Canadians’ life expec-tancies are getting longer, according to recent data from Statistics Canada. Those born between 2005 and 2007 can expect to live, on average, to age 80.7. And, although men generally face an earlier demise than women, the gap between men’s and women’s life expectancies is narrowing.

Thanks in large part to medical advancements, boys born today can expect to live three years longer than was the case a decade ago, when male life expectancy was 78.3 years.

And Canadians who have already reached their early golden years have an even higher life expectancy. StatsCan estimates that today’s 65-year-old has 20 more years of life ahead of him or her.

The trend toward living longer has profound retirement planning implications, says Kevin Tomlinson, a certified financial planner and regional director of Investors Group Inc. in Dartmouth, N.S.

Tomlinson has a personal anecdote that illustrates the need to plan for longevity in retirement:

When Tomlinson’s grandfather retired in the late 1960s at the age of 65, men were expected to live only a few years past retirement. At that time, life expectancy was 68.8, according to StatsCan. So, for Tomlinson’s grandfather, that would have meant dying in 1972. But the feisty senior passed away only last year, at the age of 104.

Today’s retirees are not only living longer, on average, but also face new challenges, says Tomlinson. For example, on the East Coast, there is a trend toward westward migration among young people. Many older retirees may find that younger family members may have left the region.

“If I’m hoping my family is going to look after me,” Tomlinson says, “but my family is all in Alberta, I have to prepare myself.”

That’s why one of Tomlinson’s first recommendations to clients planning for retirement is to have a family discussion to outline what assistance will be available when the oldest generation reaches the late stages of retirement.

For clients in their 40s, Tomlinson recommends long-term care insurance, which provides income when clients need special care such as nursing care or personal care.

Tomlinson urges his clients to consider what he calls their “retirement paycheque” — the various streams of income available to them upon retirement. It’s best to have several buckets to sort through, he says, such as public and private pensions, RRSPs, tax-free savings accounts and insurance. Only then can the advisor help the client figure out what rate of return is necessary to fulfil the client’s goals.

Glen Rankin, a CFP with Rankin Financial Planning Ltd. in Truro, N.S., prefers to look at a set planning horizon — 91 for men; 95 for women — rather than life expectancy.

Life expectancies are based on median figures, which means half the population is expected to die before the given age, and 50% after.

“A 50% chance you’re going to run out of money isn’t good enough,” Rankin says. And outliving their money is the most important risk you need to help protect clients against.

Rankin recommends that his clients plan for a staged retirement. Early in retirement, clients usually spend more than they do in later years. Travel and leisure activities require more money than staying at home with family and friends.

He calculates projected retirement-income requirements accordingly: “We may take a number and index that to inflation for 20 years, and then take a 20% reduction and inflate that going forward.”

It makes sense to plan for end-stage retirement, as well. That’s when medical and personal-care expenses may climb.

Clients can either ensure that there are enough assets to deal with this stage themselves or buy LTC insurance. Some insurance companies’ policies provide an easy transition from critical illness insurance, which is typically held by younger clients, into LTC insurance, says Rankin, making the critical illness policy convertible to LTC at a later date.

The trend toward living longer also means fixed-income products won’t be enough to meet the long-term needs of most retirees. Tomlinson tries to make clients feel more comfortable about investing in equities by emphasizing risk minimization rather than return maximization.

Clients are more likely to understand the need for investing in equities if it is explained in terms with which they are more familiar. For example, if a client had worked in a particular industry, he or she might be more willing to invest in that industry, he says. Or, Rankin might point out that banks have been charging service fees to them for years and the only way clients can get any of that money back is by investing in the institutions themselves.

@page_break@He asks clients: “Banks make tons of money and they always will. Do you want a piece of that?”

Rankin offers three possible strategies to clients when it becomes clear that they need to have some equity to avoid the risk of outliving their money.

The meat-and-potatoes version is to look at the optimum asset allocation that has the least risk, he says. Most data, he adds, will recommend clients keep 35%-40% of their investments in equities to protect their income from inflation through retirement.

Another strategy is to match anticipated essential monthly expenses with guaranteed inflation-protected income streams, Rankin suggests: “So, if I need $3,000 a month, I would match that up with defined-benefit pension plans, old-age security, CPP and perhaps an inflation-indexed annuity.”

Once basic living expenses are covered, discretionary income can come from a pool of securities and mutual funds, he says. This is a popular route with clients but may require more detailed estate planning needs.

In a third option, which is growing in popularity, according to Rankin, the client would “ladder” four years of income into four streams: a money market fund or other high-interest account, and then three staggered GICs, maturing at one, two and three years. The remaining assets are held in a diversified portfolio. Each year, the profits from the portfolio replenish the three-year GIC. This requires more sophisticated planning but, Rankin says, it’s a great strategy because it insulates clients against four years of market risk. Retirement is more about income than growth, he adds.

Tax planning is also critical when considering longer retirements. There is a risk to assuming that tax policy won’t change over time, Rankin says. To assume, for example, that today’s 40-something will have a lower tax rate in retirement might well be a mistake. Rankin believes the tax rate in lower-income tax brackets is likely to go up over time, as the number of workers per retiree in Canada will decline.

His solution is to recommend clients convert as much of their non-registered savings as possible to TFSAs: “I think they’re safer in the future in many ways because you don’t get a tax deduction at the beginning (unlike RRSPs) so it would be very hard for future governments to unwind them.”

Assets held in TFSAs should be held as for long as possible to get the most tax-free bang for the buck, Rankin says: “I would look at this as some of the last money the client spends.” IE