Decumulate & Downsize

Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.

Using annuities to create your own personal Pension In Retirement

Posted By |

The reason why retirement planning is so difficult is because the one variable we need to know – how long we have to live – is impossible to predict. Sure, we have mortality tables and family history to help guide us, but statistically speaking, half the population will outlive their median life expectancy.

That makes longevity risk – the risk of running out of money before you die – a very real threat to your retirement. And yet many Canadians ignore this threat by not saving enough during their working years; retiring before they’re financially ready, taking Canada Pension Plan benefits too early, withdrawing too much from their RRSPs, and so on.

Nearly half of Canadians are worried they won’t have enough money to live a full lifestyle in retirement, according to a recent survey by RBC Insurance. They interviewed 1,000 Canadians aged 55 to 75 about their retirement readiness and came out with some interesting findings.

The retirees, or soon-to-be-retirees seem to want it all, according to the poll, yet many will lack the savings to do so:

  • 80 per cent want to live at home for as long as they can
  • 72 per cent said it’s important to own a car.
  • 68 per cent said it’s important for them to be able to travel at least once a year
  • 53 per cent want to go out for lunch or dinner a few times a week

Having enough money to support their desired lifestyle is a real concern, highlighted by the fact that 62 per cent of those surveyed are worried about outliving their retirement savings.

The one retirement income tool that didn’t appear on the radar was an annuity. Just 12 per cent said they are using or plan to use one in retirement.

How Annuities Can Help In Retirement

An annuity provides a predictable income stream for life – much like how a defined benefit pension, CPP, and OAS pays benefits for as long as you live. Nothing protects you from longevity risk quite like a guaranteed lifetime income.

It’s puzzling why more Canadians don’t choose to turn even a portion of their savings into an annuity – to pensionize their nest egg, to borrow a phrase coined by financial authors Moshe Milevsky and Alexandra Macqueen.

Lack of knowledge around annuities definitely plays a role. While nine in 10 Canadians polled by RBC know they don’t need to invest their entire retirement savings into an annuity, just 28 per cent know that an annuity doesn’t have to be managed once it has been purchased. Continue Reading…

Retired Money: Finally, a “Tontine” proposal for true Longevity Insurance

Posted By |

Even if they’ve saved a million dollars, retiring baby boomers lacking Defined Benefit plans and their inherent longevity insurance justly fear outliving their money. It’s been said some fear this more than death itself.

The latest instalment of my MoneySense Retired Money column looks at an intriguing proposal made this week by the CD Howe Institute. Click on this highlighted text for the full link: An annuity that pays off — if you live long enough.

CD Howe has proposed the creation of a “pooled risk insurance” scheme called LIFE, which has all the hallmarks of a 17th century concept known as the tontine.

Moshe Milevsky has long suggested tontines as one remedy for outliving our money

Annuity expert Moshe Milevsky — also a finance professor at the Schulich School of Business and author of books like Pensionize Your Nest Egg — says LIFE is a “great idea.” He actually made the case for the resurrection of “tontine thinking” three years ago in a book I reviewed at the time also at MoneySense: Tontine: Retirement Plan of the Future? 

The CD Howe paper (Headed for the Poor House) authored by Bonnie-Jeanne MacDonald doesn’t actually come out and call LIFE a tontine scheme but it certainly appears to contain the DNA of one.

LIFE stands for Living Income for the Elderly. The idea is that by sharing mortality risk, those who make it to age 85 start to receive monthly payouts for as long as they live, funded in part by the less fortunate members who die between 65 and 84. Apart from normal investment returns, the lucky survivors would enjoy the “added return” of the mortality premium.

Continue Reading…

Here are a million reasons to ignore 5 popular RRSP myths

Posted By |

A lot of Canadians seem to be harbouring misconceptions about the value of RRSPs (Registered Retirement Savings Plans) but I can give you a million reasons why it’s dangerous to believe the  five popular RRSP myths.  My latest two blogs in the Financial Post this week explain why.

In Thursday’s Post, also published in some regional dailies, I described how young people can easily save a million dollars as long as they start early enough. Click on the highlighted text for the online link: How to build a million-dollar RRSP: it isn’t as hard to get there as you think.

Yes, it’s the old story of disciplined saving year in and year out, and the magic of compounding, all aided by the lure of an upfront tax refund and a multi-decade deferment of taxes. Of course, eventually it will be time to draw an income and pay some tax on the RRIF but that’s a story for another day.

Whether a million is enough is open to debate but with today’s paltry interest rates and rising expectations for long lives, the need for annuities or some form of longevity insurance has become urgent. More on that shortly.

Exploding 5 RRSP myths

This morning, Friday,  the FP also ran a blog by me commenting on tax guru Jamie Golombek’s debunking of five common myths average investors harbour about RRSPs. You can find Golombek’s column here: The 5 biggest RRSP myths Canadians can’t stop repeating.

My take on it and a CIBC poll that accompanied the report, can be found here: Almost 40% of Canadians see ‘no point’ in investing in RRSPs — Here’s why they’re wrong.

In short, Golombek and I agree that the RRSP makes a lot more sense than investing only in taxable (non-registered or “open”) accounts. And while the TFSA is a compelling alternative to RRSPs for young people in low tax brackets, or for low-income seniors counting on living on Old Age Security, for the vast majority of middle- and upper-middle-income private sector workers lacking a Defined Benefit plan, the RRSP remains an essential tool for building wealth.

And as I also point out, if you’re in a high tax bracket, you don’t have to choose between an RRSP and a TFSA: you should maximize both!

How annuities can help fund a full lifestyle in retirement

Posted By |

By Jean Salvadore, Director, Wealth Insurance, RBC Insurance

(Sponsored Content)

Summary: While Canadians want to live a full lifestyle in their retirement, a majority (62 per cent) are worried about outliving their retirement savings. The majority are missing annuities in their portfolio that can help guarantee an income stream in their retirement. 

If you’re like most Canadians, your vision for retirement includes a full roster of activities such as travel, dining out and shopping for the things you want. But while many of us look to our retirement years as a time to enjoy life to the fullest, having enough money to support that lifestyle is a real concern. Canadians are living longer than ever before and, according to a recent survey by Ipsos for RBC Insurance, the majority (62 per cent) are worried that they’ll outlive their retirement savings.

In fact, even with various financial tools in place such as RRSPs and TFSAs, almost half of Canadians are still not confident that they will be able to afford the lifestyle they want. And perhaps not surprisingly, what’s most important to that lifestyle is keeping a sense of independence. Among those between the ages of 55 to 75, eight out of ten want to live at home for as long as they can and 72 per cent say it’s important to own a car. On top of that, almost three-quarters (68 per cent) would like to be able to travel at least once a year, shop for the things they want (62 per cent), and go out for lunch or dinner a few times a week (53 per cent). Continue Reading…

Becoming Retirement Ready

Posted By |

The Dream Stage

The most common way to start retirement planning is to determine how much money we will need. But, there is no magic number for everyone. Each person, or couple, is unique. A happy, fulfilling retirement means different things to different people. The amount you need depends on your lifestyle choices, so you won’t know exactly until you decide on what you want to do.

Retirement is not a one-time event. It’s an ongoing process that can last thirty years or more. It begins with focusing on what’s truly important to you and defining your hopes for the future. You probably have some idea of how you’d like to spend your retirement. But for now, don’t focus on the budget. Focus on ideas. Start listing all the things you want to do. What activities will you continue, and what new ones do you want to try? These activities could include travel, socializing, being with grandchildren and other family members (how much time? every weekend or just special occasions), playing sports, volunteering, reading, gardening, or crafts.

This doesn’t have to be a bucket list – just things that will give you pleasure. Get out your notebook and be as specific as you can. Don’t just write “travel,” write “take a round-the-world cruise,” or “see the African savannah by hot air balloon.”  

Retiring Couples 

Just because you’re married doesn’t mean you’re at the same place in your careers. Although you may be ready to focus on your flute playing, your spouse might still want to head to the office every day. Sometimes people aren’t quite ready to give up working yet for whatever reason. But at some point you will be retired together, and before that time you need to have a serious discussion with your spouse. Partners often have dramatically different ideas about what retirement will look like. One RBC retirement poll discovered that nearly 70% of pre-retired Canadians aged 50 and older have yet to discuss their hopes for their post-career lives with their spouse or partner.

Communication is key. You and your spouse need to be on the same page. Often people have very different visions of retirement. You may want to buy a motor home and barrel across the country, whereas your spouse may want to spend more time with the grandkids, or volunteer for a favourite non-profit. For decades you’ve spent most of your day apart.

Spending 24/7 together can require some adjustments. So you’re not continuously in each other’s pocket, find a balance between the amount of together time and time you spend apart pursuing individual interests.

Prioritize

Once you’ve decided on what you want to do, start doing your homework. If a Mediterranean cruise is the first thing on your agenda, start researching cruise lines, look at prices and schedules, and so on.

Marie Engen is the “Boomer” half of Boomer & Echo. In addition to being co-author of the website, Marie is a fee-only financial planner based in Kelowna, B.C. This article originally ran at the Boomer & Echo site on January 9 and is republished here with permission.