What if somebody told you your retirement would be a short one?
You wouldn’t save as much, would you? You might even start spending a bit more. If you know you’re not going to live a day past 70, why keep putting money in your RRSP?
In some financial plans, there is a one-size-fits-all method to retirement savings, erring on the side of conservatism and plugging in a life expectancy of 90 or even 100.
But is it possible to pinpoint how long you’ll live? And base a financial plan on it?
The British government seems to think so. They announced in April plans to give guidance on individual life expectancy to help citizens plan their savings, concluding how much you have and how long it has to last are pretty crucial to the planning process.
Tom Perls, a doctor and a professor at Boston University who specializes in centenarian studies, says similar information is readily available to Canadians online.
“You can get a ballpark figure about the direction you are heading,” said Dr. Perls who is behind the website http://www.livingto100.com. “In terms of financial planning, am I going to live to my 60s, 70s, 80s, or 90s? You want to know whether you have a shot of getting into your 100s.”
Dr. Perls says most people should have the ability to get close to 90, based on the genes we have all been endowed with. It just means giving up the obvious things like smoking and red meat while adding exercise. He says there is a heredity factor but that only kicks in when you are talking about getting closer to 100.
“You think of 90 and that’s 25 years beyond the age of 65,” he says, advocating people with chronic ailments talk to their specialists about their life expectancy. “You can get an idea from your doctor, given where you are with treatment. If you have a particular illness that you are concerned about impacting life expectancy, then you talk to a specialist with a long experience with patients. They’re not going to give you a date but they know how long people live with your issue.”
Getting a handle on the date dramatically changes how much you need to save, says Clay Gillespie, a Vancouver-based certified financial planner with Rogers Group Financial.
It might, for example, make you decide to take your CPP payments at an earlier age, perhaps as young as 60 — your monthly payments may be smaller but it might not be worth it to you to wait for higher payments that kick in if you wait to age 70.
Mr. Gillespie ran the numbers and someone making $50,000 today needs to only save $165,658 in today’s dollars if they know they’ll be dead at 70. Take that person to age 100 and it jumps to $694,532.
This information is important but it only provides a rough estimate — you really have to plan with a conservative bent, Mr. Gillespie says.
“The problem with me is I do have a bias. Running out of money before you die is a real problem for me,” says Mr. Gillespie, adding you always want to be updating your plan and targets based on new health events.
He strives to take some of the emotion out of these discussions with clients.
“Just because your father died at 50 doesn’t mean you are going to die at 50,” says Mr. Gillespie.
He says people have a misunderstanding of what life expectancy means to them from a planning perspective. “It’s not just how long you are expected to live, [some] will live to that number,” says Mr. Gillespie, adding what are you going to do when you live beyond that age?
The issues becomes even more complicated fo ra couple who have integrated their finances and must have money set aside in case even one of them gets closer to 100 — a much stronger possibility.
“You put two distinct life expectancies together and you increase the odds of one living beyond their life expectancy,” says Mr. Gillespie.
For example, a 65 year-old today has a life expectancy of 84. He has to plan for 19 more years. His wife is 65 and she has to plan for 21.5 years based on life expectancy of 86.5 years. Put together, life expectancy will have one of them alive in 26 years.
As an aside, the male has a 30% chance of reaching 90 and the female 41%. Together there is a 58% chance that one of them reaches 90.
He does factor in people’s personal health history after considering the general population. “You have diabetes, for example. There are a bunch of things that can affect life expectancy. You do have have to overlay that,” says Mr. Gillespie.
The debate over how much you need to save based on your health also has to factor in what type of estate you want to leave your family. If your plan is to leave nothing, that changes everything.
“Unless people ask for it, part of my job is not to leave a big estate,” says Mr. Gillespie.
Tom Hamza, president of the Investor Education Fund, says one of the factors around life expectancy is how quickly it is changing.
In April, the Canadian Institute of Actuaries put out the first-ever mortality tables based solely on the Canadian pensioner experience. Those tables show Canadian life spans have improved much faster than anybody had anticipated.
“The issue we have is the change has been rapid,” said Mr. Hamza. “You can say that as a percentage of your life, life expectancy has gone up 10% in 40 years and who knows what the future will hold.”
Under the old U.S. standard, a 65-year-old man in 2014 had a life expectancy of 19.8 years but with the new mortality table and improvements, his life expectancy is now 22.1 years. A 65-year-old woman jumped from 22.1 years to 24.4 years.
In just the last 10 years, life expectancy at age 65 increased by two years, according to Canada’s chief actuary, double the rate of growth in any previous decade.
And it is forecast to jump from 21 to 24 years for men and 23 to 26 years for women by 2075.
Medical costs are another variable you might want to factor into the equation and they are very hard to predict, says Mr. Hamza.
“Conservative financial planners are going to err on the side of caution and probably properly so,” he said. “It’s better to have extra when you die than to outlive your finances.”
Fred Vettese, chief actuary of Morneau Shepell, says spending habits shouldn’t change even if you think you have a handle on how long you might live.
“You can’t spend everything in your 60s because you may well live past that,” he says “For the vast majority of people, they just don’t know.”
You can go to an online life expectancy site today and it might tell you you’ll live until 85 but, ultimately, it can’t really change your financial plan, says Mr. Vettese.
“Any actuary will tell you there is a possibility you’ll still live another five or 10 years past that. How can you plan on that? You may not expire at 85, you may live longer.”
5 big things that determine how long you will live — and how much that’s going to cost you
It’s not as hard to make it to 100, as you think.
Statistics Canada says there were 5,825 centenarians in 2011, up from 3,795 just a decade earlier. By 2061, the federal agency estimates close to 80,000 people will reach the century mark.
So how do you make sure become a statistic?
Dr. Thomas Perls, a professor at Boston University and an expert in the study of centenarians, says there are five major things that determine how long you live.
1. Stop smoking. There’s no bigger guarantee of an early exit. StatsCan says one in five of were still smoking in 2012. “When I hear someone died at 65, I would say seven or eight times out of 10, I’m right in saying ‘they died because of smoking,” says Dr. Perls.
2. Being overweight is a killer. “Are you fat?” You need to ask yourself that, says Dr. Perls.
3. How much do you exercise? Regular exercise will go a long way towards longevity.
4. What type of food do you eat? Diet is tied to No. 2 but some foods all on their own will contribute to an early exit from life. “Try to minimize meat, be more vegetarian or eat fish and fresh vegetables,” says the doctor.
5. Your family history is the final piece and what might surprise some is that it comes after all the others. “That longevity in your family will take you from your late 80s until your early 100s,” says Dr. Perls.