Special Feature

2012 RRSP Special

From the Mid-November 2012 issue of Investment Executive newspaper. Treading carefully in RRSPs; moving nervous clients out of cash; women investors; grey divorce; mortgages; seg funds; and much more.

The number of people over 100 is rising sharply, with younger groups close behind

By Jade Hemeon | Mid-November 2012

The concept of longevity is taking on new dimensions as more people attain the 100-year milestone and become part of a growing group known as centenarians. Advances in medicine and healthier lifestyles mean the ranks of this group are increasing significantly by the year, creating challenges for financial advisors in helping clients fund an ever-expanding term of retirement.

Lengthening lifespans are apparent in the recently released 2011 Canadian census, which shows that almost 6,000 people now are 100 years or older, compared with about 4,000 a decade earlier; four-fifths of this group are women.

During the past five years, the rate of growth for this segment of the population was 26%, the highest of all age groups except the important 60 to 64 age group. That segment expanded by 29%. As the leading edge of the massive baby boomer generation, this 60 to 64 group is marching toward record lifespans, and many will pass 100, particularly women.

The Office of the Chief Actuary (OCA), which operates independently within the Office of the Superintendent of Financial Institutions, provides actuarial services for key government plans such as the Canada Pension Plan (CPP), old-age security (OAS) and pension plans for public servants. The OCA's projections show the number of centenarians climbing steeply to 12,000 by 2020, to 20,000 by 2030 and to 50,000 by 2050.

This trend is worldwide, with the United Nations estimating there will be at least three million centenarians in 2050. Just behind the centenarians are their slightly younger compatriots. Statistics Canada projections foresee 500,000 Canadians in their 90s and 2.6 million in their 80s by 2030 - more than double current numbers. A grey tsunami is in the making, with subsequent waves being even bigger and stronger than the first.

There are not many role models for this stage of life, with the current group acting as pioneers in exploring new terrain and finding meaningful ways to adapt.

The coming shift in society's makeup will have a massive impact on government benefits, such as health care, pensions and OAS, which were developed when people lived for just a few years beyond retirement. Changes have already been announced, with the age of eligibility for OAS and the guaranteed income supplement rising to 67 from 65 in a six-year, staged process that will begin in 2023. (See story on page B8.)

More policy adjustments could be in store as social programs become strained by the mushrooming group of the elderly looking at receiving pension benefits for 40 years or more. With age limits likely to increase further for seniors' benefits and the necessity to personally finance any kind of health care beyond the minimum levels eligible for government funding, financial advisors will be working with their clients to come up with creative solutions.

"Longevity is one of the biggest risks facing baby-boomer clients," says Jason Heath, a fee-only financial partner at Toronto-based Objective Financial Partners Inc. "However wonderful it might be to find a cure for cancer and other life-threatening diseases, when you think about the impact on retirement costs, it's a double-edged sword."

Heath is a proponent of traditional insurance annuities as a way for clients to create a steady income stream for life. And, he says, annuities are a particularly important component of a retirement plan for clients who do not have the guaranteed income provided by a defined-benefit pension plan. "An annuity is like life insurance in reverse," Heath says. "While life insurance provides protection from dying too young, annuities provide insurance against living too long."

Other types of insurance can also go a long way toward alleviating the financial burden in old age. According to research cited by Toronto-based Sun Life Financial Inc., a couple, both of whom are now 65 years of age, face an 85% chance of one partner experiencing an extended critical illness in their retirement years and an 82% chance of needing long-term care. Adding to the problem, the rate of inflation in health care in Canada historically has been double the average inflation rate.

"Depending on the client's financial circumstances," says Amy D'Aprix, a gerontologist and life transition expert for the retirement research division at Bank of Montreal, "it's important to have proper insurance in place, such as critical illness and long-term care, so [the client has] the financial options to make choices."

More people are entering their senior years as singles than ever before because of widowhood and rising numbers of divorced or people who never married, D'Aprix says. And with longevity increasing, not only are seniors getting older but so are their children, which may decrease their ability to care for aging parents. The age range of the children of the current crop of centenarians ranges from 65 to 82 years, according to a recent global study by the Boston University School of Medicine.

This shift may mean less importance being placed by seniors on leaving an inheritance for the next generation and more focus on providing for themselves and not being a burden, says Eileen Chadnick, certified life coach and founder of Toronto-based Big Cheese Coaching: "We may have to change our assumptions around the social and family network. At the same time someone is celebrating their 100th birthday, his or her child could be celebrating their 70th."

Av Lieberman, president of the Retirement Education Centre Inc., a Waterloo, Ont.-based research and counselling firm, says that when he founded the organization 17 years ago, retirees were concerned about leaving an inheritance. He has seen a marked change in that attitude in the past eight years or so.

"There's a shift in thinking," he says, "and more people are feeling they have done their part by raising their kids and helping with their education."

Working past the traditional retirement age of 65 is becoming increasingly popular - and not just for financial reasons, although it may become necessary in order to finance a retirement that could span just as many years as the person's career.

"Work contributes to well-being in ways that go well beyond the financial," Chadnick says. "Work provides built-in social interaction, a structure for intellectual stimulation and a sense of accomplishment and purpose. Work can contribute to physical and emotional well-being."

Heath cites a study by U.S.-based Shell Oil Ltd. that shows staff who retired from Shell at age 55 tended to die earlier than those who retired at 65. Working longer may not only contribute to longevity, but also provide continued access to employee benefit plans and allow clients more years to make contributions to the CPP, RRSPs and tax-free savings accounts.

Statistics show that the number of people in the 60 to 69 year age bracket who are still working has more than doubled to 1.2 million from 500,000 in the past decade - and many retired Canadians are returning to either full- or part-time work.

Working and living longer gives the portion of an investment portfolio held in growth securities - such as individual stocks and equity mutual funds - more time to benefit from the power of compound growth. Equities that can offer growth also provide better inflation protection than fixed-income investments, such as bonds and guaranteed investment certificates, or annuities that charge an extrapremium for inflation protection.

Ted Rechtshaffen, president and CEO of Toronto-based TriDelta Financial Partners Inc., points out that a couple with a retirement nest egg of $1 million that withdraws 1% less than the return on their portfolio - taking out an annual income of 3% instead of 4%, for example - could end up with significant wealth; yet, a couple that withdraws 1% more than they're earning and eats into principal run the risk of outliving their money.

Says Rechtshaffen: "If you're on the right side of the tipping point, you're getting wealthier every year - even in retirement. With help from government benefits and a mortgage-free home, this situation is achievable for many people."

In fact, many people have substantial equity built up in their homes, and this can provide a source of funds to finance the final stages of life as they downsize or move into smaller residences or into some kind of assisted-living arrangement.

A home can also be a source for a line of credit or reverse mortgage, Rechtshaffen says. The proceeds can be invested to enhance the income stream. (See story on page B10.)

"With a lifespan that goes well beyond traditional notions," Chadnick says, "new questions are coming up, in terms of life planning. Advisors can be helpful in guiding their clients to think ahead." IE

© 2012 Investment Executive. All rights reserved.