6 ways to extend the life of your retirement nest egg

This is the fifth post of Jonathan Chevreau’s new column, Retired Money, which will explore smart ways to draw down income in retirement and semi-retirement.

With today’s minuscule interest rates, falling availability of employer-provided defined benefit (DB) pension plans and the prospect of longer lifetimes, extending the lifetime of retirement nest eggs is more than a theoretical problem. Sociologist Lyndsay Green summed it up well a few years in the title of her book: You Could Live a Long Time, Are You Ready?

It’s great news that we may live a long time, but financial advisors like Vancouver-based KCM Wealth’s Adrian Mastracci try to prepare clients for a retirement that could go from age 60 to 90, and possibly more. The big fear is running out of money. Mastracci tries to allay those fears by getting retirees to address six key issues:

No. 1: Estimate your life expectancy

If you’re that worried about living too long, one of the first things you should do is check the life expectancy of immediate family members, including spouses or partners. Review the current age of grandparents, parents, uncles, aunts and cousins and be aware at what age family members passed away. “You’re looking for patterns of critical illness and longevity,” Mastracci says. He points out that when extending the life of your nest egg you need to consider the life expectancy of both you and your partner. “It is wise planning for a family to expect that one spouse could easily live beyond age 90. Another expectation is that family longevity continues to increase.”

No. 2: Factor in rising health costs

The longer you live, the greater the impact may be of rising health costs. A family requiring a retirement home can incur costs near $5,000 each month for just one aging parent or spouse. Medications can be expensive if paid out of pocket. Assisted-living facilities, nursing homes, modifications to family residences and home care services all have significant costs that will put more pressure on the retirement kitty. Find out the probable costs by speaking to your local health units. Decision-making is a lot easier when you’re armed with the appropriate facts and cost estimates.

No. 3: Don’t get too conservative

When it comes to investing your nest egg, it may be a mistake to bow to conventional wisdom and invest more and more in bonds as you age, and less in stocks. Get your financial advisor to make periodic retirement projection estimates on just how much capital preservation will be necessary to meet family income goals. The wrong investing profile can inflict financial damage both on the too aggressive as well as the too conservative scale. Mastracci reminds clients that retirement portfolios usually don’t receive injections of further savings once the contributors stop working, so families need a sensible balance between incurring risk and seeking investing returns.

No. 4: Monitor your drawdown rate

Spending too quickly can place a retirement plan in jeopardy, and this is exacerbated by low interest rates and poor investment returns. An annual drawdown rate of 3% (a little less than the well-known 4% rule) may be prudent although the level can be tweaked as required. Families have to be realistic when planning their retirement needs and objectives. They need to be realistic about future returns and the balance of stocks to bonds, since a portfolio needs to last as long as possible without having to resort to drastic actions. Remember that just because you’ve reached the age where Registered Retirement Income Funds (RRIFs) have forced annual (and taxable) withdrawals, that doesn’t mean you have to spend the proceeds: they can be reinvested for growth in a Tax-free Savings Account (TFSA).

No. 5: Consider the bite of rising inflation

Inflation is an insidious process that steadily cuts purchasing power for those on fixed incomes. If inflation remains a constant 2% per year for the entire retirement horizon, that means an initial retirement income goal of $80,000 per year will require more than $97,000 in 10 years, $118,000 in 20 years and $145,000 in 30 years, according to Mastracci. Keep in mind, those numbers are just to maintain the same purchasing power!

One way to reduce this impact is to consider delaying, until closer to age 70, the receipt of certain streams of income. Remember CPP and OAS are indexed to inflation, so by delaying the onset of benefits, not only will you have a higher level of benefits than if you had begun at 60 or 65, but you will have a greater level of inflation indexing. The same could be true for your employer-provided DB pension. While not all pensions are indexed to inflation, those that are will generally pay progressively more for every year you delay receipt of benefits. Some might view this as postponing retirement, but at this stage it’s better viewed as phased retirement. It eliminates the all-or-nothing approach and, instead, strategically delays certain income sources, while commencing other income streams. For example, you might choose to postpone CPP and OAS but gradually start to draw down on non-registered dividend income and perhaps your RRSPs in your 60s, or even set up RRIFs long before they must be established in your 70s.

N0. 6: Work longer, at least on a part-time basis

If you’re going to live longer, it may make sense to work a bit longer too. One or both spouses could decide to work longer before starting full retirement, or you could opt to work at least part-time once you do retire. Even earning $1,000 or $2,000 a month part-time in retirement can greatly reduce the drawdown of a portfolio, according to an analysis by Larry Berman of ETF Capital Management.

Of course, you can’t count on working indefinitely, so you may eventually need to draw down on home equity if extra funds are needed. Or you could consider downsizing or leaving the city as other potential options.

Jonathan Chevreau is MoneySense’s Retired Money columnist and the founder of the Financial Independence Hub. He can be reached at [email protected].

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.