Andrew Pyle
January 27, 2023
Should I stay or can I go?
As I have talked about before, the sad statistic in this country is that barely half of individuals have a financial plan. Back in 2017, CIBC conducted a poll that found that 46% of Canadians did not have a financial plan. Of the 54% that did have a plan, only two-thirds claimed they had a long-term plan that articulated their savings goals and strategies to achieve them. While not addressed in that poll, other studies have shown that even for those that had a plan, less than half indicated that they review and update their plans on a regular basis (we do updates every three years with clients). In that same survey, we found that the number one concern among Canadians was an increase in health care costs during retirement, followed by unexpected costs (including long-term care) and then not having enough money to maintain their desired retirement lifestyle.
Financial planning is usually discussed as something that only younger Canadians should do, in order to set a path to retirement and, for many, they may stop their regular planning routine once they get to retirement. This ignores the fact that their time horizon after retirement could be as long as the period of time they were actively engaged in their career and saving. And, it is when Canadians are close to or at retirement that the risks highlighted above start to become more real.
Over the past several years, the team and I have run into an increasing number of situations where clients have tabled the discussion about what happens when they get to a point when living at home when they get older becomes a challenge. Even if the topic doesn’t come in our discussions or planning sessions, often we will raise it based on our experiences with other individuals and families. The demographic shifts alone in society almost guarantee that these discussions will become more prevalent.
Some say that the most important decision in life you will ever make is the purchase of your first home, but when it comes to how your later-stage retirement years will be spent, I argue this is right up there as well. The problem is that many Canadians leave the analysis of this major decision too long, just like some wait too long before addressing their retirement plan. In Canada, we think of three main options when it comes to a supportive retirement lifestyle – long term care, retirement residences and assisted living at home. All three carry advantages and disadvantages and variations in cost.
One of my first private wealth clients was a lady in her 80s that lived in Mississauga. She lived in the same house that her and her husband built. It was right next to a beautiful golf course, where they would regularly play. After his death, she became frail and was advised to move into either a retirement / long-term care residence; however, because of her attachment to the house, she wanted to stay. This involved round-the-clock home and personal care which then cost her about $10,000 per month.
I later had a client in her late 70s who was full of energy yet was tired of doing things round the house and wanted more social connections in her life. Her choice was a higher-end retirement residence, yet she was uncertain whether this was something she could afford. Solution – a financial plan that incorporated the sale of her house, a revised list of expenses that included the reduction in costs associated with her current home and the increase in residence costs. After going through the plan, she saw that she had the financial ability to follow through with her choice and this is something that also brought a great deal of comfort to her family.
Unlike planning for retirement, where most people have a set age or date in mind, or even the purchase of a new home, analyzing our needs during our later years may seem daunting. If the choice is I want to stay at home, but I want to plan for care, when is that going to happen? Things like choosing to have someone cut the grass, plow the driveway, clean the house or even cook meals are somewhat easier as they are lifestyle decisions. When I’m going to need someone in to administer medications or assistance in getting around is unknown. Still, not knowing exactly when it will be time to either leave your home to transition into a retirement residence or long-term care, or even when services will be needed to allow for continued living at home, doesn’t mean you can’t plan. A few guiding principles will help.
First, in choosing an arbitrary start for this transition, the earlier date you select, the more prudent the plan will likely be. This is no different than electing a retirement date that is sooner or assuming a longer life expectancy.
Second, base the costing of your option on what you really want and what the realistic price tag of that option is today. For example, if you want to reside in a private retirement residence that offers more amenities, then look at what that would cost today and build it into the financial plan with an appropriate inflation rate attached. Given that the demand for retirement residences will probably continue to grow for the foreseeable future, the annual inflation rate could be higher than the stated CPI inflation rate. For example, if retirement residences simply rose at a rate of 2% per year, this would still mean that your cost would be 22% higher in 10 years and 49% in 20 years. Double that rate and your cost is 48% higher in 10 years and 119% higher in 20.
The costs of personal and home care are the most variable, given that there is such a wide range of services that you may need or want. Be exhaustive in terms of the list of services and use multiple providers of such services in your area to get an assessment of what they cost. Again, the inflation rate that will be experienced in this area could easily be higher than the broad CPI-based rate.
If done properly, a financial plan that incorporates these principles will give an individual or couple a realistic view as to what this transition in lifestyle will mean for their finances. For those that truly want to stay in their homes, this exercise will tell them if they can afford it. If not, then creating a plan well ahead of when you think this transition will take place at least enables you to make changes in a savings strategy in situations where staying at home may not look viable.
Lastly, I run into a lot of people who want to transition into some form of retirement residence, but don’t think they can afford it. Average costs have certainly risen for good quality residences and can easily run $6,000 or more per month. I tell them that this cost is not necessarily an addition to their current retirement lifestyle expenditures, since they will most likely sell their current dwelling. All the costs associated with that dwelling vanish, and there may even be declines in things like food and/or automobiles. On top of that, there may be tax advantages that stem from living in a retirement residence. In other words, while this transition may represent a net increase in spending per year, it probably will not be as much as what the individual thinks.
There are enough things in the world, from politics to financial markets, that keep you up at night. As our 2017 study showed, the top two concerns in retirement were health care costs and long-term care. While you can’t completely alleviate those concerns with a plan, you can minimize the level of anxiety created by uncertainty over the financial implications.
On behalf of the Pyle Group, have a wonderful weekend.
Andrew Pyle
CIBC Private Wealth consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. “CIBC Private Wealth” is a registered trademark of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc. This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2022.CIBC Wood Gundy, a division of CIBC World Markets Inc.
These are the personal opinions of Andrew Pyle and the Pyle Group and may not necessarily reflect those of CIBC World Markets Inc.