Elaine Politsky, president and founder of ESI Wealth Management Inc. in Markham, Ont., specializes in serving seniors, and she’s getting a good look at the meaning of longevity. Among a handful of clients who have lived more than a century, Politsky’s oldest client, Ida Hall, is 105 years old. Hall, who worked as a secretary at Toronto General Hospital, spent most of her life with her husband, Alan, a chartered accountant who died at the age of 101.

Hall, now living comfortably in a retirement home, isn’t concerned about money. Politsky has designed Hall’s portfolio to meet her needs until age 120.

“Anybody who has reached 65 is likely to live to their late 80s or early 90s,” Politsky says. “I see it all the time — and you have to plan accordingly.”

Lise Andreanna, a certified financial planner with Continuum 11 Inc. in Niagara-on-the-Lake, Ont., says a client retiring at age 65 could easily see another 35 to 40 years of life after work, which could be almost as long as the client’s working life. Andreanna is fashioning a retirement investment portfolio for herself that will take her to age 100.

“It’s about product allocation, not just asset allocation,” says Andreanna. “Portfolios for seniors need to accomplish a variety of things, including keeping up with inflation and providing an income. Parts of [the portfolio] need to be liquid; other parts, guaranteed. It’s important that clients have a financial plan that gives them comfort, and that they know they can live a long life without running out of money.”

The latest statistics confirm what financial advisors are seeing in their practices. The Canadian Institute of Actuaries projects that the average Canadian man who is 60 years old today will live to be more than 87, while the average woman will live to age 90. Although some seniors won’t hit the averages, many will live much longer — and average lifespans are getting longer and healthier all the time. The latest Canadian census, done in 2011, found almost 6,000 centenarians, up by 50% from a decade earlier. Government projections show the number of Canadians living to celebrate their 100th birthdays and beyond will rise to 12,000 by 2020.

“Longevity is not a flash in the pan,” says Peter Drake, vice president of retirement and economic research at Toronto-based Fidelity Investments Canada ULC. “No client knows what their individual lifespan will be. But, in planning, you have to rely on broad trends and plan for probabilities. It’s not a good thing to run out of money at any time of life; but the older you are, the more difficult it is.”

With every client, there are a couple of major unknowns that you must address in their financial planning, aside from how long the client will live. These include the future rate of return in financial investments and the rate of inflation. You must determine not only an appropriate mix of assets but a safe withdrawal rate for any investments that are held outside a registered retirement investment fund (for which annual withdrawal rates are prescribed by government). The withdrawal rate, and even the choice of products, will be influenced by whether your client desires to draw down assets as he or she ages or leave assets to heirs.

Like Andreanna, many advisors are finding that the best approach is to invest a portion of the portfolio in products offering a guaranteed income, such as annuities and guaranteed minimum withdrawal benefit (GMWB) products. The rest would be balanced between stocks and income-producing products.

The products chosen for income go beyond traditional government bonds paying paltry levels of interest to include securities that are higher-risk and may have equity-like features, such as preferred shares, corporate bonds, real estate investment trusts (REITs) or dividend-paying stocks.

One product that Andreanna uses to provide the guaranteed portion of income is a life annuity, an insurance product that pays a guaranteed income for life, whether the client dies next week or in 40 years. She likes to wait until her clients are in their mid-70s, however, before purchasing annuities, as the income payouts become more favourable as the client ages. An annuity can be chosen to provide enough income to cover basic living costs, such as housing and food, so that the essentials are covered.

The drawback of most annuities is that there is no cash-out feature, maturity date or ability to increase the payments. Only special types of annuities can transfer a portion of the income to a surviving spouse. And unless the annuity is indexed, which comes at extra cost, the income is fixed and there is no inflation protection. However, with at least part of the income stream secured for life via an annuity, many retirees feel more comfortable investing a portion of their wealth more aggressively in securities. Although these may fluctuate in value, they historically have offered superior long-term growth.

Andreanna also likes to invest a portion of a retiree’s portfolio in GMWB products, which typically offer a guaranteed annual income of 4%-5% and have more flexibility than annuities. GMWBs offer the potential for growth in the underlying investment portfolio from which the income is derived (typically, a mix of equities and fixed-income). However, portfolio growth is reduced by GMWB fees that are higher than traditional mutual funds. Andreanna chooses GMWBs that have a high percentage of equities investments, as she feels the risk in equities is offset by the guarantees providing a minimum level of income.

Most of the remainder of the portfolio would be invested in conservative, diversified mutual funds, focusing primarily on income-producing securities. Andreanna also keeps some money in short-term GICs to act as a “buffer,” and holds some cash for emergencies, travel and short-term expenses. “I don’t invest in growth equities or small-cap stocks,” Andreanna says. “Retired people are in drawdown mode —they want to be more cautious.”

Politsky also chooses GMWB products to provide some of a portfolio’s income. In addition, she invests her clients’ assets in conservative, balanced mutual funds and diversified income funds. Politsky likes to have some exposure to global and U.S. products, but most holdings are Canada-based, she says, as her clients’ expenses are largely in Canadian dollars. Politsky always meets the portfolio manager for the funds in which she invests her clients’ money to discuss the investment approach.

“I don’t want to put my clients in anything volatile,” Politsky says, “and I look for fund portfolio managers with a history of steady returns.”

Politsky stays away from GICs and similar low-return investments, which, she says, are “horror stories when you figure out what they pay after inflation and taxes. You might as well keep your money under the pillow.”

Drake points to inflation as one of the key retirement risks, and notes that the longer a client lives, the greater the danger of inflation eating away at a fixed pool of assets or fixed returns. Even if the modest 2% inflation rate that we’ve seen during the past 20 years continues, he says, inflation would erode the purchasing power of retirement income by 40% during a 25-year retirement. Put another way: to buy $33,000 worth of goods valued in today’s dollars, your client would need $54,000 in 25 years.

The 2008 global financial crisis heightened fears relating to stocks, Drake says, but equities historically have provided the long-term growth critical to a retirement plan. Traditional retirement holdings, such as government bonds and GICs, are offering skimpy returns in this environment of low interest rates and the 30-year bull market in bonds that has accompanied falling interest rates has plateaued or could even reverse, creating the risk of capital loss in portfolios overloaded with bonds.

The old rule of thumb — that equities exposure should amount to 100 minus your age, with the balance in fixed income — is being abandoned in favour of greater exposure to equities, Drake says. But the actual mix depends on a variety of factors, including the amount of retirement savings and home equity, income needs, risk tolerance, other sources of income and how much income is guaranteed or indexed to inflation.

For example, Drake says, baby boomers can count on the Canada Pension Plan (CPP) being available throughout their lifetime: this creates a small but reliable income stream because actuarial reports show the CPP is on sound financial footing for the next 75 years. In addition, some clients are lucky enough to be members of defined-benefit pension plans, which allows those clients to take greater risks in their personal investments.

“For most people, there is a mismatch between the duration of their life in retirement and the duration of the life of their capital,” says Sandy McIntyre, co-CEO at Toronto-based fund company <b>Sentry Select Capital Corp. </b> “The client needs income, growth in income, preservation of capital and growth of capital.”

McIntyre manages his 90-year-old mother’s portfolio, and although she had some fixed-income at the beginning of her retirement, she now is fully invested in shares of high-quality companies with the ability to increase their dividends. “My mother would not be able to enjoy the lifestyle she has,” he says, “with the ability to travel and do things, if she hadn’t been able to grow her income in retirement.”

Tina Tehranchian, certified financial planner and branch manager for Assante Capital Management Ltd.in Richmond Hill, Ont., achieves some equities exposure through GMWBs, as well as through individual stocks and balanced funds. Her retirement portfolios also include portfolio funds offering a mix of high-yield bonds, global bonds and, in some cases, a bit of small-cap and emerging markets exposure.

Tehranchian also likes global REITs, as real estate tends to be an inflation hedge and the global exposure complements any equity clients may have in their homes. Dividend-paying stocks are another income alternative that typically offer a yield of 3%-5% (plus the dividend tax credit, in non-registered accounts). Dividends and share prices have the potential to rise over time as company profits grow, providing inflation protection for investors.

“There are all degrees of nervousness,” Tehranchian says. “If clients are uneasy with any fluctuation, I put the bulk of assets in GMWBs. But other [clients] who can handle volatility may have healthy exposure to equities markets even if they’re in their 70s. If volatility is not affecting the income stream or their day-to-day spending, it’s fine.”

Tehranchian adds that bonds tend to act as a portfolio stabilizer. She prefers to access bonds through exchange-traded funds (ETFs), which have lower management fees than mutual funds and offer a variety of strategies for changing interest-rate scenarios. For example, some ETFs offer protection from rising interest rates through holdings in laddered, short-term or floating-rate bond portfolios. For clients who are prepared to accept more risk in return for higher returns, there are corporate and emerging-market bond ETFs. (See story on page B14.)

Fidelity’s research, says Drake, indicates that retirees making inflation-adjusted withdrawals of more than 4%-5% of the value of a balanced portfolio run a high risk of running out of money. At these rates, clients would need at least a $1-million portfolio to generate annual income before taxes of $40,000-$50,000 if they did not want to dip into the principal.

Andreanna steers a more cautious path, targeting a drawdown rate of 3.5%-4%. Due to compounding, clients who withdraw a little bit less than their portfolio generates — for example, 3% annually — could end up with significant wealth to leave to heirs.

But withdrawing even a little more than what the portfolio generates over time can lead to something no one wants — your client outliving his or her money.     IE