Will you be a centenarian?

Don’t think you’ll live past age 100? More than 50,000 people across North America already have, says Dan Anders.

What’s more, the number of centenarians (people aged 100 and older) in Canada is rising. Statistics Canada predicts there will be more than 17,000 centenarians in Canada by 2031, and close to 80,000 by 2061. As of 2011, there were 17.4 centenarians for every 100,000 Canadians. It’s also been one of the fastest-growing segments for nearly 40 years.

So Anders, a retirement and estate-planning advisor in Vancouver, says if you aren’t realistic about your life expectations and income needs, you’ll run out of money.

Anders knew a man who’d led a successful career as an oil and gas executive in Calgary. That man should’ve had a comfortable retirement. But, after his wife died in her late 70s, he loaned significant sums to five of his six children without drawing up legal agreements.

Each child promised to pay him back, but never did. As a result, the man was cash-poor, and had to downgrade to a studio apartment. He became so broke, in fact, that he couldn’t even cover basic expenses, and began depending on his daughter — the only child who never borrowed from him.

That man lived into his late 80s, so he struggled financially for nearly a decade.

This may seem like a one-off situation, but an increasing number of clients are choosing to gift money while alive, even as they live longer.

Choosing a plan’s end date

Anders asks retirees to consider how they’ll fare financially if they live to age 95, or even 100.

Your financial plan should include your net worth, retirement cash flow projections and long-term care plans. He encourages investing in segregated funds, annuities and guaranteed minimum withdrawal benefits (GMWBs), as well as long-term care (LTC) and critical illness insurance.

Living even longer

Chris Buttigieg, senior manager of Wealth Planning Strategy at BMO Financial Group in Toronto, says, “There used to be a higher likelihood you’d have someone caring for you as you aged.” But now, if you have only one child, that’s less likely. “This is a problem since parents need help emotionally, financially and physically, even while their kids have their own kids.”

When calculating people’s needs, he stretches current income over longer periods, and looks at CPP and OAS trends. He notes that these programs typically account for only 25% of retirees’ incomes.

Key income sources

Many retirees prefer low-risk investments, such as GICs, but those offer returns of only 2% or less. Consider preferred shares, blue-chip dividend stocks, real estate investment trusts (REITs) and mortgage investing to help boost returns before and during retirement.

Some say this switch is short-term, but even when interest rates rise, “it’s still going to be difficult to make good real rates of returns, minus inflation, on GICs,” says Anna Knight, an advisor with International Capital Management in Toronto.

“In the 1980s, when they offered returns of 14% or 15%, inflation was also very high. Over the long-term, even retired clients are better off in blue-chip dividend-paying stocks than GICs.” Currently, many of her clients are depending on pensions, savings and real estate until interest rates rise.

If you need a boost beyond that, she suggests you can invest a small portion of your funds in vehicles such as life annuities, which offer guaranteed income, or GMWBs, which allow for income growth.

The amount invested, she adds, “depends on [your] essential financial needs. If a couple is retiring and has some guaranteed income, then we focus on making up the difference.”

If a couple has no guaranteed income, and are at risk of running out of money, then Knight will reallocate their investments so that 80% to 90% of their income needs are met through guaranteed sources. She would never put 100% in such vehicles, however, since doing that would limit liquidity and portfolio growth.

If interest rates go up, says Knight, and if you aren’t locked into annuities, consider adding exposure to floating-rate loans, given that their yields will rise.

You should also maintain positions in dividend-paying stocks, and can look at adding exposure to interest-rate sensitive parts of the market, such as the financial sector.

A look at GICs

Bruce Cumming, investment advisor at HollisWealth in Oakville, Ont., also predicts GICs and other traditional retirement vehicles will fall out of favour as people live longer.

Before you turn 65, he suggests investing in 60% equities and 40% traditional fixed income. At this stage, invest in “predominantly large-cap exchange-traded funds (ETFs) with management expense ratios (MERs) of 10 to 15 basis points.”

Also, ensure you maximize registered accounts. When you hit 65, move your “40% fixed income allocation to a life-only annuity. I can sell an annuity at 6% to 7% cash flow for individuals and just below 6% for couples.”

That’s preferable, he suggests, because “if someone is withdrawing their money on a 7% basis and their assets are being invested at 2% in GICs, they could run out of money in 16 to 17 years.”

The catch with annuities, however, is people will have to “forfeit the capital [invested] if they and their spouse die young. That’s not a good scenario, but at least they’ll have had peace of mind from knowing they’d never run out of money.”

If you fear losing capital through annuities, or if you and your spouse have checkered health histories, Cumming suggests 20-year term-certain annuities. That way, “if a client gave me $1.7 million today, I could start delivering $10,000 per month for the next 20 years on a fully guaranteed basis, and less than a third of that money would be taxable, since it’s deemed return of original capital.”

Protecting capital

So that you don’t have to dip into savings to cover health expenses, Anders recommends LTC insurance. But you should purchase it prior to retirement, preferably in your 50s; otherwise, it’ll become too expensive. “Around ages 90 to 95, I don’t know anyone who isn’t in need of care, either through home care or within a facility.”

In Canada, the cost of long-term care per year varies based on where you live and your income and, for couples, whether both spouses are receiving care. In B.C., Alberta, Saskatchewan and Ontario, couples can benefit from income splitting if only one spouse requires long-term care.

Still, without insurance to cover the cost, you will be left with little disposable income and will deplete any savings you have left to cover extra expenses. For example, Canadians over age 65 pay an average of $5,391 a year on out-of-pocket medical costs, according to a BMO Wealth Institute survey.