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Longevity Risk

Longevity risk corresponds to the financial risk associated with living a life that lasts longer than you expected, therefore outliving your savings.

Charlotte, for example, will turn age 65 in 2020. She based her retirement plan on her life expectancy to make sure that she would have a proper income for 24 years, that is, until she turns age 89. She therefore has enough savings to maintain her lifestyle for an average life expectancy. There is, however, something that she did not realize: she has a fifty fifty chance of not having enough money saved! To be fairly certain that she does not end up in that situation, Charlotte should have had enough savings to last until age 110. The sum of her retirement assets should have been enough to provide income for 45 years.

As demonstrated in our example, exorbitant savings are needed to eliminate longevity risk completely. However, you can decrease it without having to make too many concessions. Here's how:

  1. Plan your retirement savings properly

    • A good preventative measure consists of "hoping for the best, but planning for the worst".
    • You need a plan to accumulate assets, but also a plan to withdraw them.
    • As your retirement projects become a reality, your financial plan must be followed closely and adjusted. Should something unexpected happen, the pace of withdrawal of your assets must be adjusted rapidly to limit the adjustments necessary to maintain the projected withdrawal period.
  2. Make sure that you estimate your life expectancy accurately

    • Remember that life expectancy has increased over the last decades; we can live over age 80!
    • Look at cohort life expectancy or life expectancy including mortality risk reduction after the year indicated to get a realistic idea.
    • Take into account your actual age instead of looking at the life expectancy at birth, which includes death risks you were exposed to at a younger age. It is important to know that as a person ages, his or her life expectancy increases.
    • Adapt the general life expectancy with your lifestyle and your relatives' age at their time of death. It is realistic to think that you could live at least 5 years longer than your parents did.
  3. Choose the right time to retire to obtain maximum benefits

    • The Québec Pension Plan (QPP) and the Old Age Security (OAS) program let you put off your payments and therefore get higher amounts for the rest of your life. As a result, you will receive a higher pension amount even if you live up to 45 more years. Putting off the time at which you begin receiving your benefits is one of the most effective ways to make sure that you have a minimum income until the day you die.
    • Several supplemental pension plans (SPP) also allow you to increase the amount of your benefits in exchange for the postponement of your retirement.
    • Postponing retirement can also make up for a lack in past personal savings. For each additional month of postponement, the savings period increases and the withdrawal period decreases. Some people can greatly improve their financial comfort in retirement by postponing it by one year. Working one additional year may seem like a long time, but do not forget that you can retire gradually by reducing your working hours.
  4. Convert part of your savings to life annuities

    • In exchange for a premium, insurance companies offer life annuities. The payments are predetermined and paid until death. They eliminate longevity risk on a portion of your income.
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