Sunday, June 26, 2011
Good genes can be a curse
There is a financial solution to the need for lifetime sustainable income
Plan to live to 100? There are 6,000 centenarians in Canada, projected to hit 20,000 by 2035.
But improved longevity and low investment returns pose a vexing problem for healthy people with good genes. If worried about outliving your money, consider taking out some longevity insurance, better known as annuities.
Life annuities purchased from life insurance firms provide streams of guaranteed income for as long as you live. Those in employer-provided defined benefit (DB) pensions have extensive annuity protection, as do those collect-
ing Canada Pension Plan or Old Age Security.
But if most of your wealth is exposed to stocks through defined-contribution pensions, RRSPs, TFSAs or non-registered investments, you may need some annuities or newfangled "finsurance" products finance professor Moshe Milevsky describes in How to Pensionize Your Nest Egg.
"If you have the insurance from your employment or job (e.g. DB pension), there is no need to buy more." But those lacking such insurance or worried about longevity risk may need to at least partly annuitize.
Annuities are as old as the hills but are being rediscovered by a new generation of investors scarred by stock-market losses in 2008. The current Barron's profiles a recent retiree, now 67, who bought annuities in 2007, in time to dodge the crash. He no longer frets about outliving his money.
Annuities are more popular in the United States because variable annuities - which add a stock-market kicker - are better and cheaper. With interest rates near historic lows, most Canadian advisors view age 67 as too young to buy life annuities. They suggest waiting until rates rise, when the interest component will be lower and the mortality premium makes up a bigger chunk of the return.
Milevsky doesn't worry that insurance firms can foot the bill if too many reach 100 because they are also. on the other side of the bet, through life insurance. "They will perform handsomely if we all live forever."
In The Only Guide to Alternative Investments You'll Ever Need, Larry Swedroe rates fixed annuities as"good" but variable annuities as "flawed." In an interview in Toronto this week, he warned you need a very long lifetime for variable annuities to pay off.
He's keener on payout annuities or SPIAs (single premium immediate annuities), especially for those in their seventies. ''It's the only asset class that can get you in effect equity-like returns without taking equity risk."
Annuity critics don't like the loss of control or the fact they leave little for heirs. But that applies only if you die young, Swedroe says. "If you live longer than you expect, You're saving the estate's money."
In Canada, Some variable annuities are called segregated funds. Clay Gillespie, managing director of Vancouver's Rogers Group Financial, prefers fixed annuities but suggests clients wait until 78 or 79 before buying.
At 60 or 65, the pickup in yield over regular bonds is only 0.5% or so. but by your late seventies mortality credits make up 80% of the return so low interest rates are less of a concern.
Michel Fortin, vice-president of Standard Life, says the lower interest rates are, the more expensive fixed annuities are, and the younger you are, the higher their cost. Most annuity buyers are between 60 and 70. The annuitization question often arises at 71, when RRSPs must be deregistered. You can also annuitize non-registered assets with tax-efficient "prescribed" annuities. Gillespie is not a fan of another type of variable annuity known as GMWB (guaranteed minimum withdrawal benefit). As structured in Canada, I don't believe they're the soluton:' Gillespie says, ''but I would use them in the U.S."
Asher Tward, vice-president of Toronto's Tridelta Financial, says GMWB fees are "way too high" at 3% or 4%, with the funds mostly balanced or fixed incQme. With SPIAs, you know what you get and can arrange for inflation indexing or term guarantees by accepting lower payouts. He suggests investing conservatively for a few years, then laddering into annuities as interest rates start to rise.
Not all annuities provide longevity insurance. Vancouver advisor Diane McCurdy uses five-year term-certain annuities to bridge clients to retirement. Some may require just five years of income while waiting for employer or public pensions to kick in at 55, 60 or 65. By the time the term is up (terms can also be 10 or 20 years), the rest of your portfolio may have grown.
These are purchased with non-registered funds: One reason McCurdy recommends clients build up non-registered savings. Jonathan Chevreau
June 26, 2011 email@example.com
Posted by BEYOND RISK at 11:01 AM