At first glance, it might seem like an odd thing to worry about. But if there’s one trend that I’ve begun to notice in my financial practice, it’s that more and more Canadians are concerned that they’re going to live too long.
As recently as a few generations ago, we humans were lucky to make it to our 40s. Living into our 50s or 60s was a true rarity, which meant dodging high infant mortality rates, a host of childhood diseases and a life of back-breaking labour.
Today, we are the most affluent society that has ever called this little blue orb home. Yet the pollsters say that our number one worry is money – including the fear that we won’t have enough of it to fund a comfortable lifestyle for nine or ten decades of life.
In the “good old days” (before we had luxuries like indoor plumbing, access to medical care and enough food to eat), most people worked until they died. The good news was, this often didn’t take very long. The bad news, was that the notion of having time to relax and enjoy one’s “golden years” was as foreign a concept as iPhones or the internal combustion engine.
Then, in the late 1800s, the German Chancellor Otto von Bismarck introduced the world to a brand new idea: retirement. Not surprisingly, the idea that people should actually stop working 14-hour days at some point in their lives proved popular, and it wasn’t long before it caught on in North America.
Of course, even in the early part of the last century, this new-fangled “retirement” didn’t last very long. The life expectancy for the average North American male in 1960, for example, was just 67 years. So most people typically worked until they turned 65, got a gold watch and a hearty handshake in thanks for all their years of loyal service, and then had at most a few months to enjoy life until they kicked the bucket.
Fast-forward a few decades to the year 2011. Today, there is a very good chance that at least one member of the average Canadian couple will live into their 80s or 90s. This is, for the most part, a good thing. But it also creates a number of new problems we never had to think about before – like the possibility that many of us could outlive our carefully-feathered nest eggs.
As a financial advisor, I often meet people who are in danger of outliving their savings. This can be due to unexpected longevity and escalating costs eating up their capital as they get older, or they may be facing unforeseen assisted living or other health care costs.
Whatever the cause, these people are in a tough spot. To fund the rest of their lives, they need to get a higher return on their money. But because they’re at the stage of their lives where they’re using their savings to live, they’re in no position to take any kind of risk with their capital.
As a result, their options often come down to an unpalatable choice between living in near-poverty on dismally low interest, or taking a risk that they’ll lose everything they’ve worked so hard to build.
When I meet with someone in this situation, one of the first alternatives we generally explore is a life annuity.
Life annuities are guaranteed income contracts you buy from an insurance company. I use the word “buy” rather than “invest” because, once you purchase an annuity, your capital is gone. There are options available that allow for the return of part of your capital to your estate upon death.
In exchange for your capital, the insurance company enters into a contract to pay you a specific amount of money every month for as long as you live. In essence, this gives you a guarantee that you won’t outlive your income. For couples, the monthly payment from an annuity can also be guaranteed until the last surviving member of the couple passes away.
Annuities can be a very interesting planning tool as we get older. In general, the older you are, the higher the monthly payout.
This is because insurance companies know that, statistically speaking, older people generally have a shorter remaining life expectancy than younger people. So if they sell several thousand (or several hundred thousand) annuities, they can price their contracts according to the current average life expectancy, and still turn a tidy profit.
Let’s say, for instance, that you just turned 75. If you buy a life annuity, the payouts will be very high, because the insurance company doesn’t think you’ll be around much longer to enjoy them. If you outlive the average life expectancy, you win – not just because you’ll have more time to spend with family and friends, but also financially, because you’ll keep getting paid even if you live to be 110.
Of course, there are no free lunches. The price for this kind of financial peace of mind is that you have to hand over your capital in order to gain the guarantee of lifetime income. But in the right circumstances, this may be the best thing to do – especially if longevity happens to run in your family.
Annuity payments also have another feature that can have a dramatic impact on how much money ends up in your bank account. If the annuity is purchased with funds outside of an RRSP, a large percentage of each monthly payment is classified by the CRA as a return of capital, and therefore not subject to taxation.
If your assets are in danger of being depleted, or if you just want to convert a portion of your assets into a guaranteed monthly income so you can have the financial freedom to enjoy your retirement, then annuities might well be worth a look.
Just remember that annuity rates can vary widely from one company to another. So make sure you find an advisor who can access a variety of insurance companies, and help you decide what course of action is right for you.
Alan MacDonald is an investment advisor with Richardson GMP Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. He is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.
For more information please visit www.alanmacdonald.ca or email Alan at Alan.Macdonald@RichardsonGMP.com.
All material by Alan MacDonald. Alan MacDonald is an Investment Advisor at Richardson GMP Limited. The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.
Richardson GMP Limited, Member Canadian Investor Protection Fund.
Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.
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