July 16, 2019

How to make the right pension decision when longevity is so variable

With the average life expectancy ranging from the mid to late eighties, yet, in reality, could be much more or less, Canadians planning to retire have to make decisions about where their retirement income will come from. You need to figure out where you stand to lose money on your household balance sheet should you or your spouse lives longer than expected. You need to know how much cash flow you will have and plan your budget. Having a financial plan in place for any situation will take away the stress and uncertainty.

Key Takeaways:

  • The average Canadian woman lives 21.9 years in retirement, and the Canadian average man lives 18.9 years in retirement.
  • To help reduce the risk associated with using the average life expectancy in financial planning the 25% probability of survival is used, not the 50% probability provided by average life expectancy – as “forecasting a longer life expectancy offers protection from future improvements in mortality and accounts for the greatest financial risk to an individual: longevity risk.”
  • When you shift your focus from projections and probabilities to risks, dependencies, and contingencies, then the goal of financial planning is sometimes not be to maximize the funds paid out of a pension, but rather to reduce the risk on your household balance sheet.

“The real value of financial planning [is] it helps reduce uncertainty—not by making highly exact predictions, but by identifying financial vulnerabilities and dependencies, and ways to effectively address them.”

Read more: https://www.moneysense.ca/columns/ask-moneysense/longevity-is-so-unpredictable-and-variable-so-how-do-you-make-the-right-pension-decision/

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