And if by some miracle they succeed, it can only be barely and in a walker, which I understand. It’s a way of saying to the chronicler: “Can you let us have some fun while we are still capable and let go of your retirement plans that stretch until age 95?”
Well, okay. I would nevertheless point out that life expectancy for a 65-year-old person exceeds 85 years, with a one in four chance of reaching 95 years.
At the other end of the spectrum, there are people who, on the contrary, are afraid of running out of money at 108 years old. They are by nature more discreet, they rarely write to me. The times their concerns find their way into my inbox, it’s through a loved one, a woman exasperated by her elderly husband who counts his pennies despite a RRIF that is growing exponentially. , or a fifty-year-old who regrets seeing his frugal parents give up on a cruise.
Like reader Fred, precisely. His 77-year-old mother, a former laboratory technician, has saved her entire life in preparation for retirement. She is now content with her Old Age Security (PSV) pension, the Quebec Pension Plan (QPP) and the surviving spouse’s pension from her late spouse’s pension plan. She withdraws the minimum from a well-stocked RRIF, money which is mainly used to spoil her children and grandchildren. And to save again, for later!
Treat yourself to little luxuries? It’s a lot to ask of her, despite her means and the exhortations of Fred and his sister who would like their mother to spoil herself a little. Our reader is pleased with a recent small victory, his mother was convinced to buy a brand new armchair.
It’s as difficult to get a squirrel to let go as it is to convert a diehard enjoyer to the virtues of thrift. But it’s possible.
Squirrels, everywhere!
I touched on the subject on a few occasions during discussions I had in recent years with René Beaudry, partner at Normandin Beaudry, a firm specializing in compensation. The actuary was part of the committee that looked into the Quebec retirement system, a committee chaired by Alban D’Amours who would produce an influential report (D’Amours report), almost a dozen years ago. years.
The expert notes that many savers have difficulty “switcher in spending mode”, in Quebec as in Canada and the United States. These retirees deprive themselves of traveling and always order pasta at restaurants, for fear of seeing the bottom of their pockets.
-For many retirees, there is something traumatic about turning the hourglass, the savings that run out evoke for some the countdown which leads towards the final deadline.
This is a problem. You spend your life receiving regular income, then, the day it stops, you have to draw on a reserve. This change requires a new mindset, and many retirees are unable to make this transition.
Four possible avenues, one better
So what to do? René Beaudry has been thinking about this problem for a long time, he was waiting for me with a whole presentation, I will send you the main points. I insist: the main lines, the principles. We can apply them or not, or can do so partially. They can be combined with other strategies, including the postponement of the PPQ and the PSV, the base.
A retiree with a few hundred thousand dollars in savings has four options to make their nest egg last as long as possible. There is one that stands out.
- First option: withdraw the mandatory minimum from your RRIF throughout your life. This minimum is calculated as a percentage of the kitty, it increases each year, which roughly gives 4% at 65 years, 5% at 70 years, 6% in 75 years, 7% at 80 years… With a return of 4, 5% (which may seem high, it’s true, but achievable with a relatively conservative asset allocation ETF), our retiree will only have exhausted 20% of his reserves at age 80, and 50% at 90 years old. At 100 years old, he will still have some left, but at the cost of a less “olé olé” retirement than it could have been. Withdrawals can vary depending on yields, which fluctuate each year, averaging 4.5%, in our scenario. With lower returns, savings will fall more quickly.
- Second option: aim for capital exhaustion at age 95, as recommended by financial planners. With the same returns of 4.5%, the retiree will be able to draw down 5.5% of his nest egg in the first year, 6% at age 70, and so on. Some retirement income funds produce these payments automatically, notes the actuary, and the client is free to withdraw whenever they want. By age 95, savings will have dried up.
- Third option: the life annuity purchased from an insurer, with a 15-year guarantee (in the event of premature death). With returns of 4.5%, the monthly payments will be higher than the other two options due to the pooling of risk by the annuitants. This is more than the current rates at which annuities are priced, they are just under 4%. At 3.5%, it remains advantageous. The annuity is paid for life, regardless of the age of death, which provides increased protection against longevity risk.
But this is not yet the best solution. You have to see the fourth optiona combination of the last two illustrated in the graph above. In a first phase, you disburse with a view to exhausting your savings at age 95. At 75, we wonder a little, are we in good shape? Do we hope to live much longer? Yes? This is when we buy the life annuity with what remains, this time guaranteed for 10 years. Acquired at the age of 75, it will be more profitable than if you spin the rest of your nest egg yourself until the age of 95, with yields in the same waters. The income will be higher, guaranteed for life, and the annuitant will no longer have to worry about the financial markets.
In addition, he will no longer see a countdown, he will collect income like when he took home a paycheck.
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