Section 8 – Financial Planning and Portfolio Monitoring
Retirement is considered a disinvestment. Being overly optimistic or pessimistic does not help you assess your long-term financial security. To analyze projected retirement over 30 years, it is recommended to use the 3%7 net rate of return.
Also, it is a good idea to conduct several simulations to assess different costs of living and consider the impact that various projects could have on long-tern financial security. Statistics Canada’s historical data reveal that retirees spend on average 67% of what they spent during their years on the labour market. The majority reduced its consumption by choice (53%) rather than by lack of resources (33%).8
7 Net of portfolio fees and inflation.
8 Source: McKinsey & Company: “Building on Canada’s Strong Retirement Readiness” 2014.
As the prospect of retirement looms, protecting your wealth becomes more important than growing it. Investors must, therefore, grapple with the following three elements:
- The longer life expectancy of Canadians means that they must ensure that they have income for a lengthier period of time. We estimate the expected retirement horizon at about 25 years. And this number increases where there is a younger spouse or in those situations where the family’s longevity history exceeds statistics;
- Inflation which, if left unchecked, can erode retirement savings. Even if it stands at the relatively low rate of 2%, inflation reduces purchasing power nearly 40% over 20 years. To maintain their purchasing power, retirees must see to it that their income keeps pace with increases in the cost of living;
- Market volatility is a major risk factor. In terms of retirement savings, the order of investment returns has a determining effect on the duration of capital. Hence, for a same annual average return (7% in the following example), the capital will be exhausted at an earlier or later time, based on the sequence of returns.
|Sequence of returns||Age of retirees where resources will be exhausted||+/- month|
|+7%, +7%, +7%||86.5|
|+7%, -13 %, +27%||83.3||-38|
|-13%, +7%, +27%||81.1||-65|
|+27%, +7%, -13%||94.9||+101|
In this instance, constant returns will make it possible for the investor to benefit from his/her capital until age 86. However, a downturn in returns at the beginning of the savings period will shorten the amount of time that capital will last, whereas higher returns at the start of the savings period will ensure that it lasts longer.
9 Based on research conducted by Moshe A. Milevsky, Associate Professor of Finance at York University in Toronto and Executive Director of the Individual Finance and Insurance Decisions Center.
10 Source: Asset Allocation and the Transition to Income, Milevsky & Salisbury, September 2006. Example based on a $100,000 portfolio, from which a retiree withdraws $9,000 annually starting at age 65.
Retirement usually coincides with a drop in income and an increased reliance on savings. In these circumstances, having to manage debt can increase financial insecurity, both for retirees and those planning their retirement. Recent Statistics Canada data confirm that among those age 55 and over, one-third of the retired and two-thirds of the not-yet-retired report having some form of debt.11
Consequently, Sun Life Financial’s 2015 Canadian Unretirement Index Report determines that only 27% of Canadians between 30 and 65 years of age expect to be retired at 66 (compared to 51% in 2008).12 Among those who responded that they expect to be working at 66, 59% said it was because they needed to while 41% said it was because they wanted to.
11 Retiring with debt by Katherine Marshall (April 27, 2011). Product component No. 75-001-X, Statistics Canada catalogue.
Life insurance companies offer various types of annuities to investors who want to convert their registered13 or non-registered capital into periodic fixed or growth payments:
- during their lifetime (life annuity);
- during their lifetime and the life of their spouse (survivorship annuity);
- for a specified period (annuity certain, e.g. until age 90).
The total amount received from an annuity acquired with registered capital is taxable whereas only the interest portion of an annuity acquired with non-registered capital is taxable.
Factors Influencing Annuity Amount
Health, age, sex, capital available and long-term interest rates when the annuity is purchased, as well as the issuer selected, are important basic factors that will have some impact on the amount of the annuity.
In addition, the protection that can be obtained with respect to an annuity to protect the capital and/or the beneficiaries of the estate, e.g. guarantee, reversibility and indexing. There is an inherent cost to these factors that will be reflected in the amount of the payments offered.
Protection if Financial Institution Granting Annuity Goes Bankrupt
The Assuris14 organization is a non-profit corporation that protects insured Canadians if their life insurance company goes bankrupt. If you are a Canadian citizen or resident and you purchase a product from a life insurance company that is a member of Assuris, you are protected up to certain limits. For example, if an insurer goes bankrupt, Assuris guarantees annuity contract holders payment of 85% of the expected monthly income up to a maximum of $2,000 per month. In the case of annuities purchased from financial institutions other than insurers, no amount is insured by either the Canada Deposit Insurance Corporation or the Autorité des marchés financiers.
13 RRSP, RRIF or other registered plans.
|AVERAGE INCOME5 OF CANADIAN SENIORS BY INCOME SOURCE6 (in constant 2011 dollars)|
|Income from public sources|
|Income from private sources|
State-run pension plans (combined OAS, GIS, CPP and QPP) represented 41.2% of the total income of seniors in 2011. A third (33.7%) of seniors’ income came from private pension plans and RRSPs. The remaining came from investment income (9.3%) and other sources (15.8%), including other market income and other government transfers.
5 At the average point, when data are organized numerically, half of the results are above the average and the other half is below.
6 Calculations of Human Resources and Skills Development Canada based on Statistics Canada data, CANSIM Table 202 – 0407, 2011.
This document has been updated on August 31st, 2018 and reflects the state of the Law, including draft amendments, at that date.