Over the years, many lines from popular entertainment have become verbal signposts in popular conversation and so well-known that no one ever asks ‘What do you mean?’ Who has not heard someone do a Bogey imitation of ‘Here’s looking at you, kid’, (perhaps after a couple of drinks)? Who hasn’t jokingly said ‘May the force be with you’ after a Star Wars movie — or at the end of an evening as a group of friends is wrapping up a get-together, or when a friend is going into a tricky situation?
And how many times have we heard that famous Vulcan line ‘Live long and prosper’?
In real life nowadays, the ‘Live long’ part has become easier. Generally, most of us will outlive our forebears since we know about the dangers of smoking, consuming too much alcohol, poor dietary habits and lack of exercise. We have benefited from improvements in medical knowledge and science as well as techniques in medical care. A recent BMO Wealth Management report says that the current life expectancy is 79 years for men and 83 years for women, and that we live about 15 years in retirement.
The same report says that in 2016, for the first time, we had more people aged 65 and over than under 15 years of age. That has implications for tax revenues and social expenditures, but that is another story for another time.
That’s the ‘Live long’ part.
The ‘prosper’ part involves longevity risk, a phrase that we first heard about 10 years ago. For financial institutions, it refers to how the increasing life expectancy of pension beneficiaries can result in higher and longer payouts by funds and insurance companies.
For individuals, it refers to the potential for living longer than expected for the reasons above, and potential for depleting one’s savings and, in effect, outliving available resources. This can mean living in poverty, depending on relatives, or becoming more dependent on government programs — and for exactly this reason, those programs are going to come under increasing pressure in years to come.
Depending on the individual’s situation, he or she can choose between several strategies:
1. Postponing retirement
2. Going into partial retirement and continuing to work part-time
3. Stretching out the retirement glide path – that is – the period of time between the decision to retire and the actual retirement date; a glide path can be a year or even more and involves serious stock-taking of resources and opportunities
4. Proceeding with retirement as scheduled, but setting up a home business
5. Continuing equity investments for as long as the individual can feel comfortable; this can mean holding equities in the investment portfolio well past 65 years of age and even past the late 70’s. That compares with accepted financial practice in the days of pre-longevity risk when conventional financial wisdom required a sharp reduction in equities at around retirement age
6. Cutting back on non-fixed expenses
7. Paying close attention to the conflicting needs of retirement saving and children’s education expenses
8. Ensuring that your insurance covers you for all reasonably foreseeable emergencies
9. Calculating potential retirement income at least one year — and preferably more — before the projected retirement date; this means adding up the following:
- Projected payments from a company pension plan (where there is one) and estimating the income tax liability on them
- Preparing a conservative projection of how much can be withdrawn annually from registered and non-registered investments, again allowing for the income tax liability; this calculation is more complicated than it sounds since it can involve different tax calculations on different asserts and stock market assumptions
- Understanding government benefit programs
All of this produces a complex two-way financial tug between the understandable feeling of entitlement and wanting to cut loose in retirement on the one hand, and the need to stretch out finite resources on the other.
Most of the above strategies are effectively carried out in consultation with a trusted financial advisor who is totally aware of the client-investor’s needs and plans as well as the investment portfolio.
How to make sense of all of this?
An approach that I strongly recommend is asking the financial advisor to calculate a ‘safe’ retirement monthly figure that can be withdrawn from investments held outside of the pension plan. The figure should take into account anticipated taxes, conservative investment growth, portfolio volatility and a lifespan of at least 10-15 years longer than typical in the client’s family.
To that figure, add company pension plan payments, government benefits and other sources of income.
Then reconcile that figure against the retirement budget, including fixed expenses, lifestyle plans such as travel and, where applicable, elder care and continuing education expenses for dependent children.
If the first figure is larger than the second figure, no adjustment is needed. If the second figure is larger than the first, some adjustments will become necessary.
The ‘Live long’ part is only partially within the individual’s control and involves at least some self-discipline. The ‘prosper’ part requires work, usually with an advisor, and is more within the individual’s control.
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