How Canadians can afford living to 100

Individuals and the government should brace for four specific challenges

How Canadians can afford living to 100
These days, it can be hard to determine whether a long life is a good thing. As the likelihood of becoming a centenarian increases, people stand to face new financial challenges — which they have to prepare for as early as now.

A report from the World Economic Forum (WEF) has highlighted challenges faced by Canadians as they are more likely than ever to live to 100. To address some of these problems, individuals and the government have to take action, according to Jason Heath from Objective Financial Partners.

“The first challenge is increased life expectancies combined with lower birth rates,” he said in an article published on the Financial Post. According to Heath, the ratio of working-age people to retirees is expected to hit 4:1 by 2050 — half the ratio observed today.

Heath said that Canadians need to face reality and acknowledge the statistics: they should prepare for a long life with proactive retirement planning and saving. He also asserted the need for government policies that promote retirement saving, nudge Canadians toward having children, and encourage young foreigners to come to Canada.

The WEF has also highlighted the limitations in easy access to pensions. According to Heath, current Canada Pension Plan (CPP) and Old Age Security (OAS) benefits add up to an average of $14,732 and a maximum of $20,375 per year. In contrast, US Social Security pays up to US$31,668 yearly; considering exchange rates, he said, that’s nearly double the maximum combined payment from CPP and OAS pensions.

In the UK, nearly half a million employers are registered under the government’s workplace pension scheme, the National Employment Savings Trust (NEST). According to Heath, plan member contributions to this fund generally amount to 0.5% or less, compared to the average mutual-fund MER of 1.82% paid by many Canadians without pensions. “Obviously, Canada cannot play catch-up overnight. But we may be falling behind other industrialized countries,” he said.

The third challenge highlighted was the long-term low-growth environment, with future stock returns and bond returns projected at 5% and 3%, respectively. High fees were also flagged as an investment-growth risk.

“Canadian investors need a healthy stock exposure to avoid outliving their savings and reasonable expectations about investment returns,” Heath said. He also said the investment industry has to continue innovating to produce low-fee products.

Finally, the WEF reported that Canada’s $3-trillion retirement savings gap in 2015 is estimated to reach $13 trillion by 2050. “[M]ore than 90% of the shortfall is identified as being unfunded government and public employee pension promises,” Heath said. “When pension promises that were meant to make 20 years of payments need to sustain 40 years instead, formulas and contributions may need to be revisited.”

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