Longevity risk

For 50 years, life expectancy at age 65 has increased by approximately 6 years and should increase by approximately 3 years over the next 50 yearsSee the note 1. An increase in life expectancy means that retirement is longer, which means that you will need income for more than 20 years if you retire at age 65. The longevity risk therefore corresponds to the financial risk associated to the possibility that you will live longer than expected and outlive your savings before your death.

Today, a man age 65 has:

  • 3 out of 4 chances of reaching age 80
  • 1 out of 2 chance of reaching age 86 (life expectancy)
  • 1 out of 4 chance of reaching age 92.
Survival probability of a man age 65 until the age shownSurvival probability of a man age 65 until the age shown

Life expectancy also increases with age. Therefore, the more you age, the longer you might live. A person age 75 has more chances of reaching age 90 than a person age 65.

Survival probability of a person age 65, 75 or 85 to the age shownSurvival probability of a person age 65, 75 or 85 to the age shown

How to set aside enough savings

An important aspect of planning for retirement involves setting aside enough savings to maintain a good level of income for the rest of your life, despite the fact that you do not know the time of your death. You have several options to reduce the effects of the longevity risk on your retirement.

  1. By using several portfolios illustrating the risk of longevity, our experts have determined for you the number of years you need to add to your life expectancy to reduce the probability of running out of money during your retirement. Therefore, if you are age 65 today, you need to add 5 to 6 years to your life expectancy, that is, the duration of your estimated retirement in your financial planning, to be 75% certain that you will have enough retirement income.

    Table 1: Number of years to add to life expectancy, based on the probability that you will have enough income

    Probability to have enough incomeMan
    (Life expectancy at age 65: age 86)
    (Life expectancy at age 65: age 89)
    75%+ 6 years+ 5 years
    90%+ 10 years+ 10 years
  2. You can also estimate your life expectancy according to your life habits and the age of death of your family members. For example, it is reasonable to believe that you will live at least 5 years older than your parents.
  3. You could apply for your retirement pension under the Québec Pension Plan (QPP) at a later time. Each month that payment of your retirement pension under the QPP is postponed increases the amount of your pension and can help you a little more to maintain your income level for the rest of your life. Postponing the date on which payment of the retirement pension under the QPP begins also allows you to better manage other financial risks , such as inflation risk or rate of return risk.

    You can retire without applying for your pension under the QPP, but, if you continue to work, it will have beneficial effects on your financial health, because you will be saving for a longer period. Your savings will generate a rate of return for a greater number of years. Overall, you will benefit from both a higher pension amount under the QPP and more savings.

    In addition, the indexation of that pension reduces the importance of non-indexed income resulting from your investments and therefore reduces the risk of longevity related to retirement.

  4. You could do the same exercise with the Old Age Security pension because it increases by 7.2% per year when you postpone its payment from age 65 to age 70.

Take the time to explore our CompuPension tool to simulate various scenarios by using your own data. It will help you to better assess your situation.

  1. According to the Actuarial Valuation of the Québec Pension Planas at 31 December 2018.Go back to the reference
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