Live Long and Prosper
By Robyn Graham, CIM, CFP, FCSI, Portfolio Manager – Managing Director of Wealth Management at ETF Capital Management
“IT’S NEVER TOO LATE TO BE WHAT YOU MIGHT HAVE BEEN. — GEORGE ELLIOT, AUTHOR”
A sea change has occurred in the financial planning and wealth management professions. With the average life expectancy now 87 years for women and 85 for men, retirement planning is no longer the key issue our clients will face and for which we must prepare. Enter lifestyle strategy–a process that encompasses a longer timeline and a multi-stage life experience.
What are the ramifications of planning for longevity risk? The increased probability that clients will outlive their capital has significant insurance, tax, investment and estate planning implications. Traditional solutions no longer suffice. For example, with interest rates at historical lows, the opportunity cost of longevity insurance (a.k.a. fixed rate annuities) is unacceptably high.
Alternatively, funding clients’ lifestyle over increasingly long time horizons with a diversified investment portfolio is a daunting task for investment managers in the face of low bond yields, muted global growth, and a nine-year long bull market in US equities. Investment managers will need an enhanced skill set to meet investors’ goals without exposing them to unacceptable risk.
Tax specialists can expect to be busy, designing 30-year portfolio harvesting strategies that optimize capital gains, dividend and income withdrawals across a range of account types. These strategies will need to be revised periodically, in line with realized returns, capital market expectations and changing client needs.
Estate planning experts will find that client needs are a moving target, as time horizon and future value uncertainty changes the timing and value of planned bequests. A couple drawing $70,000 of living expenses from an investment portfolio of $500,000 starting at age 65 will find their income assets depleted by age 80. Living longer may eliminate one’s goals of leaving a legacy, or even of living independently, especially if unplanned health care or assisted living expenses suddenly arise.
Fortunately, savings can be extended if one or both partners entertain a part-time career for a few more years after retirement. For example, a couple jointly earning only $12,000 annually for ten years after retirement can extend the life of their income assets another four years to age 84. Joint income of $36,000 extends the portfolio’s life to age 90, while higher part-time earnings increase the potential even further, providing peace of mind, and perhaps a small legacy.
The benefits of embracing part-time work in retirement don’t end there. Many lifestyle coaches warn of the health risks of not having an active retirement. Further, a growing body of research from the field of psychology shows that maintaining strong social connections and keeping mentally active reduce the risk of cognitive decline.
Blessed with good health, longevity and enough income to support a desired lifestyle, a part-time second career can give purpose and passion to life after 65. Indeed, this may be just the beginning of one of the most productive and creative stages of life.
Much has changed in our society in the last 50 years. Life expectancy in Canada was only 72 when CPP was introduced in 1966. With increased life expectancy, full retirement at age 75 may be a more realistic and satisfying goal for many Canadians.
About Robyn Graham: CIM, CFP, FCSI, Portfolio Manager – Managing Director of Wealth Management at ETF Capital Management
Robyn oversees ETF Capital Management’s wealth management team, private client business and key strategic relationships. She has 30 years of investment industry experience serving high net worth and institutional clients, consultants and financial professionals.