It is all over the news; life expectancy is growing continuously for Canadians.  A look inside the statistics to calculate life expectancy and retirement savings needs doesn’t bode well for most investors.

The plan to overcome this situation must include several factors like a disciplined saving approach matched to active management, either personally or structurally, as well as excellent investment picks with corrective action when they aren’t so “excellent”.

The simplest action is to save for a longer period of time.  “The power of compound interest” or returns is the magic potion for most potential retirees.

An illustration:

  • $10,000 (or $200/week) is placed into a tax sheltered, registered account for 3 years ($30,000 total)
  • The deposits grow at an annualized return for 40, 39 and 38 years (from age 25 to 65 for deposit #1, from 26 to 65 for deposit #2 and 27 to 65 for deposit #3)
  • With no adjustments for inflation or tax considerations to keep it as simple as possible (so perhaps a 3-year plan to catch up on unused TFSA “room”):
    • @ 5% per year these three deposits of $10,000 grow to $201,302 at age 65
    • @ 8% the total is $604,650
    • @ 15.6% the total is $8,620,128!! !

So in about 40 years you will have to have about $67,000 for each of three years, or $200,000 each year, or $2.87 million for the three scenarios above.

The 15.6% figure is not meant to be any sort of expected rate of return, but merely meant to illustrate “what could happen”: because it has.  In Canada, and over a 20 year period for the five major banks combined when dividends are reinvested according to an October 2014 article in the Globe and Mail authored by John Heinzl.

Perhaps the question to be asked, “Is it more likely that the Canadian banks will continue to return 15.6% per year like they did during the 20 years that ended September 30, 2014 or that you will have $2.87 million per year for three years in 2053-2055?”

Or “if we put $200/week for the next three years into Canadian banks, collected and reinvested dividends, AND the bank stocks perform as well as they have for the past 20 years . . .     . . . how much would we have in 40 years?”

Factors to Know

The following findings were prepared by the Office of the Chief Actuary for projecting the mortality component of the long-term financial status of Canada’s Old Age Security (OAS) Program and the Canada Pension Plan (CPP):

  • Over the recent 30 years from 1979 to 2009, increases in life expectancy in Canada have been largely due to the reduction of mortality rates after age 65.
  • Over the last decade, life expectancy at age 65 increased by two years, a rate of growth of about twice of what has been observed over each of the previous decades since 1929. Currently:
    • Life expectancy for men at age 65 is 86
    • Life expectancy for women at age 65 is 88
  • It is further projected to increase from 21 to 24 years for men and from 23 to 26 years for women by 2075. This means that Canadians are expected to live beyond age 90 on average in the future.
    • So those born in 2010, who will be 65 in 2075, will live on average to 89 and 91 for men and women, respectively.
  • Currently, five out of ten Canadians aged 20 are expected to reach age 90, while only one out of ten is expected to live to 100.

The summary is that if you think you’re feeling old today, just wait!

Some of those statistics could be dizzying, but remember that those who achieve 65 years of age will live another 21 or 23 years ON AVERAGE.

More than half the people will have to fund 20+ years of retirement if they retire at 65.

Bottom Line

Canadians are living longer, and more actively, and placing greater and greater pressure on their retirement savings.

In order to acquire retirement assets, and maximize the nest-egg at the end, investors must place a higher percentage or amount into savings each year, earn a higher compound rate of return over their lifetime, and utilize a longer time frame for compounding to occur and for deposits to accumulate.

This final point has two options; begin saving earlier or keep working and saving longer, perhaps well past age 65.