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Will I run out of Money before I run out of Life?

Canadian life expectancy (“LE”) continues to improve a little each year. A male age 65 today has a LE of 20 years: and a female 65 today has 22 years, on average to live. "Life Expectancy" means that one half of the random group of Canadian men, or, women, will still be alive at age 85,or age 87, respectiveky. In turn this means that 50% of 65 year olds need to have a monthly income in 20-22 years and who knows how much longer? 

A sure fire way to have an income that lasts to one's death is to purchase a life annuity from an insurer. Currently these are expensive because the insurance company will back the payments by investing in 15 year bonds. Since current bond yields are very low the insurance company will require a large amount of money to set up the annuity since they will only earn a modest 2.195% based on currently issued bonds,( June 8, 2021, Government of Canada issues). 

Some life insurers offer a guaranteed lifetime income contract. These contracts are more flexible because the contract owner can withdraw amounts at any time and in any amount. If he or she withdraws more than the minimum monthly benefit however the ultimate guaranteed income may not be available at older ages. Therefore when arranging for this product it is important to see how the cash flow meets the depositor's expected needs in later years. Secondly the insurer will limit the investment choices to support the long term growth so that the assets are available to continue the monthly guaranteed income for life in the contract owner's later years. If the withdrawals are continued at the minimum level, then the insurer is on the hook to pay the lifetime-promised monthly income even if there are insufficient funds or none left at some future date. 

Given that the typical spending pattern for retirees is to spend more heavily in the first 5-10 years of their retirement on such expenses as travel, you need to think about what retirement means to you and then plan for invested assets and cash flow to sustain the needed spending in future years. Ideally you will have assets earmarked for the higher spending years, and hold those assets separately from the assets that will generate retirement cash flow. For example if you choose to defer the CPP and OAS pensions to your age 70, you could finance travel with TFSA withdrawals and then potentially replenish your TFSA(s) from the higher CPP and OAS payments in your 70's and 80's. 

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