Life expectancy in Canada is on the rise. And, along with that, is the need for more astute retirement planning. Financial planners once based projections on the premise that a couple’s money had to be capable of supporting a 30-year retirement.
That notion no longer fits in an era where many couples expect to retire around 60 and there’s an 18% chance of at least one member of that couple living to 95 or beyond, according to the Society of Actuaries.
University graduates live longer
All this and more is to be found in a report, written by Ian McGugan and originally published in The Globe and Mail (June 8, 2015). University graduates need to be particularly conscious of such huge planning horizons, because they tend to be longer lived than the general population.
Men with a degree tend to live six years longer than men without a high school diploma, according to a 2011 report from Statistics Canada, while women who have finished university live 4.2 years longer than women who don’t get past Grade 12.
People with high incomes also enjoy substantially higher longevity than low paid workers. In a nutshell, these are the clients – actual and prospective – of a wealth advisory practice like The Funke Group.
40 is the new 30
Said Wade Pfau, a professor of retirement income at American College in Bryn Mawr, Pennsylvania who was quoted in the article: ‘When it comes to retirement planning, 40 years is becoming the new 30 years for highly educated, higher-income people.’
As Mr. McGugan writes: ‘Adding an extra decade to your retirement planning spreadsheet isn’t a big deal if you’re one of the fortunate few with an inflation-protected defined-benefit pension plan. For everyone else, though, a longer retirement means a substantial dollop of added risk.’
The 4% rule
Let’s consider the 4% rule. As reported by Selena Maranjian in The Motley Fool (February 24, 2017), a well-established multimedia financial services company operating out of Alexandria, Virginia: ‘The 4% rule has been around for a long time. It was introduced by financial advisor Bill Bengen in 1994 and was made famous in a study by several professors at Trinity University a few years later.
It says that you can withdraw 4% of your nest egg in your first year of retirement, adjusting future withdrawals for inflation. This withdrawal strategy assumes a portfolio 60% in stocks and 40% in bonds, and it’s designed to make your money last through 30 years of retirement.’
But professor Pfau’s new numbers, which include results to the end of 2014 (again, as reported in Mr. McGugan’s article) show that even the supposedly safe 4% rule looks dicey for today’s super-sized retirements. For instance, an investor who stuck to the 4% rule and had a portfolio composed of 25 per cent stocks and 75 per cent bonds would have run out of money more often than not over 40 years.
A further complication
And here’s a further complication. Those downbeat numbers don’t yet reflect the impact of today’s ultra-low interest rates because the most recent 30-year period in professor Pfau’s study began in 1985.
If interest rates remain low in years to come, the success rate from even conservative withdrawal strategies is likely to plummet. Says professor Pfau: ‘I think a 3% withdrawal rate is now much more realistic.’
The bottom line? Retirees have to become more flexible. They should be more willing than past generations to tap into their home equity to fund retirement. They should take a close look at variable-spending strategies, which adjust expenditures in line with actual market results.
Most important of all, perhaps, they might want to consider a serious retirement planning strategy session with their wealth advisor.
Geoff Funke, Senior Wealth Advisor, Scotia Wealth Management, 604.535.4721.