Longevity risk planning has become more important as fewer Canadians have defined benefit pensions and retirements get longer.kbeis/iStockPhoto / Getty Images
The biggest concern for many Canadians heading into retirement is whether they’ll outlive their savings. No one can say for certain how long they’ll live, but longevity risk assessments are reducing that uncertainty.
Longevity risk planning is fairly new within financial planning, says Alexandra Macqueen, certified financial planner and vice-president of learning, development and professional practice at FP Canada. It has emerged as the share of Canadians receiving defined-benefit pension plan benefits has declined and more have had to save for their golden years independently. At the same time, the retirement age has gone down and lifespans have extended alongside advancements in medicine.
“It’s a new scenario, the idea that you would have a retirement that might be as long as your entire working life or longer,” she says. “We don’t have a wellspring of practices.”
FP Canada and Quebec’s Institut de planification financière have put together annual projection guidelines for financial advisors since 2015. In addition to reasonable expectations for asset class returns and inflation, the projections include a probability of survival table.
The table gives a range of survival probabilities for men and women at ages 20 and up, as well as joint probabilities of survival for couples. For example, the 2024 table suggests that a woman at age 50 has a 50 per cent chance of living until 92, a 25 per cent chance of living to 96 and a 10 per cent chance of living to 99.
The probabilities were arrived at based on data from Canadian public and private sector pensions between 1999 and 2008, and brought forward to 2024 using a scale created by the Canadian Institute of Actuaries to measure mortality improvements.
Gender, socioeconomic status, health and age also play roles in longevity assessments. The probability table noted Statistics Canada research that found non-smokers can expect to gain about three years of life expectancy, while heavy smokers can expect to lose about nine. People who are more financially comfortable and better educated also tend to have higher life expectancies, and younger clients may be able to benefit from further advancements in medicine.
“The point of the tool is to take a risk-management approach to longevity risk,” Ms. Macqueen says. FP Canada recommends financial planners have “fulsome conversations” with their clients before selecting a planning horizon, but Ms. Macqueen suggests planning to the 25 per cent probability as a general rule.
Most financial planning software requires advisors to input a fixed horizon or age to plan toward, but Ms. Macqueen said the association is hopeful more software providers will integrate its projection assumption guidelines.
Brenda Hiscock, certified financial planner at Objective Financial Partners Inc. in Markham, Ont., says she uses FP Canada’s probability tables and typically runs financial plans until age 100 for single clients or until the youngest partner turns 95 for a couple – unless there’s “good information” to suggest there’s no need to plan that far out. She also asks clients questions about their lifestyle and health to determine whether to tweak the planning horizon.
“With couples, there’s less risk of outliving their assets, and a single person is more stressed, quite frankly, about the future,” Ms. Hiscock says.
She notes her financial planning software is able to show clients what their assets are expected to look like year over year, so they can understand what their financial picture would look like if they passed away sooner.
Moshe Milevsky, professor of finance at York University’s Schulich School of Business, says a concept called biological age is starting to become part of a small group of advisors’ practices. Different from chronological age, biological age refers to how old someone’s cells are. Sometimes the two ages are the same, but someone’s biological age can also be older or younger than their chronological age.
He says some advisors to high-net-worth clients in the U.S. are beginning to offer clients the option to get tested for their biological age and plan toward that horizon.
“Some institutions are going to be slow to adapt to that. The regulators are going to be slow to adapt,” Mr. Milevsky says.
He adds that “there’s a lot of focus right now on lifespan and not enough on health span … The gap [between the two] is going to be 10, possibly 15 years.”
Ms. Hiscock says she factors clients’ potential health declines into her financial plans by leaving a cushion of cash for long-term care.
“I have clients coming to me saying, ‘I want to do a die-with-zero approach.’ I hesitate to do that, because there’s a reasonable chance that if they live a full life they will need some care,” she says.
Clients’ health span is a major focus for Manulife Financial Corp., and the insurer is using artificial intelligence to allow for more precise and personalized longevity risk assessments, says Karen Cutler, Manulife’s head of underwriting and claims, and chief underwriter for individual insurance.
The insurer began using an AI-powered underwriting assistant in 2018, which makes decisions on straightforward policy applications and allows underwriters to focus on more complicated cases. It also uses AI to analyze large amounts of data across multiple countries on health conditions, medical advancements and demographic data.
She says the combination of medical innovation and a wider swath of data to draw on has allowed Manulife to offer better insurance rates to groups of clients – including, this year, updating its rates for people with diabetes as continuous glucose monitoring and other treatments have improved outcomes – and to consider cases it didn’t have enough information on before, such as people with rare diseases.
While Ms. Cutler couldn’t speak specifically to financial planning, she notes Manulife’s wealth products are backed by the same actuarial tables that the insurer uses for insurance products.