WANDA MORRIS |POSTMEDIA| 08.21.2017
If you’ve been doing any financial planning for retirement, you have estimated how long you will live.
If you are in good health, the answer could be “a good long time.” If you are half of a 65-year-old male/female couple, there is almost a 50 per cent chance that you or your partner will live to age 90, there’s almost a 25 per cent chance that one of you will live to age 95 and there’s a 10 per cent chance that one of you will celebrate your 100th birthday. That’s a long time to make your savings last.
The problem is that while most of us will die before we hit 90, if we don’t save as if we will live that long, we risk living in poverty.
One casualty of the decrease in defined pension plans in Canada is the decline of what’s called pooled risk. In a risk pool, the amount put aside for each pensioner is lower than the amount that may be needed for any single pensioner. Some folks will live longer than others. The extra payments to those who live longest are offset by the savings in payments to those who die early. But fewer and fewer of us can rely on such pensions for financial security.
We can buy individual financial products that reduce our risk. A registered annuity will pay us a guaranteed income for life, but it won’t be cheap. At today’s rates, a woman aged 65 will pay more than $200,000 for a guaranteed monthly annuity of $1,000 for life. If you live to 90, it was a great decision, but if you pop off in your sleep at 67 after only two years of payments — your spouse or kids receive $175,000 less from your estate than if you’d just put the $200,000 under your mattress.
Or you could take your nest egg and carefully stretch it out. If you’ve stashed away $100,000 in a tax-free saving account by 65, and continue to earn money on the balance at four per cent after taxes and fees, you can spend $1,012 a month — as long as you die by age 75. But if you live to 85, you’ll have to spend only $606 a month or your savings will run out.
So what’s the solution?
Just as we have life insurance to protect our loved ones in the event we die too early, we need a type of death — or perhaps long-life — insurance to protect ourselves in the event we don’t die soon enough.
Annuities solve this problem — but they’re not cheap. This is because we start receiving payments as soon as we purchase an annuity. What’s more, life insurance companies that sell annuities know their purchasers are relatively healthy, so they charge enough to cover years of payouts. After all, if we have a terminal diagnosis and just a few months to live, we wouldn’t be in the market for an annuity.
But there is a way around this.
In the U.S, individuals can buy a deferred annuity. For example, at 65, a U.S. retiree could purchase an annuity to pay a set monthly amount for life — but only once they’ve reached 85. Because payments don’t start for 20 years, there is a chance that no payments will be made, so the cost of the deferred annuity is far cheaper than a regular one. The insurer is effectively pooling the risk that an individual will live extra long.
If you had a deferred annuity that kicked in at 85, you could spend all your savings by your 85th birthday, knowing that, if you do win the extreme old age lottery, you won’t be spending your final years eating cat food and Kraft Dinner.
The time for waiting is over. Canadian regulators need to license the sale of deferred annuities now.
Wanda Morris is the VP of Advocacy for CARP, a 300,000 member national, non-partisan, non-profit organization that advocates for financial security, improved health-care and freedom from ageism for Canadians as we age. Send questions to [email protected]. To join CARP or learn more, call 1-800-363-9736 or visit carp.ca