Increasing life expectancies mean you may need new solutions
Are you financially planning for your clients to live to 100? If you aren’t, you should be, says one fund vice-president, because life expectancy is creeping up, so building plans to age 90 for those retiring now or planning to in the near future is not enough.
“The most difficult part about planning for retirement is the fact that you don’t know how long your clients will live. So, the longer that you plan for, the better,” Simon Barcelon, vice-president of product for Purpose Investments told Wealth Professional.
“Think of all the trends that we’re seeing, not just in Canada, but around the world, with aging demographics and life expectancy increasing. I think it’s prudent for those who are planning for retirement to ensure they have a financial plan, but then plan to live to 100. When you think about the importance of why you want to plan to 100, it’s really about avoiding outliving your savings.”
Barcelon said there are a few more products on the market now for advisors to more efficiently provide their clients with longevity risk protection while building on their traditional portfolios. He spelled out three options – one of which is Purpose’s year-old Longevity Pension Fund.
The first option, life annuities, are typically offered by life insurance companies. Clients pay a large sum of money upfront, then are guaranteed certain income levels for their lifetime. While that income guarantee provides some assurance, he said it’s hard for many to turn their life savings over to an insurance company, especially when they can’t get their money back if they change their mind or die, meaning their estates also can’t access what’s left.
“These types of products are irrevocable. Once you hand it over to the insurance company, it’s pretty much their money,” said Barcelon, adding there’s little non-institutional demand for these.
The second option is guaranteed minimum withdrawal benefit (GMWB) funds, popular in the early 2000s. They’re like a segregated fund with an insurance wrapper. Like annuities, they provide clients with a life-long income. Unlike annuities, the clients can withdraw their funds. The trade-off is that the initial income range is much lower than what clients may be looking for in retirement.
Purpose’s Longevity Pension Plan, launched on June 1, 2021, incorporates the concept of longevity risk pooling and also provides life-time income through a mutual fund structure.
“It’s the first solution of its kind in the world to offer this concept of income for life within a mutual fund,” he said. “We’ve really tried to democratize institutional solutions for any Canadian to access.”
The product provides life-time income at a higher rate than GMWBs with the distribution rates designed to increase over time. Clients, or their estates, can also withdraw their remaining funds. The trade-off is that there is no income level guarantee, so a retiree’s income can fluctuate.
Barcelon noted that the life expectancy for those entering retirement at 65 now is roughly 88, but more are expected to live past 90 over time.
“That’s what makes this type of solution extremely valuable for those who are planning for, or already in, retirement, because it really gives you that income for life solution that optimizes for income. It gives you more money while you’re alive and it allows you to participate in the market, so you can benefit from positive market returns and you have the ability to achieve higher distribution over that time. In the event that you pass away, you can get back the unpaid capital that’s left. So, we’ve optimized for income and for flexibility.
“The trade-off is there’s no guarantee on the income level, which is why we’re able to provide that higher income and that increasing distribution rate over time.”
Advisors are turning to it, though, because it allows them to build effective retirement plans, which work well with traditional investment portfolios, for their clients
“This isn’t meant to replace what you’ve traditionally been doing for the past thirty years,” said Barcelon. “It’s meant to complement it and act as a tool, so you can improve your retirement planning experience for your clients and they can retire peacefully, knowing they’ll have some sort of income from their investment portfolio, above everything else they’re going to be getting from the government or their pension plan, if they’re luck enough to have one.”