Make sure your money outlives you

Hey there, time traveller!
This article was published 06/10/2018 (2584 days ago), so information in it may no longer be current.

Living a long time is desirable, for the most part.

But it’s likely not going to be much fun if you run out of savings.

And that’s a possibility for some current and future retirees.

A CIBC study from earlier this year revealed the average Canadian thinks he or she will need about $750,000 in savings to retire. Yet it also found few had a clear road map to get there.

Additionally, almost a third of Canadians ages 45 to 64 have no personal retirement savings at all. Overall, the survey found that the median retirement savings of Canadians was about $184,000.

That’s a far cry from three-quarters of a million. And maybe we’ll experience some fantastic market growth for the next 20 years. Then again, maybe not.

Most Canadians — two-thirds, according to Statistics Canada — are saving for retirement. But we’re not doing a very good job of it. Rates have fallen from 20 per cent of household income in the early 1980s to 4.5 per cent in 2017, Statistics Canada data show.

Little wonder a recent report from C.D. Howe Institute put forward the idea we should be able to buy insurance for living too long. Called longevity insurance, tax rules and other challenges have prevented it from catching on in Canada.

But the gist is you’d pay a premium prior to, or early in, retirement for a few years. Then that sum is eventually rolled into a deferred annuity. If you’re still around 10 years later — likely around age 85 — you can collect an income stream from that annuity. And if you’re dead by then, you lose your premiums. But hey, you’re dead, so it doesn’t matter.

While it’s not anywhere close to being available in Canada, the idea has merit, considering even experts in retirement planning are somewhat vexed by the growing challenge of trying to have your money outlive you in a low-interest-rate return world.

“It’s certainly a complication for advisers too,” says Daryl Diamond, a certified financial planner with Diamond Retirement Planning in Winnipeg, as well as author of the bestseller Your Retirement Income Blueprint.

For the government worker with a defined benefit pension, outliving the money really isn’t a concern — unless the pension plan goes bankrupt. (And that’s not entirely out of the question — though unlikely.)

But draining the accounts is a big problem for the growing number of self-employed and employees with a hodgepodge of defined contributions plans, group RRSPs and their own savings.

Annuities are one option, but these days, they’re not exactly a great deal, Diamond says.

“If this was my money, knowing what I know, what would I do? Honestly, for the past few years, the last thing I would do for anybody under the age of 75 would be to put them into a conventional annuity.”

Giving up a large sum of money for a fairly meagre payout is unappealing. Investors can also select a variable-rate annuity that allows the amount you earn to grow with the stock market.

But to start, you receive less money than you would from a regular annuity, Diamond says.

Another route that’s increasingly in vogue among seniors is relying on the equity in their home. The reverse home mortgage has been around for decades, but it’s become very popular in the past few years.

Just ask the leading provider of them — HomeEquity Bank, which offers CHIP (Canadian Home Income Plan). Yvonne Ziomecki, executive vice-president of marketing and sales at HomeEquity Bank, says demand is up 40 per cent this year so far compared with last, and in 2017, sales soared by 30 per cent year over year.

“There are a couple of factors (driving its popularity),” she says. “One is the aging demographic.”

People are also living longer and “there are now more people over 65 than there are kids under 14,” she says.

“The other thing is fewer people have pensions.”

Add to that surging housing prices, and you can see why house-rich/cash-poor seniors are choosing to borrow against the equity in their home.

The idea makes sense for some retirees — especially those with very little cash flow from savings, and hundreds of thousands of dollars tied up in their home.

“First of all, it’s extremely tax-effective,” Diamond says. “You don’t get taxed when you borrow money.”

But it’s not something he’d suggest for people early on in retirement — you can get a reverse mortgage at age 55 — because the interest accumulates, given that you don’t make any payments until you sell the home.

Also, the interest rate on the loan is significantly higher than a line of credit. Over a long period, the size of the debt could take up a significant chunk of the value of a home. That may not be an issue if you plan to be removed from your abode in a body bag. But it might be one if you later need to sell and use the proceeds to pay for assisted living.

But it’s worth it to “at least to investigate the idea,” Diamond adds, noting a financial planner could help flesh out the different options and potential costs.

Of course, many individuals are just trying to save enough to get to retirement. And for those starting — some very late in the game — it’s a tough task. Having small sums often means investing in high-fee mutual funds, or low-return GICs. The intrepid can do it themselves — though that’s difficult for individuals who may not have a lot of know-how.

Robo-advisers are a good option because they offer low-fee portfolio management.

Another choice flying under the radar is the Saskatchewan Pension Plan (SPP). And yes, this registered retirement savings vehicle is open to everyone — not just denizens of Canada’s most rectangular province.

Offering access to a balanced portfolio with institutional management normally accessible only through defined-benefit plans and sovereign funds, “it has an annual management fee of less than one per cent,” SPP general manager Katherine Strutt says.

Robb Engen is a former financial adviser who blogs about personal finance, including topics like the SPP, at Boomer & Echo. He says the plan “is ideally suited for the self-employed, or those who work in small or medium-sized companies that don’t offer pension plans.”

What’s more is “its returns have been strong,” he says.

Strutt says its annualized return since inception (1986) is 8.1 per cent. That’s roughly about the benchmark for a portfolio of 50 per cent bonds/50 per cent stocks (according to Vanguard Group between 1926 to 2017).

Not bad considering most managed funds underperform their benchmark over long spans.

Of course, past performance guarantees nothing.

Unfortunately, guarantees in retirement planning are hard to come by. Even when we can get some certainty on the investment side, what will almost always remain challenging is figuring out just how long we’ll need the money.

“Longevity risk is what makes this (retirement planning) such an inexact science,” Diamond says.

“You don’t know if someone will live to age 97 or be dead in 97 days from the time they retire.”