Make way for centenarians

If clients can’t imagine living past age 100, tell them more than 50,000 people across North America already have, says Dan Anders.

What’s more, the number of centenarians (people aged 100 and older) in Canada is rising. Statistics Canada says that cohort grew 25.7% between 2006 and 2011 (the number of people aged 60 to 64 grew 29.1%). It’s also been one of the fastest-growing segments for nearly 40 years (see “Changing retirement landscape,” below).

So Anders, a retirement and estate-planning advisor in Vancouver, says if people aren’t realistic about their life expectations and income needs, they’ll run out of money.

Anders knew a man who’d led a successful career as an oil and gas executive in Calgary. That man should’ve had a comfortable retirement. But, after his wife died in her late 70s, he loaned significant sums to five of his six children without drawing up legal agreements.

(Anders says to draw up such documents for loans of more than $25,000, since he considers this the maximum amount average clients can lose during retirement.)

Read: One-third of Canadians haven’t started saving for retirement

Each child promised to pay him back, but never did. As a result, the man was cash-poor, and had to downgrade to a studio apartment. He became so broke, in fact, that he couldn’t even cover basic expenses, and began depending on his daughter—the only child who never borrowed from him. While she let him eat free at her high-end French restaurant, he felt embarrassed.

That man lived into his late 80s, so he struggled financially for nearly a decade.

This may seem like a one-off situation, but an increasing number of clients are choosing to gift money while alive, even as they live longer.

“Besides wanting to build retirement savings and help family, they wonder how they’ll be remembered,” says Elizabeth Lunney, president and CEO of Fiduciary Trust in Calgary, Alta.

But rather than prioritize families and legacies, warns Anders, retirees should make sure they can cover basic and health-related expenses well into their 90s.

Choosing a plan’s end date

When calculating sustainable drawdown rates for retirees, many advisors use actuarial tables in CRM software, most of which assume people won’t live past age 90.

Yet those mortality assumptions are outdated: Statistics Canada predicts there will be more than 17,000 centenarians in Canada by 2031, and close to 80,000 by 2061. As of 2011, there were 17.4 centenarians for every 100,000 Canadians.

Read: Canadians worry about increased expenses in retirement

Still, says Anders, too many accountants and tax specialists think plans can be reworked if income and longevity projections are wrong. But “if you don’t create a plan on the assumption that it’s correct for at least the first few years of retirement, then why even do the plan at all?”

He asks retirees to consider how they’ll fare financially if they live to age 95, or even 100. He creates long-term plans based on that assumption, and usually revisits them bi- annually with retirees.

Many plans, he says, “are 30 or 40 pages in length. But unless clients have a complicated set of circumstances, such as multiple marriages, businesses and children, they don’t have to be.” He suggests five- to six-page plans because clients can review and understand them more easily. These documents should include clients’ net worth, retirement cash flow projections and long-term care plans. He encourages investing in segregated funds, annuities and GMWBs, as well as LTC and critical illness insurance.

Living even longer

Chris Buttigieg, senior manager of Wealth Planning Strategy at BMO Financial Group in Toronto, goes a step further. He has clients picture living up to 110, and creates projections based on that potential reality. This is important, he says, since “people are expecting advisors to help them live happily and more financially secure than ever before,” especially given the uncertain future of workplace and government benefits.

He asks clients about their current health, diets and lifestyles to customize predictions. He also asks about family health history, and how their spending habits have changed throughout their lives (see “6 questions for retirees,” below).

Read: Prioritize RRSPs over debt repayment: Golombek

This transitions into a conversation about longevity risks. For instance, “There used to be a higher likelihood you’d have someone caring for you as you aged,” says Buttigieg. But now, if a client only has one child, that’s less likely. “This is a problem since parents need help emotionally, financially and physically, even while their kids have their own kids.”

When calculating people’s needs, he stretches current income over longer periods, and looks at CPP and OAS trends. He notes that these programs typically account for only 25% of clients’ incomes.

Key income sources

Many retirees prefer low-risk investments, such as GICs, but those only offer returns of 2% or less. So, advisors are educating clients about preferred shares, blue-chip dividend stocks, REITs, and mortgage investing to help boost returns before and during retirement.

Some say this switch is short-term, but even when interest rates rise, “it’s still going to be difficult to make good real rates of returns, minus inflation, on GICs,” says Anna Knight, an advisor with International Capital Management in Toronto.

“In the 1980s, when they offered returns of 14% or 15%, inflation was also very high. Over the long-term, even retired clients are better off in blue-chip dividend-paying stocks than GICs.” Currently, many of her clients are depending on pensions, savings and real estate until interest rates rise.

If they need a boost beyond that, she suggests they can invest a small portion of their funds in vehicles such as life annuities, which offer guaranteed income, or guaranteed withdrawal benefit investments, which allow for income growth.

Read: Investors putting retirements at risk

The amount invested, she adds, “depends on their essential financial needs. If a couple is retiring and has some guaranteed income, then we focus on making up the difference.”

If a couple has no guaranteed income, and are at risk of running of money, then Knight will reallocate their investments so that 80% to 90% of their income needs are met through guaranteed sources. She would never put 100% in such vehicles, however, since doing that would limit liquidity and portfolio growth.

When interest rates go up, says Knight, clients who aren’t locked into annuities can consider adding exposure to floating-rate loans, given that their yields will rise.

They should also maintain positions in dividend-paying stocks, and can look at adding exposure to interest-rate sensitive parts of the market, such as the financial sector.

A look at GICs

Bruce Cumming, investment advisor at HollisWealth in Oakville, Ont., also predicts GICs and other traditional retirement vehicles will fall out of favour as clients live longer (see “Case study comparison,” below).

Before a client turns 65, he suggests investing in 60% equities and 40% traditional fixed income. At this stage, he tells her to invest in “predominantly large-cap ETFs with MERs of 10 to 15 basis points.”

He also ensures she maximizes registered accounts. When that client hits 65, he switches gears. To boost income, he moves her “40% fixed income allocation to a life-only annuity. I can sell an annuity at 6% to 7% cash flow for individuals and just below 6% for couples.”

That’s preferable, he suggests, because “if someone is withdrawing their money on a 7% basis and their assets are being invested at 2% in GICs, they could run out of money in 16 to 17 years.”

Read: Help clients secure their retirements

The catch with annuities, however, is people will have to “forfeit the capital [invested] if they and their spouse die young. That’s not a good scenario, but at least they’ll have had peace of mind from knowing they’d never run out of money.”

If clients fear losing capital through annuities, or if they have checkered health histories, Cumming suggests 20-year term-certain annuities. That way, “if a client gave me $1.7 million today, I could start delivering $10,000 per month for the next 20 years on a fully guaranteed basis, and less than a third of that money would be taxable, since it’s deemed return of original capital.”

6 questions for retirees

Chris Buttigieg, a senior manager at BMO Financial Group in Toronto, asks clients the following questions before creating retirement plans. He revisits their answers every year during portfolio reviews.

If clients aren’t forthcoming, he says, then book meetings two times a year specifically to go over complete retirement plans. Your goal is to assess their physical and mental health, and ensure they have family and community support.

• What are your hobbies or pastimes? This reveals how active clients are, as well as whether hobbies drain or add to income.
• How often do you see family and friends? This shows how much support clients have, which is important for mental health.
• Does your family have any history of illness, and how do you plan to stay healthy? Genetics, family history and longevity need to be determined because it provides insight on how long to run a client’s projections, based on how long she might live.
• How often do you exercise, and what types of activities do you do? Physical activity promotes health.
• What are your spending habits? You need to keep track of this each year.
• Have you encountered any extra expenses over the last year? A jump in spending could be due to one-time expenses, or could signal a lifestyle change.

Protecting capital

So that clients don’t have to dip into savings to cover health expenses, Anders recommends long-term care insurance. But clients should purchase it prior to retirement, preferably in their 50s; otherwise, it’ll become too expensive. “Around ages 90 to 95, I don’t know anyone who isn’t in need of care, either through home care or within a facility.”

So when he’s running plans to 100 years old, he mentions the need for this product.

In Canada, the cost of long-term care per year varies based on where clients live and their incomes and, for couples, whether both spouses are receiving care (see “Cost of long-term care,” below). In B.C., Alberta, Saskatchewan and Ontario, couples can benefit from income splitting if only one spouse requires long-term care.

Still, without insurance to cover the cost, clients will be left with little disposable income and will deplete any savings they have left to cover extra expenses. For example, Canadians over age 65 pay an average of $5,391 a year on out-of-pocket medical costs, according to a BMO Wealth Institute survey.

Another thing to warn clients about, says Buttigieg, is overspending. It’s common for retirees to spend more in the first five to 10 years of retirement, since they’re healthier and tend to travel more.

If people don’t settle into a consistent spending pattern after that, use data and graphs to show them they’re in danger of running out of money long before they die. They should expect to spend more at the beginning and end of retirement, he adds, so make sure they have enough money to achieve this even if they live to 100.

Changing retirement landscape

In past decades, advisors typically split the retirement planning cycle into three parts, says Dan Anders, CFP and TEP at Raymond James Financial Planning in Vancouver. These were:

• Estate creation: Up to age 30 or 40, clients built wealth through working, buying homes, saving and investing.
• Estate preservation: Between their 40s and 60s, they focused on debt repayment, buying insurance and maximizing registered plans. By this stage, children had often moved on to school and their own marriages.
• Estate succession: Clients would enter this phase as early as their 60s and 70s, since low-risk, high-return investments, such as bonds, had set them up for comfortable retirements.

But times are changing. These phases have been overlapping for a few decades, adds Anders, given people are starting families later, saving less and getting lower returns. Now, clients in their late 30s to 50s are creating estates, while those in their 50s to 70s are preserving their estates and even working longer. That means people aren’t moving to the succession phase until they’re between ages 70 and 100.

Also, many are entering a fourth phase between their late 80s and 100s, which involves draining their estates due to health-related or long-term care costs.

Table: Cost of long-term care

These ranges cover the cost of care for couples at different income levels. The starting income level is $22,394 (very low) and the highest income level is $184,500 (three times average). Average is $61,500. Source: N. Fernandes and B. Spencer, “The Private Cost of Long-Term Care in Canada: Where You Live Matters,” Canadian Journal on Aging 29 (3), 2010.
Province	Range of LTC costs for married seniors who are both in care
Alberta	$16,548 to $24,021
B.C.	$16,864 to $36,500
Manitoba	$21,682 to $50,882
New Brunswick	$18,756 to $51,100
Newfoundland	$19,394 to $43,297
Nova Scotia	$15,906 to $57,670
Ontario	$19,201 to $28,541
P.E.I.	$19,922 to $47,450
Quebec	$17,882 to $24,314
Saskatchewan	$20,246 to $43,848

Case study comparison

We asked retirement guru Jim Otar to compare financial scenarios for two couples nearing retirement. Here’s his breakdown.

Couple 1

Margaret (67) and Henry (68) married in 1972. They never had kids, and both led successful careers. Henry recently retired from his private legal practice, but Margaret is still working as a management consultant—she’s a sole proprietor and has no successor, but wants to retire as soon as possible.

So, they not only maxed out a joint RRSP every year after 1972, but also opened three non-registered accounts during their working years—these include a discretionary brokerage account, an account that holds non-registered mutual funds, and a third that holds a bond portfolio. Their total invested assets are $2.3 million, and they have no outstanding debts. Further, both Margaret and Henry are expected to surpass age 90 since they’re vegetarians, non-smokers and non-drinkers. Also, Henry’s parents lived to 85 (and they ate meat), and Margaret’s parents are in their 90s.

Income expectations The couple needs $65,000 per year, and $23,600 of that will come from CPP. The minimum withdrawal amount for their RRSP will likely override what they actually need to fill the remaining gap, so they should ignore OAS benefits, given they may be clawed back based on the value of the RRSP. That said, they may need an extra $20,000 until age 76 for travelling, and they’ll need to have enough money earmarked for long-term care after age 88, which could cost an additional $30,000 per year.

Optimal portfolio The couple should hold 45% stocks and 55% bonds, says Otar. They should convert their RRSP to a RRIF at age 71, since they have excess assets and don’t need guaranteed income. If they move to an assisted-living facility later in life, they could move all assets into cash and cash-like investments, such as GICs, floating-rate bond funds and, perhaps, one- to five-year government bond funds (see Chart 1 and Chart 2, below).

Longevity risk Otar finds Margaret has a 7% chance of surviving beyond 98, while Henry has a 3% chance.

Chance of running out of money Low to zero

Couple 2

Sarah (63) and Shane (63) married in their 40s. They managed to scrape together enough to buy a house in Edmonton the same year, and had their only child, Glynnis, the following year. She’s now 19 years old, attending community college, and still living at home without paying rent.

Sarah is an award-winning documentary filmmaker who earns $53,000 per year by taking work as a film editor. Shane is a painter whose work is currently in demand: he sold 14 pieces in 2013 at an average price of $4,000, and that was his best year to date. In other years, he’s earned so little as to not have to file a return.

On average, the couple has put a few thousand each into a joint RRSP each year since they married. Their total invested assets are $132,455.

Sarah and Shane may not live past age 90 since they eat poorly. Sarah’s parents are alive but unhealthy at ages 86 and 88, and Shane’s parents both died of cancer before age 60.

Income expectations After age 65, Sarah can expect $13,600 per year from CPP and OAS, and Shane can expect $7,500 per year. In total, they want $50,000 per year when they retire, which leaves a deficit of about $29,000; based on what they’ve saved, they would be broke in about five years. So, they need to work until age 75 and, during that time, Otar says that Shane needs to save at least $28,000 from painting sales, while Sarah must continue to save at least a few thousand per year.

Optimal portfolio The couple should hold 50% stocks and 50% bonds until they retire at age 75. They’ll have converted their RRSP to a RRIF or an annuity, depending on whether interest rates are still low. If rates are low, they should choose a RRIF and then revisit that decision at age 73. Then they should consider buying a life annuity if they’re overspending and if assets are dwindling. After they retire, they can switch to 40% stocks and 60% fixed income.

Otar also suggests segregated funds, because he says the MER is justified by the funds’ withdrawal guarantees during potentially bad sequences of returns. Also, they can be transferred probate-free to Glynnis (see Chart 3 and Chart 4, below).

Longevity risk Otar says Sarah has a 14% chance of surviving beyond 95 and Shane has a 7% chance.

Chance of running out of money High