The Longevity fund is unique, and so are you. It’s also getting a lot of media coverage and its launch is a good excuse to review your retirement income strategy. We run the numbers
Many financial planners run financial plans based on the expectation of returning four or five per cent, but Purpose Investments’ new Longevity fund is designed to pay a 65-year-old a lifetime income of 6.15 per cent, based on the total amount invested with some inflation protection.
Whether you are tempted to buy into this fund, it is a good time to think about the risks it is trying to mitigate. And a good excuse to review your own retirement income strategy. The thing to ask yourself is: What are the risks to my retirement income planning and do I have them covered?
The Longevity fund is trying to eliminate three retirement income risks: longevity risk, or the risk of outliving your money; inflation risk, or the cost of goods and services rising faster than your income; and sequence-of-return risk, which means that poor returns in early retirement force you to spend your capital faster.
In general, sequence-of-return risk is not well understood or demonstrated in financial plans. The accompanying table does a good job illustrating the risk.
The top row of the table shows what happens when you draw $7,000 annually from an initial investment of $100,000, earning seven per cent each year. The initial $100,000 remains intact. This is how most financial planning software illustrates retirement projections and is likely how most people think. The problem is that investments never earn the same return year after year.
The bottom row demonstrates sequence-of-return risk. Investment returns are poor in the early years and the $100,000 becomes $83,150 after 10 years of drawing $7,000 annually. Notice the average return is still seven per cent.
Now, before you jump into the Longevity fund, you’ll need to know that it doesn’t guarantee anything, but Purpose Investments have had the product actuarially tested and say there is a very good chance it will deliver as promised.
What makes it so confident? It says it only needs to earn 3.5 per cent to pay investors 6.15 per cent because they are doing something called “risk pooling.” Think of risk pooling in this simplified way: Investors deposit their money into one pot and the investment growth of all investors goes into another pot.
For the first 15 years or so, your 6.15-per-cent withdrawals come from your capital pot. Once your capital has been depleted, your 6.15-per-cent withdrawals will come from the combined growth pot of all investors.
Do you see what is happening? Investors are sharing the retirement income risks with the other investors in the fund. If you die early, you will receive any capital that is left, but your investment growth stays in the growth pot to fund other investors’ retirement. Conversely, if you live a long life, investors who passed before you will be contributing to your retirement income.
There is no doubt this fund will appeal to retirees who put safety first, but there is another group of retirees who are more investment or probability focused. They will likely want to know what rate of return they need to earn to match or beat the Longevity fund.
As an example, investing $500,000 in the Longevity fund at age 65 is expected to provide an annual income of $30,750 for life, with a possible income increase. The table below shows how long $500,000 will last earning various interest rates and drawing $30,750 annually.
The zero-per-cent return shows how long a 65-year-old can expect their capital to last. This is the point at which the Longevity fund relies on the growth pool to continue to make payments.
The bottom row of the table represents a retiree investing on their own, earning five per cent. The $500,000 should last to age 98, but will it? I used an average rate of return of five per cent and didn’t take into account sequence-of-return risk. If market returns are low in the first few years, the $500,000 will not last to age 98.
I have also assumed a constant draw of $30,750, while the Longevity fund suggests it will be able to increase that amount over time.
In addition, if you invest on your own and markets are down, will you still confidently, without worry, continue to annually withdraw $30,750 from your investments? The retiree in the Longevity fund will.
Two things quickly come to mind when thinking of alternatives to the Longevity fund: life annuities and delaying Canada Pension Plan and/or Old Age Security to age 70.
A $500,000 life annuity will make guaranteed annual payments for life to a 65-year-old male and female of $28,919 and $26,650, respectively. Females receive a lower payout because they live longer, so the $500,000 has to last longer. Based on the annuity results, it may be that females will derive the greatest benefits from the Longevity fund.
I haven’t compared delaying CPP and or OAS to the Longevity fund, since it is a highly individualized comparison, but you should do so if considering the fund.
Other planning-oriented questions you should ask yourself include:
Do you want to have your basic lifestyle needs secured for life? Does your CPP, OAS and possible pension do that? If not, maybe having some of the Longevity fund will fill the gap.
Are you 65 and have health issues? Maybe the Longevity fund is not for you.
Are you holding bonds or cash in your retirement portfolio? Does it make sense to replace some of your bonds with the Longevity fund?
Knowing you only have so much time on this planet, how do you want to spend your money? Do you want a steady income from now until death or do you want to spend more and do more while you are younger and healthier? If the latter, you may want to limit or avoid the Longevity fund.
Although you can make additional withdrawals from the fund, it is not a good idea. Remember, you are leaving your returns in the fund. Plus, once you’ve drawn all of your capital, in about 15 or 16 years, you can’t draw more than what the fund distributes.
Do you want to leave money to your spouse or children? How will the Longevity fund affect your estate?
Are you hesitant to spend your retirement savings? The Longevity fund may psychologically give you more freedom to spend.
If your financial planner is projecting four-per-cent returns, have you restricted your lifestyle? Ask your planner if you should switch to the Longevity fund and draw a larger income to enjoy a bigger lifestyle. I am not suggesting there is anything wrong with using a four-per-cent return, but questioning your planner will lead to an interesting and informative discussion for both of you.
There is a lot more to unpack with the Longevity fund and if it is something you’re interested in, Purpose Investments has a good question and answer page. Finally, the Longevity fund is unique and so are you. This is not a fund to blindly purchase. Make sure to put in the time to explore what it may or may not do for you.
Allan Norman, M.Sc., CFP, CIM, and Real Wealth Management specialist (RWM), is a fee-only certified financial planner with Atlantis Financial Inc. and a fully licensed investment advisor with Aligned Capital Partners Inc. He can be reached atwww.atlantisfinancial.ca or alnorman@atlantisfinancial.ca
This commentary is provided as a general source of information and is intended for Canadian residents only.
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TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
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