Statistics Canada recently reported a significant increase in the proportion of older people. According to 2016 census figures released in May, seniors in the country outnumbered children for the first time. And that could be a concern especially given increasing pressure on retirement incomes.
One issue is longevity. “Currently, a 65-year old can expect to live for about 21 years,” said Jason Heath of Objective Financial Planners in a piece for the Financial Post. “By 2050, the Office of the Superintendent of Financial Institutions estimates 65-year old Canadians will have a life expectancy of 23 years.”
Heath acknowledged that Canadians are retiring later on average, with the average retirement age currently at 63 — one year later than the age of retirement in 1992. But he estimated that working until age 63 instead of 62 is just a 2.3% increase in working years assuming one enters the workforce at age 18, while an extra year of life over a 23-year retirement is a 4.3% increase in retirement years.
Another issue is the decline in defined-benefit (DB) plans as fewer companies opt to provide DB pension coverage. In the absence of forced savings, more people have to proactively set money aside for retirement. “Unfortunately, when tasked with saving independently, workers often forgo optional savings in favour of the urge to spend,” he said.
Interest rates are also an issue as they impact returns from fixed-income investments. He noted that 3-month T-bills currently yield 0.7%, compared to total CPI inflation of 1.3%. Over a long-term perspective, “T-bills are paying less than one third of the returns they have earned for investors over the past 20 years,” he said.
Citing the Financial Planning Standards Council
(FPSC), Heath said long-run stock returns are still between 6% and 7%. However, older investors still tend to favour bond exposure because they have a preference for certainty. He also noted research from Texas Tech University suggesting that seniors “face declining cognitive abilities over time, which corresponds with a decrease in investment performance and financial literacy skills.”
Finally, investment fees are also causing struggles in retirement funding. While Canadian mutual fund fees are now typically between 0.5% and 2.2%, Heath said they still take a significant bite out of returns given the compression from falling interest rates. “This is even more pronounced for retirees who are shown to have an increased exposure to lower yielding bonds as they age,” he said.
The trends translate into several lessons for investors and advisors. If interest rates stay low and asset prices stay high, asset accumulation targets and decumulation plans have to be reconsidered. “It’s also important to consider that a 65-year old husband and wife have a 25% chance that one of the two spouses will live to 97 years of age,” he added.
According to Health, the increased role of private savings also makes retirement planning more important to focus on than product or security selection. Finally, he said, investment fee compression and increasing investment options are crucial in a low-fee environment where increased exposure to low-risk options could make retirement more expensive.
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