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 up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 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 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
TORONTO – Canada’s main stock index was little changed in late-morning trading as the financial sector fell, but energy and base metal stocks moved higher.
The S&P/TSX composite index was up 0.05 of a point at 24,224.95.
In New York, the Dow Jones industrial average was down 94.31 points at 42,417.69. The S&P 500 index was down 10.91 points at 5,781.13, while the Nasdaq composite was down 29.59 points at 18,262.03.
The Canadian dollar traded for 72.71 cents US compared with 73.05 cents US on Wednesday.
The November crude oil contract was up US$1.69 at US$74.93 per barrel and the November natural gas contract was up a penny at US$2.67 per mmBTU.
The December gold contract was up US$14.70 at US$2,640.70 an ounce and the December copper contract was up two cents at US$4.42 a pound.
This report by The Canadian Press was first published Oct. 10, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
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