The Three Risks In Retirement Income Planning

There are three clear risks in retirement. Simply put, you might die too soon, you might live too long, or you might need costly care.

Which is hardest to cope with depends on other circumstances.

Costly Care

You should make a point of knowing how much care will amount to should you need it. It is not a trivial sum, and you can assess both the risk and the price. There are alternative ways to have it delivered. Some facilities are less costly than others. Even with the substantial contribution from the Ontario government, $3,000 to $3,500 a month is likely close to the minimum. If both of a couple nee dit, it can become unaffordable very quickly.

As always, the future is unknowable, but if you anticipate possibilities, there is a chance you can influence them in your favour.

If you start to think about it soon enough, you could consider Long Term Care Insurance. A couple would usually explore it between 55 and 65. A single person a bit later. There are underwriting requirements, and not everyone qualifies. It’s worth a look if you rely primarily on pensions for your spending money. People with significant investment assets can usually make it work easier.

It’s worth a look, and you can always say no.

Die too soon.

If you are single with no dependents, that presents no financial problem. If you are part of a couple or have dependents, it might. Part of a couple is the one most people analyze poorly.

When one of the couple dies, income goes away. Often quite a lot of income.  The expected losses are:

Old Age Security $7,500 a year stops.

Canada Pension Plan. 40% of the retirement benefit goes away at least. At maximum pension, that would be about $5,000 per year. If the survivor receives maximum CPP, all of the survivor benefit will go away because there is an all-source maximum CPP benefit.

Employer pension, sometimes the pension choice was 60% to survivor, so 40% of that goes away.

Income Taxes. One argument is that all of that lost income was taxable so it is not as much as it looks. Add to that the saving in living costs. One car instead of two for example. Sadly, that is not what happens. I have one case where income dropped $45,000 when the husband passed away, but the surviving wife’s tax bill was $10,000 higher than their combined tax bill before his death. Recall that income splitting is a powerful tax tool.

Be sure your retirement income plan recognizes the risk involved.

Live too long

If you don’t need care, living too long doesn’t seem such a burden. The question is, “How long will you have enough income?”

If inflation is under 3%, many older seniors have no significant problem. Their lifestyle tends to be more restricted later in life. They have seen what they want to see and have done what they want to do. Some of the rest are made unimportant by physical frailty. I had a 92-year-old senior tell me he would pay $10,000 a year to not have to go to Florida each winter. After 28 years, most of his friends had passed away, and there was nothing that attracted him there.

Nonetheless, inflation at rates higher than 2% puts you at risk unless you can increase your after-tax cash flow as prices rise. 6% inflation is not twice as bad as 3%. 3% inflation will double prices in about 24 years. 6% doubles every 12 years, so prices will be 4 times more. At 8%, prices double in 9 years, so even 18 years from now, prices would be 4 times more. It is unlikely your income will rise as fast. Even pension plans with inflation protection have upper limits to what they will increase.

Long sustained high inflation is unlikely, but even a short burst creates problems. Investment income might go up as fast as inflation, unlikely but not impossible, but you pay tax on that. In an 8% inflation world, a modest income taxpayer would be losing purchasing power at any rate below 12%. The double hit. Your income after taxes and inflation is below zero, and two, the purchasing power of your capital is falling too.

At 8% inflation, earning 12% riskless income, you have two choices:

  1. Maintain the purchasing power of your capital, which means there is nothing to spend.
  2. Spend the after-tax income and lose some of the value of your capital.

That’s a cruel choice. Which would you choose?

A minor defence. Maximize your invested capital in a Tax-Free Savings Account. There is a chance you could get some gain over inflation without taxes on your investment income.

Multiple variable problems do not have intuitive answers

You need to work it out. A big arithmetic puzzle. The variables at a minimum are these.

  1. In a given year in the future husband lives or not, and wife lives or not.
  2. The annual cost of living increases because of inflation. What parts, if any, can be removed?
  3. How much income has a cost-of-living clause? Does it cover any inflation or just up to a limit. Analyze by source.
  4. Will investment income provide a margin above inflation before taxes? Unlikely with income assets like bonds and bank accounts.
  5. Will income taxes be higher or lower? Some tax factors are indexed to inflation, but not all and not completely.

It is a very difficult problem to solve while taking a shower or driving to visit grandchildren.

It matters. Stress is harmful to your health.

The bits to take away

Have a plan B

Implement it at the first sign of trouble.

Rethink your investment portfolio as if inflation is much higher than it has been.

Anticipation is a powerful tool.

I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email at

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