What is longevity risk?
What happens if you live longer than you’re financially prepared for? That’s longevity risk.
It’s something that’s on Canadians’ minds: According to a 2024 survey by CPP Investments, 61% of us are worried we’ll run out of money during retirement.
As Canadians live longer than previous generations, the chance that you will outlive your retirement savings also increases.
Think about it: In 1970, average Canadians could expect to live to 72 years old. In 2023, on the other hand, average life expectancy rose to 81 years old.
The difference? If you retire at 65, you could be looking at 9 more years of retirement you’ll need to fund compared to previous cohorts of seniors.
For example, imagine John assumed that he’d need about 10 years of living expenses after retirement because that’s what worked for his parents. Fifteen years later, he’s outlived them both – and run through his savings with just his government benefits to fall back on.
It’s not just the length of time, either. As we age, our health can often deteriorate. For example, according to Statistics Canada, 73% of Canadians over 65 have at least 1 chronic condition like diabetes or high blood pressure.
This means we might need to spend more money – home health aides, adapting our home, moving into a long-term care facility, other medical expenses like hearing aids or mobility devices - on our health needs than we did earlier in our retirement.
Or, let’s say Mary based her retirement based on her expenses when she was a healthy, fit 65 year old about to retire. Fast forward 10 years, and she’s spending thousands every month on health costs – a personal support worker, medication, mobility devices. She’s worried about how she’ll continue to pay for long term care.
If you’ve got invested money, there’s also market volatility to consider. The longer you’re in the market, there is always the potential that you’ll experience some kind of downturn.
When you add it all together – declining health, potentially declining resources coupled with increasing costs – longevity risk can be a real concern as you plan for your retirement.
How can you mitigate longevity risk?
While we can’t control everything, there are a few things you can do to help make longevity risk less of a worry.
1. Investigate ways to mitigate your financial risk
Take longevity risk into account when creating your retirement savings goals and plan. As part of your financial planning, look into investments that might reduce the impact of any market volatility you encounter. Segregated funds, for example, can help you grow your wealth while offering insurance protection. Mutual funds can also be a great way to diversify your portfolio, reducing risk by spreading your money across a wider portfolio of assets than if you were investing solo.
2. Look after your health
As much as you’re able, try to be proactive about staying as healthy as possible for as long as possible. Eat nourishing foods, move your body and stay socially connected.
According to the government of Canada, staying active can reduce your risk of developing chronic diseases like cancer, high blood pressure, obesity and osteoporosis. In older adults, it can also reduce your risk of falls.
3. Plan for healthcare expenses
You might also want to look into private health insurance, which can help cover some of the costs that your government healthcare doesn’t include.
For example, Freedom to Choose health and dental insurance can include coverage for routine needs like physiotherapy, massage therapy, hearing aids and glasses or contact lenses.
It can also help with other costs you might face as your health declines, like a home healthcare aid, wheelchair or private hospital room.