Leading experts unpack risks confronting today's retiring Canadians, and how wealth industry must step up to the plate
With longer life expectancies, a decades-long demographic shift, and inflation risks all coming to the fore, it’s past time to rethink the problem of retirement planning in Canada.
That’s the call to action from two of Canada’s leading retirement experts at the Wealth Professional AdvisorConnect webinar last week titled “Examining the Strategic Planning & Solutions Needed for a Sustainable Retirement.”
“A lot has changed as we think about what's different from a few years ago,” Fraser Stark, president of the Longevity Retirement Platform at Purpose Financial, told the 170 advisors in attendance at the virtual forum.
Looking across Canada’s retirement income landscape, Stark sees a number of risks. Apart from the fundamental challenge of people’s variable lifespans, he said retirees today have to grapple with inflation potentially eroding their nest eggs at a much faster pace. Beyond that, he noted, is the more limited access today’s workers have to defined benefit pension plans.
Moshe Milevsky, chief retirement architect at Guardian Capital, noted how Canadians’ life expectancy at birth has changed from roughly 72 years in the 1970s, to 82 years today. Over the same timeframe, the number of people above 65 years old in Canada has shot up from around one million to seven million; as a share of the population, they’ve grown from around 5% to between 20% and 25%.
“If you go back to the 1970s, you had eight people working between the age of 15 and 65 per one person that was retired … Now you do the exact same analysis, it's not eight to one, it's about two and a half to one,” Milevsky says. “It's a new ballgame. We have to think differently about how to deal with this.”
Even amid the shifting sands of retirement planning, Stark says most Canadians are continuing to hold their nest egg in a balanced portfolio of stocks and bonds, whether it’s in registered or non-registered retail accounts, with investment advisors helping to compile those investments. What’s getting overlooked, he says, is the need for people to protect themselves against their own longevity risk.
“They're not using lifetime annuities. They're not using other products available to them,” he says. “What that means is that in effect, they're self-insuring against the risk that they live to be a very long time. They're approaching this from an accumulation mindset and not mentally shifting into the decumulation framework.”
While people on average may be able to satisfy their retirement income needs through CPP, OAS, and GIS along with the government’s various tax credits and the ability to split income, Milevsky argued there’s still a group of people who need more to avoid a decline in their standard of living during retirement. And while one could attempt to forecast life expectancies today based on the fraction of people who lived up to age 100 in previous generations, black-swan events like COVID and disruptive innovations make it impossible to know for sure.
To address the problem, Stark said, will require a concerted effort among stakeholders. Asset managers can play a role by offering innovative products that protect for the chance of someone living a long life. Education by advisors and firms – particularly to spread awareness of the risks arising from variability in returns, inflation, and longevity – is also key.
One possibly overlooked solution, Milevsky suggested, is the use of longevity risk pooling – essentially, people putting their resources together in a common pot of investment, which will be distributed over time. A crucial piece to that is allowing so-called mortality credits to accrue to the participants in the pool who live the longest, thus offsetting the risk of their outliving their source of retirement income.
“Many of your clients [as an advisor] are going to be living off of their RRSP; their spouse is going to have an RSP, and they're going to have to convert it into a RRIF at the age of 70,” Molevsky said. “[If] they have no pooling whatsoever other than CPP, which only covers a little bit, they're candidates for more longevity risk pooling.”
But what should be at the heart of it all, Stark said, is the need to build a financial plan that accounts for all possible outcomes. Beyond constructing a portfolio with a target rate of return and income, he said a plan should incorporate different considerations and critical life elements – not just solving for expenses and liabilities, but also for quality of life.
“You could spend more in retirement by taking on some risk pooling … you could take on more spending safely while you're retiring. Maybe in the early years, you can live life larger – go on more trips, play more golf, whatever it means to you – knowing that that it will mean somewhat less [ultimately flows] to your estate,” he said. “I think that's a trade a lot of people would take if explained to them.”
To discover all the insights and learnings from this informative AdvisorConnect webinar on retirement planning, click here.
