I was lucky enough to know my great-grandmother. I remember her living to the age of 94 — “incredible,” my family would say. But not as incredible as my great-grandfather. Though I never knew him, he lived to the age of 101. Growing up in the 1980s, I recall that someone living to age 100 made the news.
At the time, it didn’t mean much to me, except I grew up thinking that making it to age 90 is almost impossible. Making it to age 100? A miracle. Other than that, I never thought about it much until recently.
As fate would have it, I’m now a pension consultant. When I speak to plan members, one question I ask always brings me right back to the ’80s: “What do you think your life expectancy is?” It never fails. Everyone I ask underestimates how long they’re expected to live.
Do you know what current life expectancy Canadian pension actuaries use in their work? In calculating pension costs, actuaries typically assume males aged 65 will live until about age 88 and females aged 65 will live until about age 90 — and that’s for the average Canadian pensioner. The reality is, life expectancy varies based on individual characteristics well beyond gender alone.
Club Vita, an analytics firm specializing in pensioner longevity, has found Canadian life expectancy at age 65 ranges by more than 10 years when we account for differences in gender, affluence, lifestyle (using postal codes), occupation type before retirement and health at retirement. And these are still just averages.
I recently came across two statistics that blew my ’80s-childhood mind. The chance of one half of a retired couple, both aged 65, reaching age 94 is about 50 per cent, according to estimates from pension actuaries. And the chances of one half of the same couple reaching 100 is 10 per cent. For those with better than average longevity characteristics (based on their affluence, lifestyle, etc.), the chances are even higher.
Canadians’ tendency to underestimate how long they’re expected to live is concerning. How can we plan to be financially sustainable in retirement if we consistently underestimate its length? We must come to the realization that living beyond age 90 will be the case for many of us. As well, living to age 100 won’t be as incredible, and certainly not as miraculous, as it was in the past.
When facing these enormous risks, many retirees struggle with the amount they should withdraw from their retirement savings. Withdrawing too conservatively (i.e., too little) could negatively impact their lifestyle, but withdrawing too much (i.e., too frequently) could increase their risk of outliving their savings. With the shift away from defined benefit pensions beginning in the 1990s, more and more people are finding themselves in this difficult position. One option for removing these risks is an annuity purchase, but most retirees currently don’t do this and leave their money invested in the markets instead.
Personally, I welcomed the federal government’s 2019 budget proposal to legislate the introduction of advanced life-deferred annuities. These deferred annuities will allow Canadians, like my great-grandfather and great-grandmother, to gain peace of mind about living longer, since the annuities will provide a guaranteed lifetime income.
This type of annuity is purchased at retirement. At that time, individuals choose the date at which they’d like to begin receiving annuity income, which can be any date before they reach age 85. This structure enables the retiree to keep a portion of their savings invested in the markets — if they wish to — for several years after retirement, and allows them to draw income as needed, while providing the safeguard of a lifetime income in later years.
As I look to the future, I’m excited about the opportunity we now have to devise strategies to effectively help retirees manage their spending during the earlier part of active retirement differently than during the latter parts. And I’m encouraged these new ways of turning pension savings into income will provide more tools to help people better manage their own longevity risk. To me, that’s a step in the right direction — enabling retirement savings to last to age 100 and beyond.
Simon Deschenes is a principal at Eckler Ltd.