5 Retirement Risks Every Canadian Should Plan For
Retirement is an exciting new chapter. It can mean more time with family, travel, new hobbies and the freedom to enjoy the things that matter most.
But achieving the retirement lifestyle you envision takes more than saving enough money. It also means preparing for the unexpected.
Market downturns, rising living costs, longer life expectancy, spending too quickly and increasing healthcare expenses can all affect how long your retirement savings last.
The good news? While you cannot predict every financial challenge, you can take steps to prepare for them.
Here are five important retirement risks every Canadian should understand—and practical ways to help manage them.
1. Market Risk: What Happens When Investments Lose Value?
Investing involves uncertainty. Markets rise and fall, and the value of your portfolio will fluctuate over time.
A market downturn can be particularly challenging when you are approaching retirement or already relying on your investments to generate income. During your working years, you may have time to recover from a decline. In retirement, you might need to withdraw money while your investments are worth less than they were previously.
For example, imagine that your retirement portfolio declines in value just as you begin withdrawing money each month to cover living expenses. You may have to sell investments at lower prices to fund your retirement. Depending on the timing and severity of the downturn, this can make it harder for your portfolio to recover.
This is one reason why the timing of investment losses can matter as much as the losses themselves when you are drawing an income from your savings.
How can you manage market risk?
Understand your comfort with risk. Your investment strategy should reflect both your willingness and your financial ability to accept investment losses. A portfolio that keeps you awake at night may encourage you to make emotional decisions during a downturn.
Diversify your investments. Holding a mix of investments across asset classes, industries and geographic regions can help reduce your reliance on any one investment or market. Diversification does not eliminate losses, but it can help manage risk.
Keep your long-term plan in perspective. Before reacting to market headlines, consider whether anything has changed about your goals, income needs or time horizon. Avoid making major investment decisions based solely on short-term fear.
Review your retirement income strategy. Consider how you will fund everyday expenses during periods when your investments are down. Your plan should account for market uncertainty rather than assume returns will be positive every year.
The goal is not to avoid all investment risk. It is to take an appropriate level of risk for your circumstances and have a plan for navigating difficult markets.
2. Inflation Risk: Will Your Money Still Buy as Much?
Inflation is the gradual increase in the prices of goods and services. Even when inflation is relatively modest, its effects can add up over a long retirement.
Think about the expenses you rely on every day: groceries, utilities, home maintenance, transportation, insurance and travel. If these costs rise over time, the same retirement income may no longer cover the same lifestyle.
For example, imagine that your household spends $50,000 a year on a particular standard of living. If prices increased by an illustrative 3% annually, maintaining that same level of spending would require approximately $67,200 a year after 10 years.
That is the challenge of inflation: your expenses can rise even when your lifestyle stays the same.
How can you prepare for inflation?
Build rising costs into your retirement budget. Do not assume your current expenses will remain unchanged throughout retirement. Consider how essential costs may increase over time.
Maintain an appropriate balance of investments. Depending on your circumstances, a diversified portfolio containing both growth-oriented investments and more conservative holdings may help balance long-term growth potential with stability and income.
Review your income sources. Understand how your workplace pension, Canada Pension Plan (CPP) and Old Age Security (OAS) may contribute to your retirement income, including which benefits are adjusted for inflation and under what rules.
Revisit your plan regularly. If your expenses rise faster than expected, you may need to adjust your spending, savings or withdrawal strategy.
Inflation is not something you can control, but you can plan for the possibility that your retirement will cost more than it does today.
3. Longevity Risk: What If You Live Longer Than Expected?
One of the most encouraging possibilities in retirement is having many healthy years ahead. However, living longer can also create a financial challenge: your savings may need to support you for 25, 30 or even more years.
This is known as longevity risk—the possibility of outliving your retirement savings.
Consider someone who retires at age 65 and lives to age 95. Their retirement could last three decades. During that time, they will need money for housing, food, transportation, leisure activities and potentially increasing care needs.
A retirement plan based on a shorter time horizon could leave that person financially vulnerable later in life.
How can you manage longevity risk?
Plan for a long retirement. Rather than basing your financial future on an average life expectancy alone, consider whether your savings and income sources could support a longer-than-expected retirement.
Understand your guaranteed income sources. CPP, OAS and an eligible workplace pension may provide important sources of retirement income. Understand how these fit alongside your personal savings and investments.
Avoid relying on overly optimistic assumptions. Investment returns, future spending and lifespan are uncertain. A sound plan should consider less favourable scenarios, not just the best-case outcome.
Review your investments as your needs change. Retiring does not necessarily mean you should eliminate all growth-oriented investments. Your money may still need to support you for decades. The appropriate mix depends on your time horizon, income needs and risk tolerance.
The objective is to build a retirement income plan that can adapt to a long life—not simply one that works if everything unfolds exactly as expected.
4. Spending Too Quickly: Are Your Withdrawals Sustainable?
After years of saving, retirement can finally offer the opportunity to enjoy the money you have accumulated.
You might want to travel, help your children or grandchildren, renovate your home or pursue hobbies you previously had little time for. These are meaningful goals, and enjoying retirement is important.
The challenge is finding a balance between enjoying your savings today and preserving enough to support your future needs.
Withdrawing too much in the early years of retirement can put pressure on your portfolio, especially if investment markets perform poorly at the same time.
For example, a retiree who takes larger withdrawals to fund an expensive trip during a market downturn may have less money invested when markets eventually recover. If this pattern continues, the portfolio could become depleted sooner than expected.
How can you help make your savings last?
Understand your complete retirement income picture. Identify your expected income from CPP, OAS, workplace pensions, RRSPs, RRIFs, TFSAs and non-registered investments, as applicable.
Create a realistic spending plan. Estimate essential expenses, discretionary spending and potential future costs. Identify areas where spending could be reduced if circumstances change.
Review your withdrawals regularly. Your income needs and investment performance may change over time. Reviewing your plan can help you assess whether your current withdrawal strategy remains sustainable.
Build flexibility into your spending. If markets decline or costs rise unexpectedly, having some discretion over non-essential expenses may help reduce pressure on your investments.
What about the 4% rule?
You may have heard of the 4% rule, a commonly discussed retirement-planning guideline. In its traditional form, it suggests withdrawing 4% of a portfolio in the first year of retirement and then adjusting the dollar amount for inflation in subsequent years.
It is often discussed in the context of funding a retirement lasting approximately 30 years, using assumptions about the portfolio and historical investment returns.
However, the 4% rule is a guideline, not a guarantee. Its suitability depends on factors such as investment allocation, fees, inflation, taxes, retirement length and market conditions. It may not be appropriate for every Canadian retiree.
Your withdrawal strategy should reflect your individual circumstances rather than rely on one percentage as a universal answer.
5. Rising Healthcare Costs: Are You Prepared for Future Needs?
Healthcare is another important consideration when planning for retirement.
Although Canada's publicly funded healthcare system covers many medically necessary services, coverage does not mean every health-related expense is paid for. Depending on your province, eligibility and personal circumstances, you may face costs for prescription medications, dental care, vision care, mobility aids, home support or private and long-term care.
Some people will have relatively modest expenses. Others may need more extensive support as they age.
For example, you might be comfortable managing your household independently today but eventually need help with transportation, personal care or daily activities. Those services can add to your expenses, and the cost will depend on the type and amount of support required.
How can you prepare for healthcare expenses?
Review your existing coverage. Understand what your provincial health plan covers and what it does not. If you have employer-sponsored benefits, find out whether coverage continues into retirement or whether a conversion or continuation option is available.
Estimate potential out-of-pocket costs. Consider prescription drugs, dental and vision care, mobility equipment and other expenses that may apply to you.
Explore long-term care possibilities. Learn about the types of support available in your community, including home care and residential care, and investigate how costs are funded.
Build a financial cushion where possible. Having accessible savings or flexibility in your broader retirement plan may help you respond to unexpected expenses without immediately disrupting your long-term investment strategy.
You cannot know exactly what your future health needs will be. Planning for possible costs, however, can give you more options if circumstances change.
Bringing It All Together: Your Retirement Risk Checklist
You do not need to predict the future perfectly to prepare for it. A thoughtful retirement income plan can help you understand where you may be vulnerable and what options you have.
Use these questions as a starting point:
Market risk: Is my investment strategy appropriate for my financial situation and comfort with risk?
Inflation: Have I allowed for the possibility that my expenses will rise throughout retirement?
Longevity: Could my savings and income support me if I live longer than expected?
Withdrawals: Is my spending plan realistic, and can I adjust it if markets or expenses change?
Healthcare: Have I considered potential out-of-pocket medical and long-term care costs?
It is also important to revisit your plan when significant events occur, such as a change in health, the loss of a spouse, a major expense or a shift in your retirement goals.
The Bottom Line: Plan for the Retirement You Want—and the Unexpected
Retirement planning is not just about reaching a savings target. It is about creating a financial strategy that can support your lifestyle through changing markets, rising prices, unexpected expenses and the possibility of a long retirement.
The five risks discussed here are not reasons to worry about retirement. They are reasons to prepare.
Start by understanding your income sources, estimating your expenses and identifying the areas where your plan may need more flexibility. Review your investment strategy and consider speaking with a qualified financial professional who can help you assess your circumstances.
The more prepared you are for uncertainty, the more confidently you can focus on what retirement is really about: enjoying the life you have worked so hard to build.
This article is for educational purposes only and is not individualized financial, investment, tax or legal advice. Investment returns are not guaranteed. Consider seeking professional advice based on your personal circumstances.