On the Money with Dynamic Funds

PARTICIPANTS

Daryl Diamond
Chief Retirement Income Strategist

Rebekah Young
Vice President, Head of Inclusion and Resilience Economics

David De Pastena
Vice President of Portfolio Solutions

Mark Brisley: You're listening to Retirement Income the Right Way presented by On the Money with Dynamic Funds, the podcast series dedicated to changing the retirement conversation. Join us as we pull back the curtain on retirement planning.

David De Pastena: Welcome to another edition of On The Money. I'm your host, David De Pastena, Vice President of Portfolio Solutions. Today, we're diving deep into the vital topics of aging, health care costs and the impacts to retirement planning.

We're joined by Rebekah Young. She's a visionary in inclusive economic growth and a thought leader on the financial challenges of aging. As one of Scotiabank's economists, Rebekah brings insights from her impressive work with IMF and the Department of Finance. We're also joined by Daryl Diamond, Dynamic's Chief Retirement Income Strategist. With over 44 years of trailblazing experience and bestselling books, he's reshaped retirement planning in Canada. Daryl, Rebekah, it's a pleasure to have you with us today.

Rebekah Young: Thank you for having me

Daryl Diamond: David, great to be here.

David: Rebekah, as a thought leader on aging, what are some of the biggest challenges Canadians face as they age?

Rebekah: I would say, first of all, not so much challenges as trends, but one really big one is that Canada is aging as a society, but we're also aging individually. We all know the statistics, mostly that one in five in Canada now are seniors and that category of 65 plus are one of the fastest growing population, literally at multiples of other cohorts. As a society, we are increasingly aging, and we haven't even hit peak aging when you think that the last of the boomers will turn 65 by the next decade and they'll continue aging by mid-century.

Also, individually, we're living longer. Science is staving off some of the traditional diseases, cancers, cardiovascular disease. We are living longer. Just to put a number on it, since the 80s, the average 65-year-old has gained an additional four years of life expectancies. A boomer hitting 65 today, retiring at 65, if they were to look back when they started the workforce, they have gained another four years in life expectancy.

Now that's pretty good news, but I would say there are a number of asterisks on that. We're aging as a society and individually, but not all those healthy years are keeping pace. As we live longer, we are also seeing more of those years in less than full health. Now the not so great news is that governments haven't effectively planned for this aging, and that per capita spending on an 85-year-old is three times of what it is for a 65-year-old and multiples higher than a 35-year-old. This isn't a knock on older people that we all mostly aspire to get there, but essentially, public systems, whether it's health care, home care, long-term care, they're already stretched, and we haven't yet hit that peak aging.

From an economic perch, our message to policymakers is essentially do better, that we're on a trajectory of muddling through that we will likely be seeing chronic unmet demand for services, greater means testing on support, and eventually higher taxes to pay for it. For individuals, it can also mean taking some of these trends into account when you're planning for your own financial security and resilience in an era of longevity.

David: That's really interesting. Do you think Canadians might be underestimating the real costs of retirement? How does what they want to compare to what they can really afford, given that they'll live longer and health care costs are rising?

Rebekah: Canadians really aren't internalizing these trends, and that's natural because they are slow moving. You don't see them in the headlines every day. Just to give you an idea, the Canadian Institute of Actuaries did a very comprehensive study of 50-year-olds, so pre-retirement Canadians. One of the data points they found is that the average 50-year-old underestimated their life expectancy by almost four years. Essentially, they're back in the 80s in terms of what they expect their life expectancy to be. You can imagine how much science and medical knowledge has advanced over that period.

Psychologists might say that we look at our parents or even our grandparents and think that we're going to have a similar aging experience. We know through data and longevity data that is not the case. I think another area where Canadians really aren't necessarily observing some of the hard data would be around the prevalence of disability. In a similar study, when these 50-year-olds were asked, "Do you think you will have a disability as you get older or have some condition that impacts your daily acts of living?", less than a third thought they would as they got older. Whereas we have data from Statistics Canada that says if you're 75 or older, you will self-declare in these surveys that you do have a disability that impacts your daily living.

Another area where we see gross misperceptions is that less than a quarter think that they will need long-term care facilities. Again, data show that as we get older, particularly into the 90s, many more Canadians end up resorting to such care. Perhaps another area where there's a bit of a disconnect from what Canadians want versus what actually happens is that the vast majority of Canadians say they want to age at home. Canadians have a poor view on the quality, access or affordability of long-term care homes. Again, we know that many Canadians that live into their 90s end up in such facilities.

Now, I would say one of the big or most consequential misperceptions is what it would cost to age in place. We have another study by the National Institute on Aging, and they polled pre-retirement Canadians, and they found that the average Canadian thought that home care costs would run very roughly, 1,100 a month. Now, that seems like a pretty big number for the average Canadian household in terms of expenditures. That roughly works out to about one hour a day if you assume a support worker at an hourly rate of $40. That's really not a whole lot, especially when you look at what the Canadian Medical Association has benchmarked, roughly the level of support that can keep somebody out of a long-term care facility. They suggest that about 22 hours a week or about three hours a day can make that difference between staying at home versus institutional care.

We all know stories that it's not always health-related complications that land some people in long-term care homes, but rather the lack of support for some very basic functions like grocery shopping, bathing, or other daily acts of living. We also know from the Canadian Institute of Health Information that about 10% of long-term care individuals don't necessarily need to be there if they just had that very modest level of care at home.

When you piece together that misperception of how long we will live, what sorts of conditions we may have, what it might cost if we really do want to stay in place, you can see why Canadians aren't particularly prepared as they get older for some of these life surprises. Essentially, we have a system that drives Canadians to the most expensive, which is the hospital bed because it's universally provided, yet it is the least desired among most Canadians and the most costly to governments.

David: Wow. $1,100. That seems like a lot of money for the average Canadian. I think the message from what you're saying sounds like Canadians really need to consider these costs in their financial planning process. Daryl, in your 30, 40 years of working with this market, pre-retirees and retirees, what are some of the things that you've learned on helping investors prepare for health-related issues as they age?

Daryl: It's always a discussion on the surface. By the way, before I actually answer that question, I do want to direct those people who found this topic interesting enough to tune into this podcast, Rebekah did an unbelievably excellent report on Rethinking Retirement in an Age of Longevity. That is the title of it. It came out June of last year, 2023. My compliments, Rebekah, on that particular piece of research. It's excellent.

Coming back to the question, David, it's so difficult because that phrase of planning for or be prepared for, the range is so wide open in terms of when something might happen to an individual that would require them to seek additional services or care given a change in health, and the level of that change of health, right? Rebekah just finished talking about the fact that if people just had certain services provided, they wouldn't need to be in a care facility and would be able to age in place.

The range of need is dramatic, as is the ability to finance any preparations you wish to make to address this when ultimately it happens. It does ultimately happen that either you're not well enough to care for yourself, your spouse, if you're talking about a couple, may not be able to, physically and mentally, for that matter, be able to address the needs of the person who needs the care. We just don't know the timing of it, the severity of it, along with one other thing. Most people in Canada think everything is paid for. If something happens to me, if I need to have care in my retirement, I'll be fine because the government looks after me.

In certain provinces, there are private options for care facilities. In certain provinces, I'm looking at Manitoba, where I live, currently, there are government-run facilities for people requiring long-term care, and that's sort of the only option, with a couple of minor exceptions. I think first and foremost for advisors and what we try to do with our clients was bring up the discussion. I can't imagine sitting in a meeting with children of a retiree or a couple where this topic has at least not been discussed and documented, only to be explaining to the children why their inheritance has basically been chewed through by costs related to long-term care or health.

That might be an inevitability, but from the advisor's perspective, as well as the desire of those people receiving the care who wanted to leave something to an estate or to children or a charitable cause, I think there's an obligation there for all parties to at least have that conversation, revisit it, and make sure it is documented in the advisor notes when those discussions take place.

David: I'm just curious, how did you actually implement something like this when someone was aware and how did you change a financial plan or the portfolio, if at all?

Daryl: It's really difficult. It's interesting that you could have a room of a hundred people, a hundred retirees, and I'm just using a bit of a dramatic example, but it's to make the point, and say to this group of people, "Look, everybody in this room is going to be in a care facility requiring 24/7 attention except for one of you. One of you is going to be okay." Every person in that room would wipe their brow and go, "Thank God it's not me." Reality is there, but for most people, it's an issue of, "Yes, I understand that that's a possibility, but I don't think I'm going to be in that position." The ability to put in place long-term care insurance is a real challenge. I say that from personal experience.

There are some specialists who work with some of the insurance firms, and if you can access their help for a discussion or implementation, that's a useful thing to employ in helping your clients just realize all of the issues. Retirees would much rather talk about the next cruise they're going on, and I don't mean this in a dismissive way or insulting way at all, but that's where they want the focus, is talking about my grandkids, the next cruise we're going on, as opposed to, "Gee, I wonder who's going to change my diaper when I'm not able to do that myself."

It's a tough discussion. I would love to tell you that I wish, I wish we would have been more successful in implementing more long-term care insurance contracts. Not that that necessarily down the road solves every financial problem that's going to present itself if people need that level of care, but certainly it would assist people in not going through their personal assets as quickly as they otherwise will or allowing them a higher level of option in terms of care when in fact they need it.

David: Rebekah, with the costs of in-home and long-term care going up, what do you think about how retirees can plan to ensure that those last 15 years are enjoyable years?

Rebekah: That's a very good question, and I want to pick up on a number of points that Daryl mentioned, and particularly one word that he used which really resonated, which is that there are just so many variables, yet nobody really thinks it'll be them. I think being armed with information, with clear data on just how long people live, that it really is important to tease through some of the misconceptions I spoke about earlier. Daryl also mentioned being in a room with adult children. I think we tend to simplify sometimes as a single individual, you live to a certain age and here's how your money will be drawn down and you expire at such an age. We don't think of the complexity of real life.

Just to give you an example that, yes, we're aging individually, but as soon as you add two adults, statistically the chances of at least one of you living is amplified, that a 65-year-old man has 40% chance of reaching 90, a woman 50%, but together at least one of them 70%, and one in three of those couple will live to 95. It gives you this sense that just being armed with the information and appreciating that this very well could be you or your spouse or your situation warrants a discussion how you might think about it, having a plan is a really important start, and you may or may not be surprised, but half of Canadians don't even have a financial plan for retirement, let alone one that considers health-related issues.

It's important then also to essentially turn that plan from a noun to a verb because life happens to everyone, and it's not just aging. There are other life events, positive and otherwise, that require adaptation and resilience. Really planning is a constant process, is looking regularly at how your life circumstances have changed, and is your planning process building in that financial security that's aligned with your values and your desire for how you do want to age. To be fair, so half of Canadians don't have any plan, there are a third that are thinking about long-term care needs, but now only one in ten is actually setting aside funds to pay for it, according to the Canadian Institute of Actuaries.

Now there are a lot of other steps, so it's not just about setting money aside. One could think about downsizing or adapting the home, but barely even one in ten talk to their family about their preferences for aging and care. It's also important, that it's not just a question of you're going to live longer, you need to save more, you need to spend less in retirement. It can be about doing things differently. Armed with this information, what things would you do differently in terms of how you might approach building financial security? Now these are the sorts of questions and considerations that are all integral to planning for longevity.

Traditional stress testing would typically stress your portfolios for risk tolerance, for market performance, you name it. We've got very sophisticated tools to give scenarios of how your financial security might look under a range of different scenarios. Even a moderate degree of a health care related shock could have much more material impact on one's financial resilience than some of these typical market stressors. Really underscores why thinking about health related and longevity related questions are integral to building and talking about and considering financial planning over the long run.

David: Speaking to the two of you, you make me want to call my mom and see if she's thought about any of these things. These are pretty scary numbers. I want to ask you, Daryl, as a former advisor, what were some of the steps you would recommend for people to start preparing now? How would the paycheck portfolio approach help in managing the risks of living longer?

Daryl: It's well known, I think, in the industry that my preference as a financial planner, implementing investment solutions for those in retirement does involve a large amount of the paycheck portfolio approach. Our experience there has been that it assists us in maintaining capital values while providing cash flow at a withdrawal rate that is established really not by the advisor so much as the people managing the portfolios. That combination of comfort, if I can use that expression, in knowing that historically the capital is preserved while the income is being delivered, that goes a long way in terms of addressing that one issue of, in the decumulation years, is this going to go to zero at some point in time?

Of course, we cannot use words like guaranteed or payable for life. Our experience, however, in using this approach and the investment positions we use to structure that approach for clients, we weren't in a position of having someone running out of money. First and foremost, let's just sort of get that point on the table, that our obligation as an advisor in the retirement income space is to do whatever we can to assist clients in alleviating, if not eliminating, that particular concern.

When it comes to the planning side, get the children involved. You can imagine that as parents age-- I'm the only septuagenarian on this phone call. In fact, if you add up the age of everybody else on this call, I still exceed it as an individual. I've been to the movie, I've seen our parents go through, and I say our because my wife's parents were involved as well, go through stages of declining health, and ultimately three of the four people have passed away. In that experience, you really get to see it up close in terms of what can happen and what eventually does happen.

I think to have the children involved in conversations around this does two things. It provides a level of comfort for the parents, the retirees, but it also provides a level of comfort for the children because guess who this falls upon if this is not discussed in advance? It's also a freshly paved off-ramp from the financial planning discussions to go down a road with the children of the people who are clients, the retirees who are clients, and start integrating them, not only in their parent situation, but finding out ways you can be of assistance to this next generation, who ultimately are going to inherit the wealth that you're managing for your retired clients.

David: Daryl, all I have to say is that 70 is the new 50. I want to thank Daryl and Rebekah for digging deep into the impacts of aging on retirement. This is another edition of On the Money. On behalf of all of us at Dynamic Funds, we wish you continued good health and safety. Thanks for joining us.

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