Financial protection for the future, nest egg, retirement savings

With Canadians living longer, running out of savings in old age is a real possibility, according to a report published Tuesday from the C.D. Howe Institute.

The report, Headed for the Poorhouse: How to Ensure Seniors Don’t Run Out of Cash before They Run Out of Time, proposes a pooled risk savings program to protect seniors at advanced ages.

More than half of 65-year old Canadians will end up living beyond age 85, the report says, yet planning to fund longer retirements is difficult. “Retirees don’t want to think about later life planning. It’s daunting, confusing, complex and expensive,” it notes.

Retirees may be put off by planning, but that doesn’t mean they aren’t worried, according to a survey conducted for RBC Insurance by market research firm Ipsos. The RBC survey finds that two-thirds (62%) of Canadians aged 55 to 75 are concerned about outliving their retirement savings.

The financial industry has traditionally offered annuities as a solution to address this concern. However, the RBC survey finds that although 45% of older Canadians have RRSPs, and 39% are using TFSAs, only 12% are planning to buy an annuity as part of their retirement plan. Moreover, survey respondents scored an average grade of “C” on their knowledge of annuities, RBC says in a news release.

“Most Canadians are unaware of annuities and lack an understanding of the product, which can be the very reason why few are building them into their retirement plan,” says Jean Salvadore, director, wealth insurance, at RBC Insurance, in a statement.

The C.D. Howe report proposes a government-led Living Income For the Elderly (LIFE) to overcome these obstacles. The program would involve creating “a national, restrictive, non-cashable, advanced-life deferred annuity with non-guaranteed (but conservatively targeted) payment amounts, with potential end-of-year income ‘bonuses’,” the report says.

It envisions allowing Canadians to start buying into the program, which would pool retirement savings, at age 65, with payouts starting at age 85, and continuing until death. The assets could be managed by a government investment manager, such as the Canada Pension Plan Investment Board or PSP Investments, or by private firms.

“Between ages 65 and 84, each member’s account would be invested in a relatively aggressive portfolio,” the report says, “After age 85, the members’ funds would be moved into a more conservative portfolio. The monthly income would be fixed across their remaining life, calculated using conservative investment and mortality expectations. At the end of each year, any surplus in the mortality experience of the group and investment return on the accounts would be distributed equitably among the age 85+ members through lump sum ‘bonus’ payouts.”

“With this design, Canadian retirees would have easy access to a voluntary and trustworthy product that enables them to turn any portion of their savings into a reliable income stream, providing secure advanced-life income at the lowest possible price, without shifting financial risks onto the rest of Canadians,” the report argues.

Additionally, the report suggests that the creation of a national annuity program could serve as a catalyst for more innovative private solutions.

“LIFE would provide a standardized drawdown option across Canada that could create a platform for private industry to create innovative drawdown products more tailored to individual needs,” the report says, and it “could also raise awareness of the financial risks that later life can bring, helping to improve demand for private market solutions.”

The RBC survey of 1,000 Canadians aged 55 to 75, was conducted between Nov. 13 to 17, 2017, and is reported accurate to within ±3.5 percentage points, 19 times out of 20)