The long game: Post-90 planning

There are an estimated 280,000 people in Canada this year aged 90 or older – and about 7,500 of them are 100 years old or more. As life expectancies continue to increase, there could be 400,000 Canadians who are over the age of 90 in the next decade.

And although living longer is a common goal, few clients are likely to have done a thorough job of ensuring that their assets will last until they die. Coping with serious health issues, especially those requiring high levels of care for extended periods, also is a spectre few clients like to think about.

Given these realities, financial planning clearly will have to undergo some significant changes. Chief among these is the need to reframe timelines at the outset of the planning process to take account of the probability of lifespans beyond age 90, the current standard used by most planners.

The conversation with your clients should note that various investing strategies can be used to stretch assets over longer periods, that long-term care insurance (LTC) can play a large part in dealing with health-care costs and that specialized vehicles, such as annuities, can provide income guarantees, depending upon a client’s priorities.

Here’s a look at these issues in more detail:

– Longer projections

Many advisors, such as Barb Garbens, president of Toronto-based B L Garbens Associates Inc., and Paul Marion, senior vice president at Canaccord Genuity Group Inc. in Vancouver, already do projections to age 100.

However, Ted Rechtshaffen, president and CEO at TriDelta Financial Partners Inc. in Toronto, suggests being flexible about planning to 100. He doesn’t think clients should be missing out on things they’d enjoy, such as a trip, because they are worried about not having enough assets in the event that they live to, for example, age 99. His suggestion, in such cases, is to see if the trip is affordable if projections are based on the client’s current life expectancy, with five or 10 years added to that figure. That is likely to be an age considerably lower than 100. (In 2007-09, the latest period for which data is available, women aged 65 had an average life expectancy of 86.6 vs 83.5 for men, according to Statistics Canada.)

It’s a different scenario if you have a 65-year-old client who is likely to run out of assets at age 80. This can be a major problem because it’s very hard to save during retirement, says Garbens. There is the option of continuing to work, but, if the client isn’t prepared or able to do that, that client either will have to downsize his or her home or find significant ways to cut spending.

Situations such as this underline the need to start doing retirement income projections well before retirement, when there is still employment income and your clients may be able to adjust their spending to save enough for their senior years, says Garbens.

Clients also should be aware that projections – especially those that extend out by 30, 40 or even more than 40 years – are only guidelines. Plans of three decades or more are only partially accurate.

In addition to changing investment environments, tax systems change and financial products continue to evolve. The Oct. 19 federal election is a case in point. The Liberal win means the elimination or reversal of key tax-saving measures brought in by the Conservatives in their last budget. (See sidebar at right.)

– Equities exposure. Clients who can’t meet their retirement goals with their current asset mix have the option of increasing the equities portion within their portfolio. Dividend stocks are particularly popular because they provide an income flow that tends to rise, thereby providing additional income to cover increasing costs from inflation. There are a number of strategies that can help your clients live with the higher risk inherent in equities. (See story, page 36.)

Marion agrees that planners are seeing higher equities allocations than previously, despite the risk. The financial plan would have to ensure that the client’s holdings could withstand another huge market correction like the one in 2008-09. Otherwise, your clients may be left with even less than they are likely to have if they simply continue with their current asset mix.

– Long-term care insurance. This product has been around for about 20 years, but there have not been large numbers of buyers.

The reason for relatively low sales is the cost of LTC. That is particularly so for lifelong policies. “[LTC] is the toughest product to sell. There’s an assumption that it is too expensive,” says Marion, who adds that buying at a younger age helps to reduce the costs.

There are various kinds of LTC policies. There’s the classic lifelong product, but there are policies that are limited by a cap on total premiums or the number of years in which benefits can be collected. There also are LTC policies that delay the payout of benefits for one or two years after the insuree requires LTC.

Only a few companies offer LTC policies and none offer the full spectrum, so it’s wise to shop around.

Examples of costs for policies purchased at age 65 include a lifelong policy with maximum benefits of $2,000 a month that would cost about $2,700 a year in premiums for a man and $3,750 for a woman.

A lifelong policy with benefits that don’t start until a year after LTC is required could cost about $1,760 for a man and $2,760 for a woman.

Nevertheless, LTC insurance can make a huge difference. One example would be a policyholder whose spouse develops Alzheimer’s disease in their early 60s, is in good health and continues living for 20 or 30 years in an LTC institution.

But this is not the norm. Steve Krupicz, assistant vice president and actuarial consultant for individual insurance at Manulife Financial Corp. in Waterloo, Ont., says the average stay in an LTC institution is three to four years.

– Annuities. For clients at risk of running out of assets, buying an annuity to cover fixed costs can make sense. Annuities pay a specified amount monthly for life, and they can include inflation indexing.

In general, annuities should be purchased with non-registered assets. Known as “prescribed” annuities, this type of annuity carries preferential tax treatment because part of the income is considered to be return of capital. Income from annuities purchased with registered assets is taxed at the client’s marginal rate.

Ideally, annuities would be purchased with only part of a client’s assets, leaving other assets that can be used for unexpected expenses. Current annuity payouts aren’t seen as attractive because their pricing is tied to today’s low interest rate levels. (See story, page 26.) If possible, waiting until interest rates rise to more attractive levels may make sense for some of your clients.

WHAT A DIFFERENCE A DAY MAKES

The federal Liberal majority election win will eliminate or reverse many of the measures in the Conservatives’ April 2015 budget; only a few are likely to survive from that budget. The most significant measure expected to be retained is the decrease in the annual minimum withdrawals from registered retirement income funds. This measure has been passed into law and all the major parties have stated their support for it. Here’s a look at what the Liberals have said they will do:

– Personal income taxes. The Liberals plan to reduce taxes on middle income earnings. Taxes on incomes of $44,701-$89,401 will fall to 20.5% from 22%. There will be a new top tax bracket with a rate of 33% for taxpayers with taxable income of more than $200,000, up from 29%. This will result in combined federal and provincial marginal tax rates ranging from 43% to 58.75%.

– Family tax cut. The Liberals plan to eliminate this income-splitting measure for families with children under the age of 18. As of the 2014 taxation year, the measure allowed a spouse or partner to transfer up to $50,000 in income to his or her lower-income spouse/partner, with the resulting tax savings capped at $2,000.

– Universal child-care benefit (UCCB). The Liberals plan to replace the UCCB with a new Canada child-care benefit that will be income-tested and tax-free. The UCCB was introduced in 2006 and enhanced in April’s budget. Families received up to $1,920 a year for children under age 6, and up to $720 for kids aged 6 to 17. The new benefit will be about $2,500 for a family of four.

– Tax-free savings accounts (TFSAs). April’s budget raised the maximum annual contribution to TFSAs to $10,000 from $5,500 as of the 2015 taxation year. The Liberals plan to restore the previous maximum of $5,500, although this reduction will not likely become effective until 2016 because so many Canadians have already made a $10,000 contribution for 2015.

– Old-age security (OAS). The Conservatives had passed legislation to delay receipt of OAS until age 67, with gradual implementation starting in 2023. The Liberals say they will bring the qualifying age back down to 65.

– Canada Pension Plan (CPP). The Liberals have promised to negotiate enhancements to the CPP with the provinces. There are no details of the changes the Liberals are considering, but changes are expected to increase both premiums and benefits. Any changes will require the agreement of two-thirds of the provinces that account for at least two-thirds of the Canadian population. That means Ontario would have to agree – which is likely, as the province has been pushing aggressively for enhancements. However, Quebec may oppose this proposal.

– Education and textbook tax credits. The education credit for post-secondary students is $400 a month for full-time and $120 a month for part-time. If that credit is claimed, the textbook credit – $65 a month for full-time students and $20 for part-time students – can be claimed. The Liberals plan to eliminate these non-refundable credits, but probably not for the 2015-16 school year because many students planned their affairs assuming that these deductions would be available.

– Small-business tax rate. The April 2015 budget detailed a gradual decline in the small-business tax rate from the current 11% to 9% by 2019. The Liberals have promised to reduce this tax to 7% from 9%. That reduction will be important for your small-business owner clients – as well as yourself, if you are incorporated.