Recently I’ve seen an increase in retirement conversations with individuals who only a year ago said retirement was still several years out. The COVID crisis seems to be providing people with extra time to reflect upon what actually matters to them in their lives. What I’ve gathered so far is that people really want more time to do the things they want to do, when they want to do it, whether that’s travel, enjoying lake life, or just spending more time with family and friends.
With this increase in retirement conversations I thought it’d be helpful to look at two of the biggest mistakes people make when evaluating their own retirement:
Underestimating life expectancy
Twenty-five years ago, insurance companies often estimated average life expectancy in and around age 80 for most. Despite the volumes of media coverage generated over recent years about our increasing life spans, many investors still underestimate – often severely – just how long they could live. This can play havoc with retirement plans with little room for error.
At Endeavour Wealth Management we typically design our retirement plans with a life expectancy assumption anywhere from 90 to 99 years of age, which can raise some eyebrows initially. While people get it intellectually, the implications of longevity often catches them off guard.
Running financial projections to age 90 does of course cause the expected annual income in retirement to be lower had you only run the projection out to age 80 or 85. Given modern medicine, we’d rather err on the side of caution then run out of money. I’ll take having a little less money versus completely running out of money any day of the week.
A simple solution for clients who aren’t happy with the retirement income expected based upon a life expectancy of age 99, is to look at a drop in income during the less active retirement years. For example, we might look to drop a client’s target retirement income by 25% once they hit age 80 or age 85, which can help to increase the income available in the more active earlier retirement years.
Underestimating expenses in retirement
Many people assume their expenses will go down in retirement. Our experience as advisors is retirement spending generally winds up staying the same for most part. Just because you are no longer working does not mean you’re going to consume any less.
It’s actually not at all uncommon to see someone spending more in retirement, especially in those earlier years. Today, many retirees are healthy, they travel more, and they're fixing up their homes. Maybe their spending slows in later years, but likely not at first.
It is important when planning for retirement to have a true grasp of your actual expenses. Once you know what you are actually spending today, you’ll have a better idea of what expenses to plan for in the future. Saving expenses or mortgage payments often disappear. But planning doesn’t just stop with the expenses that go away. Retirement comes with added costs as well. These can include health care spending, transportation, and long-term care. It’s important to consider these additional future costs when forecasting what you might spend.
You are never going to be able to be 100% accurate in determining the actual expenses you’ll incur in retirement. Nor do you need to be. With that said, underestimating either your life expectancy or what you’re going to spend in retirement, can lead to some very serious complications with your planning down the road. By giving these items attention and thought, you can avoid exposing yourself to some very serious retirement risks in your future.
- Brandt Butt, Investment Advisor, CIM®
Brandt Butt is an Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Brandt Butt who is an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.