How can advisors help clients mitigate longevity risk?

Running out of money in retirement — it’s a concern that many Canadians have and one that keeps financial advisors on their toes. For some, the anxiety of running out of money leads them to live more frugally than necessary. 

A recent online survey of 5,183 Canadian adults (outside Quebec) found that 59% of Canadians fear they’ll outlive their savings during retirement.  

At the same time, the study, conducted by Innovative Research Group on behalf of CPP Investments, found that 52% of non-retirees said having a financial plan gave them confidence they would not run out of money in retirement.  

It’s impossible to know precisely how long a client will live, but advisors can emotionally and financially prepare them for multiple scenarios, so that their financial plans stand the test of time — regardless of whether they live to 75 or 105. 

“Not everyone handles fear the same way,” said John Soutsos, portfolio manager with Med-Wealth Financial Services, which operates under IPC Securities Corp. in Mississauga, Ont. He runs his practice with his son Alexander Soutsos, an investment advisor.   

“It is incumbent upon a professional to provide perspective and a roadmap to alleviate their fears and a strategy that can be employed to help them understand that they will not run out of money.” 

One couple the father-son duo work with assumed the 4% drawdown rule would be enough to maintain their lifestyle through retirement, John said, “but within a year, they were taking out 8%, and they’ve maintained that rate of withdrawal.”  

“Anxiety ratchets up” as soon as clients cash their last paycheque, he said. 

“People make assumptions that when they reach retirement, … their spending is going to go down because they no longer have to support their children, and they will have a different lifestyle in retirement. Our experience is that’s not the case,” Alexander said.  

Health-care expenses can be especially punishing. 

“You can end up depleting your cash flow very quickly, and that’s where it’s important for advisors to have conversations with their clients and manage their expectations,” Alexander said.  

John said he recently spoke with a client whose ex-spouse is spending $20,000 a month on personal support workers: “Think about that for a second. That’s [almost] a quarter of a million dollars a year.” 

Projecting for various scenarios 

Walking clients through various financial projections removes a lot of the guesswork around how much a client will need to sustain them by a certain age.  

Cindy Boury, senior portfolio manager and branch manager with Cindy Boury Private Wealth Management, Raymond James Ltd. in Abbotsford, B.C., shows her clients projections for a scenario where they’ll die early to account for “real life disruptions” and where they’ll live longer than they expect. These projections consider everything from a client’s expected cash flow needs to fund their preferred retirement lifestyle, to their estate plan, to health-care costs and emergency funds.  

Boury’s advisory practice also gathers information about a client’s health and family timeline to help inform projections. 

“We don’t know when your last day is here, so we help people through their concerns,” she said.  

But age projections are just part of the equation. How the client feels about risk is just as important. 

Boury said her practice also quotes “a fairly low rate of return, so everybody here at retirement has equal or slightly more than what we projected.” 

“When we do projections on portfolios, we quote a lower rate of return to ensure people do not overspend. A 5% return rate with inflation at 2.5% means their real rate of return is 2.5%,” she explained.  

“When the portfolios have a higher rate of return, the client can potentially have a surplus, which can be used accordingly. The reason I do this is to ensure we always have enough for their retirement, regardless of whether the markets are good or bad.” 

Bobby McBride, financial planner and associate portfolio manager with Designed Securities Ltd. in Whitby, Ont., uses financial planning software and actuarial charts recommended by FP Canada’s Standards Council — including a mortality table published by the Canadian Institute of Actuaries — to map out different scenarios.  

The table shows, for example, that a 70-year-old Canadian would have a 25% chance of living to at least 94 if they’re a man and at least to 96 if they’re a woman. By comparison, a 70-year-old Canadian man would have a 10% chance of living to at least 97, while a woman of that age has a 10% chance of living to 100. 

McBride uses these guidelines to have conversations with clients, “and almost 100% of the time, people say, ‘There’s no way I’m living to that age. Can we reduce it?’”  

As long as a client doesn’t ask him to reduce financial projections to an age that he feels uncomfortable with, he said, “I accommodate their request, and if it’s lower in age than I think is advisable, I’ll suggest, ‘Why don’t we go a little bit higher, just in case? As time goes on, the plan is going to change.’” 

If they manage their finances to last them longer than they expect to live, then “there’s going to be some sort of estate or residual leftover, because you’re planning conservatively and planning to have extra left over, just in case,” McBride said, which “segues nicely into the estate conversation” where he’ll ask them how much they want to give to their loved ones or charities during life or after they die. 

The Soutsoses take an unconventional approach to all of this. They manage money as if a client’s capital might last in perpetuity rather than to a defined age — a distinction they say can heighten or relieve anxiety around longevity risk. 

“I have a particular client … [who] interviewed three wealth managers, prior to deciding who to go with,” John said.  

“What distinguished me from the other two was that I said I manage money to assume the capital will last in perpetuity, whereas the others defined end dates of age 90, 85. [Those assumptions] scared him.”   

In practice, he said this means building more stock-heavy portfolios with a higher potential rate of return to offset inflation and taxes, with the aim of financially sustaining clients longer.  

John explained that most of their new clients are between the ages of 50 and 70, which he translates as a time horizon of about 25–40 years. “[That] provides a long runway for the portfolio to handle volatility,” he said. 

Holistic planning 

Joe Nunes, co-founder and executive chairman of Actuarial Solutions Inc. in Windsor, Ont., has practised in the area of pensions and retiree health plans for more than three decades. 

On the topic of longevity, Nunes’ advice is to be well-informed about various financial tools to provide personalized advice. He noted that some advisors lack licences to sell insurance products, so sometimes they’ll suggest that their clients invest in the markets rather than guaranteed income insurance products, even though that may not match their risk profile. 

On the other hand, licensed insurance reps sometimes only suggest insurance products and don’t consider other possible retirement saving tools. 

“The best advisor or advisor teams to work with are the people that are properly licensed in all the possible tools that you might want to direct your retirement funds and understand them all, and can sort of give you the pros and cons of each choice and work through what your answer is,” Nunes said. 

“Lots of textbooks will say, ‘Oh, don’t buy annuities. Just invest in the stock market, because over the long run, that will work best.’ But it doesn’t always work best for people.” 

For a client with a low risk appetite, “then even though it might optimize [their] total dollars at the end of the game, it might not be something that gives [them] the most enjoyable retirement,” he added. 

Nunes said it’s also helpful to project how much a person might need in their retirement and revisit their plan soon after, as “people generally have a good sense of how much income they need annually in retirement about two years after they retire.”  

It’s a matter of finding a balance between an aggressive approach, where a client outlives their nest egg, and a conservative approach, where the nest egg outlives them, Nunes said.  

“For some people, leaving money behind is a legacy, to children, to grandchildren, to charities. For some people, that works,” he said.  

“But for many people, it’s not the goal, and it’s not as comfortable a retirement as they could enjoy if they kind of spread the money out over a more reasonable time period than assuming age 100. Some people live to 100, but not many.” 

Ultimately, regular reviews and contact with clients allow advisors to keep tabs on what’s new in their lives and update their plans to account for life changes  —  whether it be a change in their health condition, an unforeseen expense or change in their financial situation — and coach them through the variables. 

“When you educate people, their fears go away. They can breathe,” Boury said.  

“Because when they’re nervous or have life challenges they’re not sure what to do about, they need someone to talk to, to get support. So sometimes our role isn’t just about the return from the portfolio.” 

And while “longevity risk is the biggest risk we all face,” McBride said that having a plan that can demystify the retirement years for clients tends to instill confidence in them.  

Boury said the same. 

“You’ve actually got to stop, sit down, get reasonable and mature about the whole thing,” she said. “Understand where you are and then make a decision on how you’re going to create the rest of your working years, or how you’re going to enjoy and spend what you saved.”