The risk of longevity, you know? In concrete terms, this means that you used up your savings before you die. A risk that is more present than ever with increasing life expectancy.
Ideally, if you retire at age 65, you should plan to have enough savings ahead of you for 20+ years. Because today the life expectancy of a 65-year-old man is 86 years and that of a woman 89 years.
In addition, to account for the probability of survival and to protect their clients from this risk, financial planners typically forecast up to age 94 for men and 96 for women.
What strategies can we use under these conditions to prevent our money from surviving? Dany Provost, financial planner and head of financial planning and tax optimization at SFL Expertise, lists some possible solutions.
1. Life Annuity
To protect yourself against the risk of longevity, you can take out a lifetime annuity with an insurer. To the latter we pay an amount and in return he pays us an annuity to the end of our days, regardless of the age of our death.
“It amputates our capital, but we have peace of mind. We often use a mixed strategy: the annuity covers basic needs and we keep cash in another account to give us flexibility,” explains Dany Provost.
He mentions that this type of pension is a good tool for people in good health, but less interesting for those whose health is precarious. However, the latter could, under certain conditions, purchase a ‘targeted risk pension’, which would allow them to receive a higher pension because of a serious health problem that reduces their life expectancy.
“People often misunderstand annuities. In contrast to a guaranteed deposit, for example, the capital is never exhausted with this type of annuity. It’s only at the end that we can really assess profitability,” says financial planner Dany Provost.
2. Review your investment portfolio
When you start withdrawing your wealth in retirement, you must avoid investing it entirely in the financial market. “We need to think about it three or four years before retirement and move some of our portfolio into low-risk assets to protect our wealth,” says Dany Provost.
He points out that while a good way to counter longevity risk is to get a good return on your investments and therefore invest in the stock market, the latter is riskier. It is therefore necessary to take your own risk tolerance into account and, if necessary, to resort to more cautious investments when paying out.
3. Forecast Costs
If you can already estimate certain expenses that you will face in retirement, such as changing your car every five or six years, you should include these amounts in your financial planning. “This way you avoid nasty surprises and need to draw on your savings beyond what you planned,” says Dany Provost, adding that regular review of the plan should also be done. “It allows you to reassess the situation and potentially reduce certain expenses so you don’t run out of savings too quickly,” he says.
4. Determine a payout strategy
Optimizing the payout of your wealth (TFSA, RRIF, unregistered investments) is another great way to extend the life of your savings.
“The general idea is not to unnecessarily increase the tax burden while avoiding income below the zero-tax threshold,” notes Dany Provost. Below this threshold we lose certain credits, such as B. Personal Base and Retirement Credit, which could allow us to minimize tax on RRIF (registered retirement fund) withdrawals.
For the withdrawal order itself, you need to calculate well, because choosing one scenario or the other can make a big difference in the end. A financial planner can help you create the strategy that works best for you.
“We will test the different scenarios depending on the taxation to determine the most advantageous,” specifies Dany Provost.
5. Defer your QPP and PSV pensions
If your income allows, or if you continue to work, deferring your Quebec Pension Plan (QPP) benefits beyond age 65 increases the amount you will receive until the end of your life. By shifting the QPP to age 70, you could increase it to a maximum of 42%. The same strategy for retirement savings, with a potential bonus of 36%.