How to Invest When You Might Live to 100
More and more Canadians are reaching that 100-year milestone. While a long life is obviously appealing to many, it complicates retirement planning and raises a common concern of outliving one’s savings. Let’s discuss the pros and cons of some options.
Lifetime annuities provide a guaranteed level of income for life, and investors will know precisely how much income they will receive once purchased. Some also offer certainty periods or include joint survivor options. And because they’re backed by the balance sheet of insurance companies and non-profit associations, they’re effective products for securing lifetime income.
The trade-off, however, is the irrevocable nature of the product and the lower yield they offer. Typically, if you purchase an annuity, the purchase is final: you cannot change your mind or get any of your money back in the event of early death. This can cause investors to feel like they’re making a significant bet against an insurance company on the timing of their mortality. And the cost of the guaranteed income level means it’s set far lower than what many retirees expect and doesn’t increase over time despite strong returns in the market. These factors make annuities a less popular choice among retail investors.
Guaranteed Minimum Withdrawal Benefit Funds
Another option is Guaranteed Minimum Withdrawal Benefit funds (GMWBs). These blend investment funds with an insurance wrapper that provides the potential for market gains while guaranteeing a minimum level of income for life.
Like annuities, they provide guaranteed protection against outliving your savings. However, where annuities lack revocability, GMWBs allow investors to change their minds about the investment and access the funds in their accounts anytime.
So, what’s the trade-off? Due to the insurance components embedded in these products, the fees can become quite high, leading to lower lifetime income rates for investors – typically around 4% for a 65-year-old. These products have waned in popularity over the past two decades. Since the financial crisis, three of Canada’s biggest life insurers have either exited the GMWB market or limited their exposure. These products may also come with penalties for early withdrawals.
Traditional Mutual Funds and ETFs
Most often, retirees generate retirement income using a combination of mutual funds, exchange-traded funds (ETFs), and possibly a selection of individual stocks and bonds. This strategy provides liquidity and diversification and is reasonably effective when paired with sustainable income sources from government-sponsored programs (Old Age Security, CPP/QPP).
The challenge with this approach comes back to concerns around outliving your savings, as these products do not provide longevity protection. Because individual investors are left to bear the risks themselves (including investment, sequence of returns, and mortality risk), it can very well lead to a depletion of assets before the investor passes away, leaving them feeling unsettled in retirement. This fear leads many retirees to withdraw too little, spend frugally during retirement, and pass away with significant unspent assets.
The Future of Retirement: Income for Life Without the Insurer’s Guarantee
A unique category of retirement products incorporates the concept of longevity risk pooling, which pools investors with a common goal of securing income for life and sharing the risks to combat outliving their assets. The principle behind this risk-pooling concept is simple: to enjoy a higher income level for the rest of your life, you must give up some (or all) of it when you pass away.
The benefit of this arrangement is that by effectively not putting a guarantee on the income levels, investors can directly benefit from a considerably higher expected income rate than if the cost of an insurance guarantee was embedded in the product. They may also offer more flexibility, allowing investors to change their minds and exit the investment if an unexpected life event occurs. The trade-off is that the higher levels of income the investors receive will fluctuate, depending on the funds’ performance and the pool’s mortality experience.
This category of retirement products has gained significant attention and support from retirement experts and organizations across the globe. Below are some of the examples that exist today:
Last year, we launched the Longevity Pension Fund, the world’s first income-for-life mutual fund, to give any investor access to this type of lifetime income solution. An investor benefits from an attractive lifetime income stream*, starting at 6.15%, with full access to their unpaid capital** if they change their mind or pass away early. We want to provide the peace of mind that comes with an attractive lifetime income without having to feel like you’re irrevocably handing over a large portion of your savings.
Now, let’s see how Longevity compares with other retirement solutions:
The Bottom Line
Regardless of the retirement solution you choose, the key is to take control of your finances and create a plan that is right for you and allows you to live the post-work life of your choosing. Longevity combines the lifetime income feature of a defined benefit pension plan with the flexibility of a mutual fund, offering Canadian retirees the security of lifetime income with the freedom to change their minds at any time. You have the freedom to decide what is best for you, and, more importantly, you have complete access to your unpaid capital at any time.
*Income in the form of Fund distributions is not guaranteed, and the frequency and amount of distributions may increase or decrease.
**The Longevity Pension Fund is designed to provide income for life, with an initial targeted annual income payment of 6.15% for a 65-year-old individual. The payments are designed to increase over the long term; however, they may go up or down to reflect the performance of the underlying investments and other factors such as mortality experience of the cohort. A traditional lifetime income solution could include a lifetime income annuity with a 10-year guarantee period, which has on average a fixed starting payment of 5.76% for 65-year-old males (Source: Cannex, May 19, 2021).The Longevity Pension Fund is managed by Purpose Investments Inc. The document is not investment advice, nor is it tailored to the needs or circumstances of any investor. Talk to your investment advisor to determine if the Longevity Pension Fund is right for you and always read the prospectus before investing. Nothing on this document shall be considered a solicitation to buy or an offer to sell, or a recommendation for, a security, or any other product or service, to any person in any jurisdiction where such solicitation, offer, recommendation, purchase or sale would be unlawful under the laws of that jurisdiction. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.
Commissions, trailing commissions, management fees and expenses all may be associated with investment fund investments. The prospectus contains important detailed information about the investment fund. Please read the prospectus before investing. There is no assurance that any fund will achieve its investment objective, and its net asset value, yield, and investment return will fluctuate from time to time with market conditions. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. The Fund has a unique mutual fund structure. Most mutual funds redeem at their associated Net Asset Value (NAV). In contrast, redemptions in the decumulation class of the Fund (whether voluntary or at death) will occur at the lesser of NAV or original purchase price less distributions paid.
Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments believe to be reasonable assumptions, Purpose Investments cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.