How Long Will You Live?
This seems like a silly question to ask, but there is deadly serious intention behind the question.

Is it possible that you will live so long (you or a partner) that you will run out of money? What could be scarier than being 92 years old and broke?

If you don’t have a pension, it could happen to you. Here’s why:
If your retirement assets consist of bonds and GIC investments, you could spend more than you are earning during times when interest rates are very low or times when inflation is very high or both. This could force you to dip into your actual capital itself, depleting your base of savings. Repeating this action over 30 years or more could see you erode the base so low that you can no longer live off the assets that are left.

If your retirement assets consist of stock market investments (stocks, ETFs, mutual funds), some years your returns will be positive, others they will be negative. If you are not careful you may spend too much in years where your returns are low, end up eroding your capital and eventually run out of money if you do this too long or the assets don’t recover. Further, if the periodic stock market correction is a large one, perhaps with a decline of 30% or more, a loss of one third of your asset base may result in a material decline to your ability to spend money in retirement in order to make the assets last – can you afford to cut your spending one third with short notice?

And what about your home or other real estate? If push comes to shove, you could sell your home to downsize and free up some capital to live off. But just like the other assets above, the selling price is exposed to volatility, when you sell it there are fees and possibly taxes, and then when you start to invest the money and spend the earnings on annual needs you face the same risk of losing it all again. You have merely converted your real estate to more stocks and bonds, exposed to the same risks as discussed above.

Spending all of your retirement savings is a problem for many Canadians – often failure to plan for expense costs in retirement such as new cars, big vacations, home repairs, weddings of children, stock market declines, death and disability costs, and the cost of nursing homes in old age can lead people to deplete their savings a rapid rates – causing a perilous decline towards bankruptcy at age 80 or beyond. Never be you eh? How do you know?

With a pension plan in place this won’t be you. A pension plan pays until the end of your life, period. If you live to 105, the pension pays to you every month. If you live to 88, it pays. If you live to 110, it pays. And some pensions will also pay jointly, meaning the pension will pay until the death of the last surviving spouse – so your husband or wife cannot run out of money after you are gone.

Once again, a pension shows that many Canadians are well served having at least a portion of retirement savings in a pension – the stability, the guaranteed income, the potential for tax savings and the peace of mind of knowing you cannot outlive your money is worthwhile.

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