Longevity Risk and Your TFSA Strategy

We spend our working lives saving for retirement, but what if the biggest risk isn’t the markets? It’s living too long.

The average Canadian retiree now lives well into their eighties—great news, unless your money doesn’t last as long as you do. Most retirement income plans quietly taper off around 85, leaving a dangerous gap.

Longevity risk is the chance that you live longer than your savings were planned to last. And it’s quietly threatening even the best retirement plans.

But there’s a simple strategy most people overlook: flipping how you think about your TFSA. Instead of treating it as early retirement money, what if it became your “95 fund”—your longevity reserve for when you’re truly old?

In this episode, I break down what longevity risk really means, how it can unravel your retirement, and why your tax-free savings account might be your hidden hero.

Show Notes:Longevity Risk and Your TFSA Strategy

Hey there, welcome back. This is episode 137. So we spend our working lives saving for retirement, but what if the biggest risk isn’t the markets? It’s living too long. The average Canadian retiree now lives well into their eighties. That’s great news, unless of course your money doesn’t last as long as you do.

In this episode, we’re talking about longevity risk—what it is, how it’s quietly threatening retirement plans, and a simple strategy that most people overlook. And that is setting aside part of your tax-free savings account now, so your future 90-year-old self is covered.
What is Longevity Risk?
Let’s talk a little bit about longevity risk. What is it? Well, we’ve got a whole bunch of other risks that you guys might be more familiar with. You think about investing—market risk goes up and down, and everybody has a different risk tolerance. But longevity risk is simple. It is the chance that you live a long life, longer than your savings were planned to last.

I remember, boy, it must have been almost 20 years ago, National Geographic’s cover had a picture of a baby on there, and I think the title was “This Baby Will Live to 100.” We’re living longer. Here’s what that actually means: if you are a healthy 65-year-old today in Canada, there is a high probability that you, or if you’re married, your partner will live into your nineties.

But most retirement income plans don’t reach that far. They quietly taper off around 85. And if you’re thinking “that’s okay, I’ve got investments,” I want to challenge that for a second, because it’s not just about how much money you have—it’s about where that money will come from, how it’s taxed, and whether it’ll be there when you need it.

The Ripple Effect of Outliving Your Money

There is a ripple effect of outliving your money. When money runs low—let’s assume you’re in your eighties, or maybe it’s late seventies, but you know, around that time—it’s not always dramatic. Outliving money can be subtle and it can be quiet.

It could look like avoiding help because you’re worried about costs, downgrading care not by choice but by necessity, or maybe drawing too quickly and heavily on your retirement investments. So maybe that’s your RRIF at that time, and all of a sudden now it triggers an Old Age Security clawback or extra high taxes that you haven’t thought about. And that happens a lot with single people, whether you’ve had a spouse and you’re used to income splitting, and now after the death of a spouse or even after divorce in retirement, now you can’t actually income split. So that’s going to cause some tax pain.

Or maybe it looks like stressing over prescriptions, possibly not renewing prescriptions because of the cost—I’ve heard of that. Or it’s cutting back where you shouldn’t be and putting your health at risk. That is subtle and it’s quiet. And then the ripple hits family—often adult children who become financial caregivers when there’s no clear backup plan, or maybe instead of financial, or with financial, it’s the physical, actual physically caregiving that has to happen.

The Problem with Most Plans

Most plans don’t go far enough. A lot of half-fast retirement planning stops at age 85 with no other financial considerations. I’ll put this warning out there: some investment advisors will actually do a quick little snapshot that they make out with their investments, and they might show it only lasting to 85, and then there’s no other backup plan. There’s like actually no other financial considerations.

And so it’s one thing to know that, okay, we see a shortfall at age 85, but we haven’t even talked about—you have three properties, or you’ve got something else of value that we now say, okay, this needs to be monitored and you’re going to have to actually start tapping into that. Some people don’t even have another spot to tap into.

And depending on that investment advisor, they might try and fiddle to make the numbers work. All of a sudden now they’re showing a projection—okay, I’m getting off on a tangent, but I’ve seen where there’s a projection of being able to receive 7% returns based on your investments. Great. Okay. Are you going to get that? Maybe. Are we going to have to chase that return now for the rest of your life into old age? Yeah, that’s awful.

So what I’m saying is the planning needs to go beyond that age.

The TFSA: Your Hidden Hero

Most people are told to spend down their TFSAs early because it’s tax-free. And yes, that’s technically true, but I’m here to challenge that and say, what if we flipped that thinking?
I am calling the TFSA here a hidden hero. I’m going to call it the longevity bucket. Here’s what I want you to consider for our longevity risk—and longevity risk means you’re going to live a long time. What if your tax-free savings account isn’t your go-to account for early retirement, but your longevity reserve, your longevity bucket?

Think of it like a safety net you build now and don’t touch until way later on—maybe age 85 or 90. It’s your “95 fund.” It’s your backup paycheck, your freedom account, whatever you want to call it. It’s there in case you live longer than expected, because there is magic in that tax-free savings account.

The income is completely tax-free. It does not affect your Old Age Security or other income-based coverages—I don’t know, sometimes there’s drug coverage based on income, whatever those income-based things are, it will not affect it. You control how it’s invested, and if you don’t use it, it passes on tax-free to your kids or beneficiaries. No probate, no income tax. Simple.

Running the Numbers

Let’s run the numbers. Let’s say you’ve got $150,000 in your tax-free savings account that you don’t touch. If it grows at just 5% return over the next 20 years as you age, do you know what that becomes? It grows to a little over—let’s just say I’m going to round to $400,000.

And here’s the thing: that money can be used to hire a caregiver so you can stay in your home longer. It can pay for a better room in a long-term care facility, cover medications maybe that aren’t fully insured, or just make sure you don’t have to stress about every single purchase later in life—all without triggering extra tax.

No stress about what account to pull from. It’s just there waiting in case you need it. And what if you never use it or there’s leftover? That’s the beauty of this strategy. If you don’t need it, you leave a gift—a clean, tax-free gift to your loved ones. No extra work for them, no delays, just inheritance money in their hands.

This is smart estate planning and smart retirement planning all in one. And yes, some people use annuities for this kind of thing, but if locking up money makes you uncomfortable, there are some downsides with that. The TFSA gives you all the flexibility with none of the commitment.

Other Tools to Mitigate Longevity Risk

Okay, I am going to give you the textbook conversation now of other things to help mitigate longevity risk. Let’s talk a little bit about insurance—just a super brief—and what they are.

Private Health Insurance

Well, we all have an understanding of health benefits insurance, and so this is after retirement. It’s that private health insurance that you can buy, especially if you lose your group benefits. So when you’re working, you have your employer group benefits that cover your drugs. It covers some—I think the dental benefits, it covers massage or physio—all those things in there that’s going to be with your employer. But when you leave and you retire, you’re going to need some private extended health insurance to cover those things.

And it matters because we are living longer, drug and care costs are rising. Health insurance helps preserve cash flow in retirement and reduces the pressure on investment withdrawals later in life. So think of the very, very common ones that just come to mind. I mean, there’s GMS, Blue Cross, Canada Life has some, Manulife—those are some of the examples. And the options are that 30 days after retirement, you can get a conversion plan without any medicals.

So that’s one piece of insurance that I wholeheartedly recommend. And there is a timing when you decide that you’re going to retire—that within that 30 days, we make sure there’s something in place and we talk about it. But that’s one that helps with the longevity, living longer.

Long-Term Care Insurance

Another one is long-term care insurance. Now, a long-term care insurance policy is a policy that pays a monthly benefit if you lose independence in two or more activities of daily living. So those daily living—it’s quite structured. Think of eating, bathing, dressing, and if you have some cognitive impairment in there, and so you have to lose and prove that you can’t do two or more of those activities.

And it matters because if you live into your nineties and you live longer and stay healthy, you may need some of these cares, but you’re still living a quality life. This insurance helps cover those extra expenses of either private home care, assisted living, or nursing home upgrades—you name it. The payouts are generally tax-free.

So note here though, that this is extremely expensive. The older you get and when you want it—when it dawns on you, like you know you’re an adult and you’re going into retirement and you’re like, “Hey, maybe I should get this”—it’s so expensive, and this type of insurance is getting harder and harder to find.

Annuities

The other type of insurance out there is an annuity, which is a guaranteed income. What it is: you give an insurance company a lump sum, and in exchange they guarantee to pay you income for a set period or for the rest of your life. So there’s the life annuity—that’s income for life that stops when you die. And then there’s the term annuity, and that’s over a fixed number of years. So there’s a few different types out there.

The return—so this is a general disclaimer—the return is generally lower and it has fees. And then you’ve got to think about, okay, if it’s a life annuity and I die and it just stops, can you name a beneficiary or to go to someone? And that is tricky.

Wrapping Up

So we’ve covered a lot. We’ve talked about longevity risk, what it is, how it sneaks in as we live longer, how it can quietly unravel even the best retirement plans if we’re not prepared. We looked at the ripple effects—the stress, the financial strain, the pressure it can put on family. And I want you to leave rethinking how you plan to use your TFSA, your tax-free savings account—not as the first pot to draw from, but as your longevity pension bucket, your future freedom fund.

Now, the other tools that could help too are those insurances I just mentioned. But—and this is important—long-term care isn’t always accessible or affordable. If you’re thinking about those types of insurance, the best time to plan is before you retire, ideally in your thirties or forties, which is hard to imagine that we think that far in advance about that, because it’s when the cost is lower and your health gives you more options.

And annuities—now, they can offer peace of mind with guaranteed income, but returns are often tied to current interest rates, which means payouts may be modest, especially if rates are low when you buy in. So these are tools. They can play a role, they have to be discussed and reviewed, but they’re complex and they’re not always the right fit.

And that is why I love the simplicity of the tax-free savings account. It is flexible, it’s tax-efficient, it’s already in your hands. Whether you use that money in your nineties or pass it on tax-free to your family, it gives you options.

So if you’re thinking, “How do I make sure my retirement income plan doesn’t stop at 85?” This is a smart place to start.

That’s it. Thanks for being here. If this episode sparked any ideas or questions, feel free to reach out. Until next time, I’m Zena.