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How to ensure you don’t outlive your money
Life expectancies have never been higher. Here are a few tips for making sure your retirement savings last throughout your lifetime.
According to Statistics Canada, men’s life expectancy in the 1920s was 59, and women’s life expectancy was 61. By the early 1970s, men’s life expectancy had risen to 69 and women’s to 76.
By 2013, the most recent year for which data are available, life expectancies had risen to 80 and 84 respectively. In the 2016 Canadian census, for the first time, seniors outnumbered children and there were 306 000 people nationwide who were 90 and older. So with seniors living longer in retirement, here are some strategies to ensure you won’t outlive your retirement assets.
Estimate your life expectancy
How’s your health? How long did your parents or grandparents live? What is the family history of cancer, heart disease, diabetes and other life-limiting illnesses? If you have a family history of longevity, you stand a good chance of living to a ripe old age.
List all of your financial assets, including your home, pension and other retirement funds (such as a Registered Retirement Savings Plan), other investments such as stocks, bonds, mutual funds, and real estate holdings. Don’t forget to include the value of any life insurance policies. Also, list any debts, loans, or obligations; these amounts are deducted to determine your net assets.
Do you have a pension plan? Employer-funded defined benefit (DB) pension plans, which promise a lifetime benefit amount based on salary and years of service, used to be the gold standard for retirement security. Defined Benefit (DB) plans are very expensive for employers to offer, and in recent years, many employers have converted their registered DB plans to registered Defined Contribution (DC) plans. The pension from a DC plan is based solely on contributions, so your personal savings now have a greater impact on the retirement lifestyle you can afford.
When you become eligible to receive a pension from your employer-sponsored plan, look at all your options and ask your advisor about the benefits of deferred annuities and whether they would make sense as part of an overall strategy.
And did you know…If you delay starting your Canada Pension Plan and Old Age Security until age 70, you’ll receive a 42% larger monthly amount. For each year after age 65 you defer, the benefit amount increases by 8.4%. Even a couple of years can add up to a better monthly amount.
For more financial security, insurance companies offer the option of products that guarantee income for life. It’s a good way to enjoy your retirement without worrying about potential income fluctuations. Contact us to learn more.
Even with a pension plan, you can do more to ensure you don’t outlive your money. Work with your financial advisor to devise a diversified mix of short, medium and long-term investments, with varying levels of risk, such as bonds, stocks, and Guaranteed Investment Certificates with laddered maturity dates.
Drawing down retirement assets
Take care that your drawdown rate (how much you are pulling out from your assets) is less than your rate of return, and factor in inflation. Many advisors recommend withdrawing around 4% of your total assets per year. To be safe, try to withdraw around 3% of your total assets per year.
A good strategy also accounts for the tax rate applied to different investments (for example, capital gains are taxed more favorably than dividends or interest). Withdrawals from Registered Retirement Savings Plans (RRSP) or Registered Retirement Income Funds (RRIF) are included in your income and taxed at your marginal tax rate. So not only will you pay taxes, but income-tested benefits such as Old Age Security and drug benefits, which are based on your level of income, could be clawed back by the government if your income is too high.
That being said, converting a portion of your RRSP to a RRIF when you turn 65 can provide you with a pension income tax credit. If you have a spouse, there could be further advantages. That’s why it’s important to meet with your financial advisor to see which options minimize your taxes and maximize your benefits for the short and long-term.
Anticipate high health care costs
Improvements in health care and prescription drugs help people live longer, but the cost of medical care keeps increasing. If you do not have private health insurance, your out of pocket expenses can run up to thousands of dollars per year according to a 2009 Statistics Canada report. If you need to move to a retirement or long-term care facility, the costs can run $2,000-$3,000 per month—double that if you want a two-bedroom suite. Make sure one of your buckets of money is allocated to cover future health care costs.
Plan your estate
Everyone needs a will, which is the best way to ensure your estate is distributed according to your final wishes. When you die, there will be a deemed disposition of all of your assets at fair market value, and any gains will be taxable at your marginal tax rate on your final return. However, if you have a spouse at the time of your death, your assets “roll over” to them tax-free.
Charitable donations made in the year of death, as well as charitable bequests made in your will, can be used to reduce the amount of income tax owed on the final tax return. A charitable remainder trust provides the donor with enough money to live on, and any remainder is donated to a charity after death. Another simple way to reduce taxes on death is to make monetary gifts while you are still alive.
Your will can establish a testamentary trust to hold assets for a beneficiary. You can add stipulations about how funds are to be used, and limit or grant access to principal and earnings. Those assets become the responsibility of the trust, rather than your estate.
Consider taking out a life insurance policy where the beneficiary is the estate, in an amount that would cover some or all the taxes on death. That way, all of the gross assets can be passed along to the beneficiary, without incurring a huge tax hit.
Take the time to research and document how all of these factors affect you, according to your situation. Developing a solid plan (and sticking to it) will be essential to making sure you don’t outlive your money. That way, you can enjoy your retirement!