Four big retirement risks

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 brother’s case, which is not realistic. Our father died in an accident before he was fifty and our mother died of rare cancer when she was 58. So we have to rely on 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 in 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 gauges 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 figures out 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 are pessimistic about 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 are 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 well-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.