We’re living longer these days and that can mean spending more years in retirement—which means making decisions about retirement goals
By Olev Edur
We’re living longer on average than ever before, and that’s undeniably a blessing. That growing lifespan, however, has major implications for our personal and financial well-being during a retirement that could last 20 or more years, and that’s the subject of a fall 2018 report released by the BMO Wealth Institute.
Based on online survey responses from 505 Canadians aged 55-plus and supplemented by data from Statistics Canada, the report looks at the effect that our increasing longevity is having on the concerns of the postwar baby boomer generation (those born between 1946 and 1965).
The report notes in its introductory comments that life expectancy for Canadians today is 79 years for men and 83 for women. According to 2016 census data, that has led to a 20 per cent increase in the number of us aged 65-plus since 2011, compared to growth in the general population of only five per cent. “In 2016, for the first time in Canadian history, there were more people aged 65 and over than children under 15 in the population,” the report states.
One surprising trend revealed in the report is that while we’re all living longer, some of us much longer than even those averages, we’re still spending about 15 years on average in retirement—not much longer than in the past. “While advances in medicine, health, nutrition, and fitness have extended the lifespans of Canadians, the number of years they spend in retirement has not changed much over the last generation because they are also working longer,” the report states. “The average age of retirement in Canada was about 64 in 2017 and retirement age has been slowly increasing for more than a generation.”
The report cites census data showing that as the population ages, about one in five seniors is continuing to work in retirement, twice the number who did so only 20 years earlier. Canadians with bachelors’ degrees or higher levels of education, and those without employer-sponsored pension plans, were much more likely to continue to work beyond the age of 65.
Undoubtedly many of those without pensions are continuing to work out of financial necessity, but past studies have also shown that many have other motives—a desire to keep active, the need for challenges, or even the wish to continue work-related social connections. Nevertheless, financial concerns often underlie even some of these people’s choices.
“Many Canadians address these concerns by staying in the workforce or by earning self-employment income rather than relying on accumulated retirement savings,” the report suggests. “From a financial-planning perspective, earning additional employment income beyond a ‘normal’ retirement age has a very positive impact on helping retirement funds to last longer and achieving retirement and estate-planning goals.”
Indeed, on top of whatever social and psychological benefits may accrue from continuing to work beyond age 65, there are doubled financial benefits: you have more time to accumulate savings for sustaining those later years while the amount of time those savings will be required to fund is shrinking.
Health Care Is the Top Concern
Asked about their biggest concerns in general, the most frequently cited concern among respondents was about future health-care costs and whether health problems will affect their quality of life (reported by 51 per cent of respondents, and followed by running out of money at 47 per cent). This was despite the fact that our health-care costs are supposedly covered by provincial health plans.
According to Frederick Vettese (the former chief actuary at Morneau Shepell), such fears may in many cases be overblown. As he wrote in his book Retirement Income for Life: Getting More Without Saving More (check out our review): “The majority of people will never need long-term care, and many of those who do will need it only for a relatively short period of time, like one or two years.
“The chances that the cost will be catastrophic are exceedingly slim in Canada because our universal health care system covers most of the big ticket items,” Vettese added. “About the only really expensive health-care expenditure that might not be covered are certain new drugs that can cost $1,000 a month or more … though fortunately the need does not arise that often.”
However, Chris Buttigieg, the director of the BMO Wealth Institute, points out that while we are indeed covered by provincial health plans, there are exclusions or omissions that can leave individuals and couples vulnerable. “Certain items are not covered, so it still can be quite expensive to receive care that lies beyond your provincial coverage,” he says. “For example, long-term institutional care may last only a year or two, but even two years can be quite expensive.”
And although in-home care can be a less costly alternative than institutional care, even that option can cost plenty, assuming it’s a viable option. A dementia patient’s costs for a single year of in-home care could amount to $35,000; institutionalized care costs would range well upwards from there. “In that case, a couple has two households to maintain: one in the long-term-care facility and the other trying to maintain their family home,” Buttigieg says. “That’s a big cost.”
Furthermore, the BMO report found additional health-care costs may stem not only from baby boomers themselves, but also their parents: “The baby boomer generation is in the unenviable position of worrying not only about themselves, but also about the health-care costs of their parents,” the report authors state. “With longer lifespans, blended families, and remarriages, the sandwich generation has been further stretched and is now less like a traditional sandwich and more like a 12-inch sub.”
Other Areas of Concern
Fears about becoming a burden on family members were also high on the list of concerns (40 per cent). Being lonely later in life was feared by 20 per cent of respondents, and not having anything to leave heirs was mentioned by 14 per cent of those surveyed. A similar number (13 per cent of respondents) worried about becoming a victim of abuse, neglect, or fraud.
For one in three Canadians aged 55 or over, the most important family-related concern was helping their children now, rather than providing assistance later through an inheritance. This was followed by concerns about the standard of living of their surviving spouses (28 per cent of respondents) and maximizing the value of the estate that can be passed to heirs (15 per cent). Concerns about managing the personal finances of surviving spouses and families were cited by nine per cent of those surveyed, and the management of day-to-day finances in retirement was cited by seven per cent.
The survey also asked Canadians aged 55 or over to list their most important concerns from an investment and retirement perspective, and three answers were cited most frequently: a desire to maximize retirement income (highlighted by 25 per cent of respondents), a concern about how long-term-care costs will affect personal finances (23 per cent), and worries about outliving their savings in retirement (22 per cent). Other concerns included worries about diminished capacity (13 per cent), reducing taxes (eight per cent), and estate matters, specifically about who would make financial decisions after they die (seven per cent).
The report stresses that for most of their retirement years, Canadians enjoy good health and an active lifestyle: “On average, it is not until the age of 77 that declining health limits those activities and increases the need for health care. Living an active lifestyle in retirement is enjoyable, and can promote better health as you age. This is not limited to physical activities, but also includes engaging in rewarding social interactions. For many, volunteering can provide purpose, camaraderie, and a way to learn new skills.”
Disagreement Over Goals
One disturbing finding of the survey was that quite often, significant differences of opinion existed between spouses or partners regarding their goals. Fewer than half of respondents (41 per cent) reported no major differences in opinion on financial matters. Saving for the future was the subject of disagreement cited most frequently (by 22 per cent). Other disputed issues included retirement goals (20 per cent) and how personal assets and possessions should be distributed to heirs (16 per cent).
“That translates into a lot of arguments,” Buttigieg observes. “There is no meeting of minds over issues like how much to save, or about retirement goals and aspirations. Do you want to travel? Play golf? Go into consulting work? Does one partner want to spend more time together while the other wants to play golf all day? It’s very important to have these discussions. How do you want to spend your retirement? Or, if you have a business, who is going to succeed you?”
“Living longer does not necessarily mean that Canadians will be unable to afford to retire,” the report states. “However, it does mean that thoughtful and effective financial decisions should be made about retirement and estate-planning goals, savings strategies, and tax planning in order to have the long and fulfilling retirement that most Canadians want.”
As Vettese pointed out in his book, many of us overestimate our cash needs in retirement and end up scrimping unnecessarily. “Some retirees outlive their money,” he wrote. “An even greater number deliberately underspend for fear of outliving their money.
“The vast majority of those from middle-income households who retire with enough income to replace 65 to 75 per cent of their final average earnings end up with a much higher standard of living in retirement,” Vettese wrote. “An astounding four households out of five in this category improved their living standard by 20 per cent or more. In some cases, the amount they had available to spend doubled!”
Buttigieg agrees that underspending—and the privations it can create—can be a difficult habit to overcome. “People spend many years working and accumulating savings, and now they have trouble with spending those savings,” he says. “It’s a mindset geared to saving, but now you have to switch from saving to spending, and there’s a huge psychological barrier.”
All the more reason to develop a detailed plan that addresses all aspects of your retirement finances and goals, alongside your partner’s where applicable, Buttigieg adds. “Especially given the upward trend in longevity, it’s very important to have a comprehensive financial plan for your retirement years.” He notes that planning can provide valuable peace of mind if your finances are adequate, and allow you to develop alternate strategies if there will be a shortfall.
“If one of you were to need to move to a long-term-care facility, how much of your savings are going to be depleted?” Buttigieg asks. “The surviving spouse will have that much less to live on. We would suggest being proactive by adding more to your savings or contributing to a certified health plan or buying long-term-care (LTC) insurance.
“It’s always better to be proactive than reactive,” Buttigieg adds. “If you try to react to a crisis after the fact…, well, you can’t put insurance in place after the fact. If you work with a professional planner, you can run different what-if scenarios. It will all affect your planning.”