What can you do to Avoid not Having Enough Money in Retirement?
Here is what you can do to avoid not having enough money in retirement:
- plan your income according to your life expectancy;
- protect yourself against the increase in the cost of living;
- have money available at all times.
Plan your income according to your life expectancy
In order to meet your needs
for the rest of your life, you must take into account two things: your life expectancy and the amount of income you need in retirement.
Guess what: you may live longer than you think! A woman aged 65 today has a one in two chances of living until age 91 and one in four chances of living until age 96. A man has a one in two chances of living until age 89 and one in four chances of living until age 94. Therefore, if you are in good health and you have good life habits, you could live longer than the average. You can use the
Life expectancy calculator based on various survival risks 
tool from the Institute of Financial Planning to estimate your life expectancy.
Did you know there are retirement pensions that are guaranteed for life? This means that you will receive them for life, regardless of whether you die at age 80 or 100. It is the pension under the Québec Pension Plan, the pension under the Old Age Security Program (OAS) from the government of Canada and certain retirement pensions offered by the employer. It is a nice protection! To reduce the risk of running out of money in retirement, try receiving higher pensions, for example, by applying for them later. In any case, you need to plan your retirement income, and therefore your pensions and savings, according to your life expectancy!
Protect yourself against the increase in the cost of living
To avoid not having enough money in retirement, you must also protect yourself against the
increase in the cost of living, that is, inflation. This has become more apparent in recent years: at the grocery store, you can no longer buy as many things with $100 as you could 5 years ago. When you work, you can hope that your salary will increase, and therefore that you will retain your purchasing power. However, once we retire, our income is not the same. So, what can you do?
Pensions adjusted to the cost of living
The retirement pension under the Québec Pension Plan and the pension under the Old Age Security Program protect you against inflation because they are indexed each year, that is, they increase according to the cost of living. It can be advantageous to apply for them later than planned, so that the amount is higher. You would have better protection against inflation because a larger portion of your retirement income would be protected.
If you have a workplace pension plan, verify whether the pension amounts are indexed. If that is the case, you should check to see how your pension may increase, since some pensions are only partially indexed.
Return on your savings
To protect your savings against inflation, you need to aim for a return on your investments that keeps pace with or exceeds the increase in the cost of living. When you keep your savings in an account that earns little or no interest, you are actually losing money because the value of your savings is not increasing, while the cost of living is.
Have money available at all times
Not running out of money also means having
enough available money, that is, liquid assets, to meet your needs quickly. Not all retirement income can be used quickly.
For example, your tooth really hurts and you have to go to the dentist for an expensive treatment. But your savings are not available because they are invested for the next two years, with no possibility of withdrawing them. You also cannot request an advance on your pension under the
QPP or from the government of Canada. You may therefore need to pay for this expense with your credit card at a high interest rate, even if you have money set aside!
To protect yourself from this risk, there are two things you can do:
- have an emergency fund to pay for unexpected expenses;
- choose your investments carefully. Make sure that your investments end at different times so that you have money coming in distributed over time. For example, one investment ending in two months, another next year, and so on.
This is a lot to think about. To protect yourself, it is important to get advice and prepare a withdrawal plan.