My brother did not have a pension plan when he was working. He was self-employed so he created his own plan. When he was developing his plan, he realized that there were five major risks in planning for retirement:
Longevity risk — the risk he will outlive his
money
Market risk — the risk of volatility in the
stock market and housing market
Health risk — the risk of unexpected medical
expenses and long-term care
Family risk — the risk of things like the death
of a spouse or partner and adult children becoming ill or unemployed
My brother was a lawyer and so when he planned his retirement,
he hired an expert financial planner to help him understand and plan for the
risks.
We normally predict longevity based on the age their parents
died, but in my case and my brothers case, which is not realistic. Our father died
in an accident before he was fifty and our mother died of a rare cancer when
she was 58. So we have to rely or other sources to predict our longevity.
The actual mortality statistics say that today’s 65-year-old
male in Canada can expect to live, on
average, to about 88; a 65-year-old female to about 90.
In the United States partly because of their approach to the
pandemic, life expectancy is dropping while in Canada it is going up. Averages
being averages, it’s possible you’ll live into your 90s or 100s — or not. Of
course, it’s impossible to know exactly how long you’ll live. Your genes play a
role. So does your current health, your future health, your health history, the
possibility of an accident or becoming a crime victim and simply the
unexpected.
I’m 76 and the rudimentary (and all right, slightly morbid)
Actuaries Longevity Calculator computes that I have a 86% chance of living to
80, a 63% chance of living to 85 and a 36% chance of living to 90. I’m
factoring those numbers into my retirement planning.
My brother is two years younger and in better shape than I
am and the Actuaries Longevity Calculator computes that he has an 86% chance of
living to 80, a 68% chance of living to 85 and a 44% chance of living to 90.
I’m sure he or his financial advisor is also factoring those numbers into his retirement
planning.
The second risk in retirement is market volatility.
We tend to be pessimistic when it comes to our
expectations about the stock market. I was talking to my advisor, and she asked
if I was concerned about the recent drop in the market. I said I was, but she
said the markets are slowly coming back, so be patient.
Here’s the problem, when we were young, we could take
a long-horizon perspective with our investments. However, as we get older, we shift our horizons from the long term to the shorter term. This is because we are so nervous about the
volatility of the stock market shrinking our retirement savings. If you have
good health and realize that your expectations about your life expectancy is
wrong, you understand that you also wind up reducing the negative effect of any
one year’s stock market volatility on your retirement. As my advisor said, stay
patient.
The third risk to consider is health. I and my
brothers are very lucky in that we have our health. The researcher in Canada
shows that 93% of Canadians age in place, and of the other 7% who don’t 3% go
into care (and in BC where I live the care is subsidized and the maximum the
government charges for the care is about 85% of a person ‘s current income), and
4% go into independent living. In the United States it is a different story.
According to
Fidelity Investments’ annual projection, an average 65-year-old retired couple in
the United States, may need about $315,000 to cover their healthcare expenses
in retirement. And that doesn’t include the possibility of long-term care
costs, which can be exorbitant. The median cost of a private room in a nursing
home in 2022 is $108,405, according to the Genworth Cost of Care Study. In
assisted living, it’s $54,000. A home health aide runs $61,776.
Long-term care is a significant risk faced by
retirees, but better-designed public programs and private products could help
protect retirees from these potentially catastrophic risks.
The last risk is family related and there is no advice or planning that can take the place of talking and helping when and if you can.
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