You’re going to die.
And you’ll probably get really sick first and, at the same time, your brain won’t be functioning nearly as well as it used to.
So, on that cheerful note, let’s look more closely at these unavoidable realities from a financial planning perspective.
Canadians live to about 82. But that’s the average. When assessing the durability of your retirement income give yourself some buffer room. What happens if you live five years longer than average? 10 years? If you unexpectedly morph into Betty White then this may strain your financial resources. Canadians retire, on average, at about 64, so that’s 18 years your money needs to last. But assume you’re above average: budget for at least 25 years. This may require adjusting your retirement lifestyle, working longer, saving more or leaving less to your grabby family.
Also remember to ‘accelerate’ your required retirement income. You should always account for inflation, but don’t forget to also factor in your inevitable declining health and the associated rising health care costs. In other words, don’t simply take the income that you’ll need at 64 or 65 and keep this constant throughout your expected lifetime. Research does suggest that discretionary spending declines as we age (we may travel less in our 70s and 80s, for example), which is fair. However, inflation impacts health care costs disproportionately and evidence also supports lower expected investment returns over time, in part due to an aging North American population and persistently low interest rates. Returns on US bonds, for example, have been steadily declining now for decades. I would argue that, even though retirees may spend less as they age, the reduced discretionary spending will be more than offset by rising health care costs, increased longevity and diminishing investment returns (you might, for instance, assume a 7% annualized portfolio return in your first decade of retirement, but lower this to 5% in your second decade). However, it’s those health care costs that loom largest.
According to Fidelity, the average 75-year-old has three chronic conditions and takes five or more prescription drugs. Further, according to the Canadian Institute for Health Information, total health care expenditure in Canada in 2015 was approximately $220 billion, or more than $6,000 per person. Health care spending has also been growing at a 6% annual pace over the past 40 years, well in excess of inflation. While many of these costs are covered by government resources, roughly a quarter are not. Keep in mind also that these costs ramp up significantly as we get older with the average annual health care expenditure tripling or quadrupling by the time you’re in your 80s (see adjacent chart).
Canada per capital health care costs by age
You also have to live somewhere. The above statistics include the cost of physicians, drugs and hospital stays, but they don’t include the cost of care facilities. While these costs are difficult to generalize given that everyone has different lifestyle wants and health care needs, it should be noted that a Canadian long-term care facility providing 24-hour care (also known as a nursing home) can cost as much as $8,000/month (source: Fidelity). Even if you’re lucky enough to continue living in your own home when you’re older, you’ll eventually, in all likelihood, need a regular caregiver. They’re not cheap. A trained nurse, for example, can run 100 bucks an hour. Amazingly, only 25% of Canadian pre-retirees have planned for how they’ll pay for their long-term care (source: Vanguard). This is bad.
Finally, recognize that you may need help with your finances as you age. Only about half of recent Canadian retirees have planned for how they’ll manage their investments throughout retirement (source: Vanguard). People simply don’t want to deal with the fact that their cognitive ability will almost certainly deteriorate over time. Rather not think about it? Well think about the below research from Harvard professor David Laibson. Cognitively, we peak in our early to mid-50s. Naturally there are exceptions, but generally speaking, it’s all downhill from here. What’s particularly telling is how the elderly gradually lose their ability to effectively reason and negotiate for themselves as reflected in the higher interest rates they end up paying for loans and lines of credit. More than 30% of North Americans will experience dementia after age 85, with a much higher percentage experiencing other forms of cognitive impairment. Think you’ll be effectively trading your portfolio in your 80s? Probably not.
If the chance of getting a disease is 10%, how many out of 1,000 will get it?"
Home equity loan and LOC annual % rate by borrower age
Many of you might be saying “I’m perfectly healthy and I’m sharp as a tack”. Good. But it won’t always be this way. Stop thinking you’re special.
You’ll decline. We all will. Prepare for it.