Prepare for the Unknowns

In 2015, 48% of couples retired earlier than planned due to illness or job loss.

60% of workers aged 55-59 and 44% of workers aged 60-64 who left long-term jobs were re-employed within the next 10 years.

Many people enjoy long retirements, from 20 to 30 years in length, or more. During that time, much can change that can affect the retiree's finances. At the same time, it may be more difficult to adjust to those and other changes. There are six potential unknowns to consider, and prepare for, as you approach retirement.

1. Longevity: How long you will live?

Though people are generally living longer, many individuals underestimate how long they may live. Life expectancy assumptions used in retirement plans may be too low, thus predicting overly optimistic results. Add five years to your retirement plan, just in case you live longer than you think you will.

2. Inflation: Will expenses rise faster than your income?

Interest rates on term deposits and guaranteed investment certificates (GICs) don’t beat inflation. Beating inflation most likely requires an allocation to equity investments. Income from investment products may not stay the same or be guaranteed.

3. Regulatory change: Will you experience changes to your seniors’ benefits or tax rates?

With the increasing number of Canadians over age 60, we should expect to have to pay for services that are currently discounted or free to seniors. More user fees are being applied. Depending on your province or territory, seniors may be reimbursed prescription drugs based on the “lowest-cost alternative” versus the total cost for prescription drugs.

If you decide to move to another province or country in retirement, watch out for changes to user fees and income tax rates. Moving between provinces may alter your provincial sales tax and income-tax rates.

If you expect your retirement income to exceed a certain threshold, Old Age Security (OAS) benefits may not be secure. If the government lowers the income at which it starts to clawback the benefits, you may receive less than a full payment. Compare your expected income against the current OAS threshold income to assess whether it would be more prudent to base your plan on reduced or, even, no OAS benefits.

4. Sequence of returns (market performance): Will markets underperform your assumed expectation?

Will you retire during good times or bad? Withdrawing money from investments in a down market locks in the loss and compromises your future income. If markets continue to rise during your first five years as a retiree, your portfolio grows more than it shrinks—a lifelong benefit just because you picked a good time to retire.

5. Sustainable withdrawal rate: How much can you safely withdraw each year and not run out of money?

Your withdrawal decisions will likely be complicated by the wide range of investment products and by the lack of unbiased advice:
  • You may be afraid of making a poor choice and regret it if the outcome is not optimal (for example, to buy or not to buy an annuity).
  • You may want to get professional advice on the best products to allocate risk and generate adequate income for life.
  • As you approach retirement, you’ll need to time your decision as to when to reduce investment risk, by reallocating assets.
    • Do it too soon and you sacrifice needed growth. (Can you still afford to retire?)
    • Do it too late and you suffer a loss. (How long until you recover from the loss?)
  • Low interest rates and uncertain stock markets reduce real rates of return.
    • You may need to lower your income expectations.
    • Make sure you examine carefully any products that claim risk-free high returns, as no return is free of risk. Find out what’s hiding beneath the surface.

6. Health and health care costs: Will your health require higher out-of-pocket expenses and if so, how much and for how long?

Don’t assume your provincial seniors’ plan will provide the same level of coverage as your employee health benefits. It likely won’t, and if you’re retiring before age 65, you won’t be covered at all. Ask about private coverage offered to departing employees by your employer’s benefits provider. Compare types and premiums to those offered by other health care providers and against your own list of needs. Have a plan in place before leaving your employer’s benefits plan.

You don’t know how well, or how long, you’ll live, or what your out-of-pocket costs will be for medical services, including home care or long-term care. In addition to health care premiums, it’s prudent to include an amount for out-of-pocket expenses in your budget.

70% of total health expenditures are paid by the public sector.

The remaining 30% is covered by the private sector, with half paid out of pocket by Canadians.

Are you part of the small percentage of Canadians who will receive health care benefits from your employer? Don’t assume all your medical expenses will be covered by these plans either. Read the plan details to discover what you will, and will not, receive. Some plans end their coverage at age 65 or limit benefits for the surviving spouse/partner if the retiree dies first. Check out deductibles, co-pay or retiree health care spending account details. The latter may deduct a premium for an associated health security plan, or “catastrophic drug” plan. This plan picks up the annual cost of drugs not covered by a provincial seniors’ drug plan, once you have met the deductible.