Longevity risk: planning for a retirement that lasts to 95 or beyond

What longevity risk means

Most financial risks are about returns: what markets do, what inflation does. Longevity risk is about time. It's the possibility that your retirement lasts longer than the money set aside for it.

It's tricky because it runs in two directions. An average lifespan is, by definition, one that many people outlive, so planning to an average age leaves a real chance of running short. Planning to a very old age protects against that, but at the cost of spending less in the years you're most likely to enjoy.

There's no correct end age. The useful step is to see what different horizons cost in today's spending, then decide how much cushion feels right for your health, family history and other resources.

A long retirement also stretches every other risk. It gives inflation more years to compound, gives markets more chances to deliver a poor stretch and leaves more time for health and care costs to appear. That's why it overlaps with the inflation guide and the sequence of returns guide.

Choosing a planning horizon

The planner on this site uses 95 as its default end age. That's a planning choice designed to leave a margin, not a prediction of how long anyone will live. You can change it to 90, 100 or any other age.

For couples, the horizon often reflects the longer of two lifetimes, because the surviving partner still needs income. The couples page and the CPP survivor benefits guide cover what changes when one partner dies.

Whatever age you choose, it's worth looking at what happens just past it. A plan that runs out exactly at 95 behaves very differently at 96 from one that still has a reserve.

A practical test is to run the plan at two or three end ages, note the sustainable spending for each, and weigh whether the difference is worth the extra protection.

What a longer horizon costs: Elaine's numbers

Suppose Elaine, 61, is single, lives in Prince Edward Island and plans to retire at 62. She has $360,000 in her RRSP and $95,000 in her TFSA, and will add $12,000 and $7,000 to them in her final working year. Her CPP estimate is $1,000 a month at 65, and she expects full OAS.

Using an illustrative 5% return in retirement and 2% inflation, the calculator estimates the highest steady after-tax spending her plan supports to each end age, with CPP starting at 65 or at 70. Each extra five years of horizon trims what she can spend every year along the way.

Running out late versus not at all

Suppose Elaine settles on spending of $36,000 a year and runs her plan to 100, starting CPP at 65. From 65, she draws about $21,487 a year from her RRSP alongside CPP of $12,000 and OAS. Her RRSP is spent by 81, and her TFSA then supplies about $15,392 a year.

On this steady path, her savings run short at 96. From then on, she'd have CPP and OAS, which continue for life, but not enough to keep spending at $36,000. That's four years of shortfall on a 100-year horizon, and none on a 95-year horizon, where the same plan ends with about $25,744 left after tax.

Look closely at what happens after 96 in this version. CPP and OAS keep paying, so Elaine's income doesn't drop to zero; it drops to what those lifetime sources provide. That floor is a large part of why public pensions matter in longevity planning.

Neither result is a forecast. The point is that the same plan can look complete or incomplete depending on the age you test it against.

Lifetime income as a longevity backstop

Income that lasts for life is the most direct protection against a long retirement, because it doesn't run out. CPP and OAS both qualify, and both are designed to keep pace with the cost of living.

Delaying CPP increases it by 0.7% for each month after 65, up to 42% at 70. For Elaine, that turns $12,000 a year into $17,040. She has to draw more from her RRSP in the gap years, about $33,487 at 65, but once CPP starts, her savings need to supply far less each year.

Run to 100 with the same $36,000 of spending, the CPP-at-70 version never runs short and finishes with about $14,031 after tax. Delaying OAS works similarly, adding 0.6% for each month up to 36% at 70; the OAS deferral guide covers that choice.

Other ways retirees address a long horizon

Beyond public pensions, several tools are commonly discussed for longevity, each with trade-offs around flexibility, cost and what's left for an estate:

• Life annuities: converting part of your savings into income for life. The annuities guide explains how they work.
• Defined benefit pensions: taking a lifetime pension rather than a lump sum, where that option exists.
• A late-life reserve: keeping part of a TFSA or other savings set aside for the far end of the plan.
• Home equity: some retirees treat a home as a backstop that could be tapped later. See downsizing and home equity.
• Flexible spending: spending more in early, active years and less later, if your plan allows it.

Balancing a long horizon with living now

Planning to 100 isn't automatically the cautious choice; it's a trade. In Elaine's case, moving from 90 to 100 with CPP at 65 costs $2,900 a year in sustainable spending, every year from 62 onward.

Many people revisit the horizon as they age. A plan made at 61 can be re-run at 70 or 75 with actual balances and health in view. The CPP start-age tool and the retirement plan both let you test different end ages.

Quebec workers receive QPP rather than CPP, with similar but not identical rules, and the tax estimates here exclude Quebec provincial income tax.