How to help clients prepare for 40-year retirements

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Retirement isn’t what it used to be. Canadians are retiring later¹ and often living longer. Many can now expect retirements that stretch 30 or 40 years, affecting how they and their advisors plan for these golden years.

Kristina Pappas, head of guaranteed wealth solutions product at Manulife, says the ability to enjoy longevity has multiple dimensions. For one, people tend to be more proactive about their health.

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“Canadians are spending more time focused on their healthspan, not just their lifespan,” she says. “The financial side of retirement planning needs to evolve accordingly.”

Ms. Pappas knows something about the importance of preparing today for tomorrow’s performance. She’s an avid runner but came to it only in her 30s, taking up the activity to build her health and well-being. Instead of tapering off with age, running has become more central to how Ms. Pappas lives.

Training, like financial planning, is a long-term commitment, she says. With consistent habits and an eye on endurance, you can see incremental but important progress.

To that end, retirement planning now requires a sustainable strategy that can support several decades of income needs, which can vary from the “go-go” years early in retirement to the potentially higher care costs of late-stage aging, Ms. Pappas says.

Traditional investment tools remain essential, but they’re not necessarily enough amid rising worries about outliving savings and ongoing market turbulence. Insurance-based solutions can complement a well-rounded portfolio and help clients prepare for possible long-life needs and eventual wealth transfers.

Societal systems aren’t designed for such longevity

Canada’s retirement system isn’t designed for people living to age 90 and beyond, says Simon Chan, a strategic longevity and retirement innovation advisor, chief executive officer of Adapt with Intent Inc., and an ambassador for the Stanford Center on Longevity.

“At the Stanford Center, this is viewed as a systems issue,” Mr. Chan says. “Our societal systems are still built for a 75-year life, not for the realities of a 90- to 100-year life.”

He says advisors must now leverage a wider range of tools for portfolios, as many clients can’t fall back on defined-benefit pension plans providing a guaranteed lifetime income indexed to inflation.

“As a result, guaranteed products like annuities can have a place in retirement plans because they can provide a floor of income,” he says.

Annuities meet a variety of client needs

For non-registered funds, prescribed annuities can provide highly tax-efficient income, making them particularly attractive for older clients seeking predictable cash flow. For clients approaching retirement, annuities can help mitigate both the risk of outliving savings and market risk by converting a portion of retirement assets into guaranteed lifetime income.

In addition, clients can choose from a range of guarantee options that help protect against the financial impact of premature death and support estate planning objectives.

An annuity provides predictable income and peace of mind because payments continue for life, in contrast to a registered retirement income fund (RRIF) that offers investment flexibility but carries market and depletion risk.

For example, compare investing $100,000 of registered funds at age 70 in a single-life annuity with a 10-year guarantee versus a RRIF. The annuity pays $650 per month for life, protecting the client from longevity and market risk. The 10-year guarantee provides continued payments to the spouse or beneficiaries if the client dies during the guarantee period. Meanwhile, the RRIF, which figured to pay the same income as the annuity, is projected to be depleted by age 85 under conservative assumptions.

Seg funds can bridge a gap

Segregated (seg) funds are another piece in the planning toolkit, with the potential to address the longevity challenge. These funds bridge the gap between growth and protection, Ms. Pappas explains.

“Many clients still want and need equity market exposure because retirement is potentially going to last several decades.”

Annuities can help provide a secure income floor, giving retirees confidence to spend, while seg funds keep a portion of their portfolio invested for growth. Seg funds also allow a smooth wealth transfer, allowing the monies to pass to beneficiaries outside of the estate more quickly and avoiding the estate administration process, which may include costs and delays.

Guarantees offer protection

Seg funds also offer maturity and death benefit guarantees, and they protect a portion of the invested capital, normally 75 per cent to 100 per cent.

The 100 per cent death benefit guarantee may be particularly attractive for clients who want greater certainty about the amount of their bequests while also providing downside protection. Death benefit resets allow clients to lock in market gains, increasing the guaranteed value.

The guarantees can influence other strategies. A 75 per cent maturity guarantee, for example, together with a 100 per cent death benefit, can give an early retiree the confidence to set aside capital that can be used decades later, or upon death to support loved ones and charities – essentially splitting the investment into two parts.

Although seg funds are a long-term asset for retirees, they offer flexibility too, allowing withdrawals whenever needed. For non-registered investments, there are potential tax efficiencies around a systematic withdrawal plan, although it does reduce the value of the guarantees.

Client value-add

Fees may be higher than with similar mutual and exchange-traded funds, but Ms. Pappas says the additional cost allows for the guarantees and estate planning benefits, which are a value-add for clients.

She says seg funds can be part of a guaranteed sleeve in a portfolio, along with annuities and guaranteed interest accounts (GIAs), which are similar to GICs, offering clients insurance-type protections. Interestingly, non-registered GIAs may report the interest accrued as annuity income, which qualifies for the pension income credit and pension income splitting.

Specialized legal and accounting expertise, available through Manulife’s Tax Retirement and Estate Planning Services team, can help advisors determine the right guaranteed vehicle to fill a need in the portfolio.

For many Canadians, focusing on health and wealth early, and continuing to invest in both, can make all the difference. Ms. Pappas knows this firsthand, both as a wealth specialist and a runner who completed the Boston Marathon in her 50s.

“We’re able to support advisors as they help clients think through retirement income, estate planning, the wealth transfer and, of course, longevity demands,” Ms. Pappas says. “We can help them prepare clients for a long, and well-lived retirement.”

Advertising feature produced by Globe Content Studio with Manulife. The Globe’s editorial department was not involved.