January 20, 2010

CANADA: Living longer -- will poverty stalk the very elderly?

. EDMONTON, Alberta / The Edmonton Journal / Business / Money / January 20, 2010 By Andrew Allentuck, Financial Post The odds of living to a very old age are increasing. Data from Manulife Financial Corp. actuaries show that one person in a couple, each of whom is 65, has a 99% chance of living to age 70, a 94% chance of living to 80, a 63% chance of living to 90 and a 36% chance of living to age 95. Without proper financial planning, chances are that those who reach their 90s will live their last years in poverty. Photograph by: Getty Images, Financial Post What would appear to be a statistical marvel is a financial irony, for inflation can devastate lives as readily as healthy lifestyle choices and modern medicine can sustain them. Further data from Manulife Financial shows that inflation running at just 3% per year will reduce the purchasing power of $1,000 to $739 in 10 years, to $545 in 20 years and to $402 in 30 years. In financial terms, these are the numbers that seniors have to beat. The dilemma of planning for retirement thus becomes one not just of saving for a life based on goalposts established 10 or 20 years ago, but for keeping up with goalposts that are being pulled upward by science. Today, the risk is growing that those who reach their 90s will live the last years of their lives in poverty. Additional data show that, while life expectancy is growing, the period of freedom from serious illness is also increasing. The process, dubbed "compression of morbidity" by James F. Fries, a Stanford University School of Medicine professor, means it is increasingly likely that the old will be relatively healthy until the last few years of life, when costly illness may take over. For those planning their financial futures, the phenomenon of extended years of health followed by a relatively few years of serious illness is a challenge. Lee Anne Davies, head of retirement strategies at Royal Bank of Canada in Toronto, says that the group with the longest life expectancy -- women -- are less likely to have saved for their later years than men. "When we asked, 'Are you saving for retirement?' the answer was that women are less active savers. Overall, 32% of people 18 and over have not started to save for retirement. But 37% of women have not started to save." And that is a big problem: The group most likely to live longest, women are less financially prepared to do so. The challenge, identified by the annual RBC RRSP poll, is that only 35% of Canadians who are qualified to contribute to RRSPs have done so for 2009. "That is the lowest percentage of contributors since 1996," RBC states. Of course, 2009 was a tough year for the economy -- and for savers. Unemployment rose, returns from financial assets declined dramatically until March, then accelerated. Neither the huge stock market decline of 2008-2009 nor the rapid ascent from the bottom had been widely expected. Investors were thrown off their plans. Financial planners suggest it is not too late to restructure portfolios to meet the challenge of attaining a venerable age. "You can't begin to save for a critical illness that may strike you several decades in the future," says Adrian Mastracci, a financial planner and portfolio manager who heads KCM Wealth Management Inc. in Vancouver. "Conversely, you will have an extended period of relatively good health. "For the first period, you want to invest for a dependable return that exceeds the rate of inflation," he says. "For the second period, that of late illness, a person can use a long-term care-insurance policy that can pay the costs of being looked after by others." Mr. Mastracci says building up retirement capital should begin early in one's working life. "But buying the insurance policy can be postponed to one's 50s -- any earlier than that and you could wind up with a policy that may not accommodate your needs a few decades hence." Steady compounding above the rate of inflation requires a portfolio diversified among stocks, bonds and cash, for each has a period when it is right for the market. Stocks work best in periods of growth, bonds in period of contraction and cash when interest rates are soaring, Mr. Mastracci says. Given that stocks pay the most over time -- about 7% on average over decades, bonds 4% over decades and cash just 2% over time -- it makes sense to hold 60% of financial assets in equities, 30% in bonds and 10% in cash. Bond allocations can rise over time, he adds, to reduce overall portfolio volatility. [rc] © Copyright (c) The Edmonton Journal