Longevity and Retirement Savings

It is all over the news; life expectancy is growing continuously for Canadians.  A look inside the statistics to calculate life expectancy and retirement savings needs doesn’t bode well for most investors.

The plan to overcome this situation must include several factors like a disciplined saving approach matched to active management, either personally or structurally, as well as excellent investment picks with corrective action when they aren’t so “excellent”.

The simplest action is to save for a longer period of time.  “The power of compound interest” or returns is the magic potion for most potential retirees.

An illustration:

• Invest $200/week into a tax sheltered, registered account every week for 40 years (age 25 to 65
• If the investment were to grow at either 4%, 6% or 8% per year depending on the investment vehicle used. No adjustments for inflation or tax considerations Is made to keep it as simple as possible. 4:41 PMending values after 40 years are as follows:
  • @ 4% per year, the ending balance is $1,033,943
  • @ 6% per year, the ending balance is $1,752,393
  • @ 8% per year, the ending balance is $3,090,763!
• If you started late and only started investing $200/week at age 45, this is what the numbers would look like at the different interest rates:
  • @4% per year, the ending balance is $320,245
  • @6% per year, the ending balance is $404,414
  • @8% per year, the ending balance is $517,070
• In order to end up with the same amounts listed above after investing for 40 years but only have 20 years to do it, you would have to increase your weekly savings to the following:
  • @4% per year, you would need to invest $646/week for 20 years to get $1,033,943 or 17.5 years at 6% or 15.5 years at 8%
  • @6% per year, you would need to invest $867/week for 20 years to get $1,752,393 or 17.7 years at 8%
  • @8% per year, you would need to invest $1,195/week for 20 years to get $3,090,763.

I hope you can see from this illustration how important it is to start early and to get a good return on your investments. The longer you wait, the more you will need to save every week or month. Compounding allows you to rely less on making substantial contributions to your retirement savings. Smaller, consistent contributions made over a long period can grow into a sizable retirement fund due to the power of compounding.

Compounding allows your savings to grow at an accelerated rate over time. It involves earning returns not only on your initial investment but also on the accumulated returns from previous periods. As your investment grows, the base on which returns are calculated increases, leading to exponential growth. The longer your money is invested and compounding, the more substantial the growth. This is why starting to save for retirement early is crucial. Even modest contributions can grow into a substantial next egg over a long investment horizon.

Factors to Know

The following findings were prepared by the Office of the Chief Actuary for projecting the mortality component of the long-term financial status of Canada’s Old Age Security (OAS) Program and the Canada Pension Plan (CPP):

• Over the recent 30 years from 1979 to 2009, increases in life expectancy in Canada have been largely due to the reduction of mortality rates after age 65.
• Over the last decade, life expectancy at age 65 increased by two years, a rate of growth of about twice of what has been observed over each of the previous decades since 1929. Currently:
  • Life expectancy for men at age 65 is 86
  • Life expectancy for women at age 65 is 88
• It is further projected to increase from 21 to 24 years for men and from 23 to 26 years for women by 2075. This means that Canadians are expected to live beyond age 90 on average in the future.
  • So those born in 2010, who will be 65 in 2075, will live on average to 89 and 91 for men and women, respectively.
• Currently, five out of ten Canadians aged 20 are expected to reach age 90, while only one out of ten is expected to live to 100.

The summary is that if you think you’re feeling old today, just wait!

Some of those statistics could be dizzying, but remember that those who achieve 65 years of age will live another 21 or 23 years ON AVERAGE.

More than half the people will have to fund 20+ years of retirement if they retire at 65. If you want to read the entire study, go to https://www.osfi-bsif.gc.ca/Eng/oca-bac/as-ea/Pages/mpsspc.aspx

Bottom Line

Canadians are living longer, and more actively, and placing greater and greater pressure on their retirement savings.

In order to acquire retirement assets, and maximize the nest-egg at the end, investors must place a higher percentage or amount into savings each year, earn a higher compound rate of return over their lifetime, and utilize a longer time frame for compounding to occur and for deposits to accumulate.

This final point has two options; begin saving earlier or keep working and saving longer, perhaps well past age 65.