face.  Even financially well-off people wonder if they have enough for retirement.

In past decades, people with limited resources have received assistance through government funded programs, including subsidized residential care and extended care.  There is a general concern about how the government will be able to continue funding assistance programs for seniors and whether they will be able to offer the same level of assistance in the future.  This is a real concern given the rising costs of these programs, especially given increasing number of seniors as the population ages.

A baby born today in British Columbia has a life expectancy of 81.7 years according to Statistics Canada.  If you’re 65 years old this year, StatsCan suggests that your life expectancy is 85.7 years.  Both of these life expectancy numbers are at the highest levels they have ever been.  Although recent studies have suggested that babies born today may actually have a shorter life expectancy than their parents as a result of health issues such as increased obesity and diabetes.    

With financial planning, assumptions are made with respect to rates of return, inflation, income tax and life expectancy.  The younger a person is, the more challenging it is to project these assumptions.  Rates of returns have fluctuated significantly for both fixed income and equity markets over the years.  Federal and provincial governments can make future modification to various programs such as benefit payments, income taxes or credits that will have a direct impact on your retirement income.   One of the assumptions to consider in retirement financial planning is your life expectancy.  The chart below shows the required savings for different life expectancies and demonstrates how your life expectancy can make a material difference.

In all scenarios, the assumptions are identical where the rate of return is four per cent, inflation is two per cent, and income tax is at 30 per cent.   For illustration purposes, we will assume an individual requires $50,000 annually after tax.  The following table gives you a financial view of the capital required in a RRIF account at age 65 with the following different life expectancies:

Life Expectancy           Savings Required @ Age 65

            75                                $522,439

            80                                 $745,470

            85                                 $959,956

            90                                  $1,166,227

            95                                  $1,364,592

            100                                $1,555,361

Another variable is the type of accounts in which investors have saved funds.  If you have funds in a non-registered account or a Tax Free Savings Account then the numbers are lower than the table above.  Having a combination of accounts (non-registered, TFSA, and RRIF) at retirement provides you the benefit of smoothing taxable income and cash flows.

Building up sufficient financial resources before you retire takes away the reliance on government funded programs and the concern of running out of money.  Financial security is achieved when you have enough resources to dictate the quality of care you receive as you grow older.  Often at times in financial plans we factor in the assumption that the principal residence could be sold to fund assisted living arrangements.  I’ve never prepared a financial plan with the assumption that the government will be paying for a client’s long term care. 

I also advise my clients to understand the issue of incapacity and how to manage this should it arise.  When planning for the most likely outcome, many people will become incapacitated (mentally or physically) for a period of time before they die.   In some cases the period of incapacity can extend for a significant length of time.

I encourage clients to take appropriate steps to deal with the financial cost of incapacity and think about how their finances would be managed if they became incapacitated. 

While they are still able, clients should ensure all legal documents (will, power of attorney, representation agreement) are up to date.  Part of this process involves reviewing the beneficiaries on all accounts to ensure consistency with your estate plan. Simplify finances by closing extra bank accounts and consolidating investment accounts.  All government benefits such as OAS and CPP as well as pensions (RRIF and RPP) should be deposited into one account, which makes it easier to budget for excess or short-falls.  Most expense payments should be automated. 

If you lose capacity or interest, it is easier for your power of attorney to review one bank statement for transactions.  In many cases, a meeting with a client and the client’s legal power of attorney is necessary to set up a “financial” power of attorney.  This power of attorney allows a person the ability to request funds to be transferred from your investment account to your bank account, if funds are running low.  Clients can set up managed accounts where a portfolio manager can act on your behalf on a discretionary basis.  Financial mail can also be sent to the power of attorney.  When bank and investment accounts are consolidated, your power of attorney can easily review and monitor the accounts through monthly statements or online access.

 

Kevin Greenard, CA FMA CFP CIM, is an Associate Portfolio Manager and Associate Director with The Greenard Group at ScotiaMcLeod in Victoria.  His column appears every second week in the Times Colonist.  Call 250-389-2138 or visit greenardgroup.com