Online:
Visits:
Stories:
Profile image
By Greater Fool (Reporter)
Contributor profile | More stories
Story Views

Now:
Last Hour:
Last 24 Hours:
Total:

No country for old investors

Saturday, March 11, 2017 12:18
% of readers think this story is Fact. Add your two cents.

(Before It's News)

DOUG By Guest Blogger Doug Rowat

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

Source: CIHI. 2013 data.

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?"

Source: David Laibson, Harvard University, 2009
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.

Doug Rowat,FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.


Source: http://www.greaterfool.ca/2017/03/11/no-country-for-old-investors/

Report abuse

Comments

Your Comments
Question   Razz  Sad   Evil  Exclaim  Smile  Redface  Biggrin  Surprised  Eek   Confused   Cool  LOL   Mad   Twisted  Rolleyes   Wink  Idea  Arrow  Neutral  Cry   Mr. Green

Top Stories
Recent Stories
 

Featured

 

Top Global

 

Top Alternative

 

Register

Newsletter

Email this story
Email this story

If you really want to ban this commenter, please write down the reason:

If you really want to disable all recommended stories, click on OK button. After that, you will be redirect to your options page.